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Debt-Financed Distributions – Canal Corporation

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Presentation on theme: "Debt-Financed Distributions – Canal Corporation"— Presentation transcript:

1 Debt-Financed Distributions – Canal Corporation
Taxpayer contributed assets to a partnership, and extracted over 95% of its equity in the assets through a debt-financed distribution Taxpayer asserted it bore the economic risk of loss through an indemnity for the principal amount of the debt Tax Court held that the indemnity obligation should be disregarded under the anti-abuse rule, and therefore treated the transaction as a disguised sale, based on findings that included the following: The indemnity agreement served no commercial purpose, but only a tax purpose The indemnitor’s net worth was substantially less than the potential amount of the indemnity obligation, and there were no restrictions on the indemnitor’s ability to further diminish its net worth

2 Canal Corp. Transaction
WISCO GP Business assets LLC

3 Canal Corp. Transaction
WISCO GP Business assets LLC Bank Loan Proceeds

4 Canal Corp. Transaction
WISCO GP Business assets LLC Cash distribution Bank Loan Proceeds

5 Canal Corp. Transaction
WISCO GP Obligation Business assets LLC Cash distribution Obligation Bank Loan Proceeds

6 Canal Corp. Transaction
WISCO Indemnity GP Obligation Business assets LLC Cash distribution Obligation Bank Loan Proceeds

7 Canal Corp. Transaction
Intercompany Note WISCO Indemnity GP Obligation Business assets LLC Cash distribution Obligation Bank Loan Proceeds

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