Tuesday, November 30, 2010

Tax Court Disagrees with IRS on Loss Claim

After a ten year long battle, the U.S. Tax Court has reversed an IRS decision to deny a tax loss claimed by a company that bought a manufacturing plant from Nortel. The court issued is decision earlier this month (November 8).

According to CFO.com, the case involved a so-called basis bump transaction, designed to provide a U.S. taxpayer with a stepped-up basis in assets without the usual cost associated with such a phenomenon. Indeed, the cost is a U.S. tax imposed tied to the transferor of the assets.

    In a case of first impression, the Tax Court ruled that such a transaction ought to be "respected" for tax purposes. The case facts are as follows: On May 28, 1998, Canadian Parent (CP) and Northern Telecom Inc. (Nortel) executed an asset purchase agreement with respect to a property owned by Nortel, namely, the Creedmoor manufacturing facility. Pursuant to the agreement, CMAC-I, a Canadian subsidiary of CP, was authorized to purchase the inventory of the Creedmoor facility. On July 2, 1998, CMAC-I, using working capital and borrowed funds, paid Nortel $12.1 million for the inventory. On the same date, Nortel executed a bill of sale and assignment providing for the sale of its rights and title to — and interest in — the inventory to CMAC-I.

    On July 7, 1998, CMAC-I borrowed $5.4 million and CMAC-GP, a CP affiliate, borrowed a total of $46.2 million. On that same date, CMAC-I pledged the inventory of the Creedmoor facility as security for payment of the $51.6 million in liabilities (incurred by CMAC-I and CMAC-GP).