The IRS denied interest deductions on audit that a corporation claimed on its senior debt. The debt was linked to shares in a subsidiary that the corporation owned. At maturity, the lenders would receive back the principal amount of the debt, plus accrued interest or, if greater, the then-market value of the reference shares. A promoter had sold the company on the idea of issuing the debt as a way of monetizing the value locked in the subsidiary shares without triggering capital gains taxes and while still being able to use a “dividends-received deduction” to shelter most of the dividends the company received from its subsidiary from taxes. The IRS said on audit that the debt and the subsidiary shares were a “straddle.” Section 263(g) of the US tax code bars interest deductions on debt that is part of a straddle. The case is discussed in a ruling — Technical Advice Memorandum 200541040 — that the IRS made public in late October . . . . The IRS told a US importer in another audit that the importer had taxable income when the US government refunded duties that the importer overpaid. The IRS suggested the importer might have avoided this result under a “tax benefit rule” in section 111(a) of the US tax code if it had shown that it did not benefit by deducting the overpayments in earlier years. The importer made no such showing. Duties paid on imported goods are normally offset against the sales price when the goods are sold. This reduces the income the importer must report on the resale. The case is discussed in Technical Advice Memorandum 200543051.