Last month the Tax Court issued its opinion in Barnes Group, Inc. v. Commr., T.C. Memorandum 2013-109.
In the case, Barnes indirectly owned 100% of ASA, a Singapore controlled foreign corporation. ASA had excess cash that Barnes wanted to repatriate to the U.S. However, Barnes would have had to pay U.S. tax if ASA had distributed the cash as a dividend to Barnes, or if ASA had loaned the cash to Barnes.
Barnes sought advice from multiple advisors looking for methods to repatriate the cash without paying U.S. tax. After rejecting advice from Ernst & Young and Deloitte Touche, Barnes spoke with PriceWaterhouseCoopers (“PwC”). PwC suggested a plan in which the cash could be repatriated in a tax free manner through two Code §351 exchanges.
In the first Code §351 exchange, ASA and Barnes transferred cash to a Bermuda corporation (“Bermuda”) in exchange for Bermuda stock. In the second Code §351 exchange, Bermuda transferred cash and Barnes transferred Bermuda common stock to a Delaware corporation (“Delaware”) in exchange for Delaware stock. Delaware then loaned the cash to Barnes.
Although Bermuda’s ownership of shares in Delaware was an investment in U.S. property under Code §956, the taxpayer argued that Bermuda’s basis in the Delaware shares was zero (under Rev. Rul. 74-503) and that the 956 inclusion should therefore be zero.
The Tax Court held that the cash that started at ASA and ended at Barnes was in substance a dividend and was taxable to Barnes under Code §301. Shown below is a chart of the case (here for PDF of Barnes):