The codified economic substance doctrine in Section 7701(o) is generally not implicated in corporate freeze transactions, said William Alexander, IRS associate chief counsel (corporate), speaking at the Texas Federal Tax Institute.
A typical corporate freeze transaction is done to shield future profits from double taxation. For example, a private equity fund buyer may have a target corporation drop its business into a newly formed partnership in exchange for a preferred interest in the partnership (with little to no upside potential). The private equity fund then directly invests in the new partnership in exchange for a junior or common interest in the partnership that is entitled to ride the upside of future growth.
Alexander's comments are significant in that even though the primary motivation for engaging in a corporate freeze transaction is to avoid tax, it appears the transaction is not relevant to the doctrine, and the issue is more one of valuation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
