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The Conundrum of Tax Ownership — One Size Does Not Fit All
Now that another tax filing deadline is behind us, many organisations will begin to shift their focus from tax return compliance to tax planning for current and future operations. Some of these areas may include transferring assets or entering into financing arrangements with related and/or unrelated parties to improve cash flow positions. These opportunities often entail an analysis and determination of a property's "tax ownership," one of the most fundamental yet seemingly complicated concepts in tax law.
Taxand US discusses the complexities around the tax ownership rules arising from the fact that the various multifactor tests have evolved over many years from judicial decisions made in courts.
The relevant factors that a court will examine may vary in connection with the nature of the property under consideration.
The difficulty arises in:
- Identifying the relevant judicial opinions
- Parsing through the cases to ascertain the factors relevant to the current transaction
- Weighing the application of these factors to a particular set of facts that may or may not be consistent with the court cases from which the ownership factors were drawn.
The tax ownership rules applicable to a particular transaction, whether it is a purported sale, a secured borrowing, a leasing transaction or the licensing of intellectual property can be a minefield to navigate. Taxpayers need to consider the relevant rules in order to mitigate the likelihood that the Service will seek to recharacterise the taxpayer's chosen form for a transaction. The consequences could be significant; the loss of cost recovery deductions, recognition of gain, responsibility to withhold US taxes in cross-border deals -- all which could have an unexpected and unwelcomed impact on a company's financial statements and cash flow. Although these rules have a rich history, their application continues to evolve, as can be seen in Calloway. A taxpayer's best defense is to be prepared by making tax ownership a part of every analysis.
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