Incentive Insider

The branch interest tax is supposed to ensure that interest paid by a branch is not a form of profit stripping by a foreign parent. The statute starts out simply by deeming any interest that is allocated to the branch, but not actually paid, as being paid to the foreign parent.

Intentional Deception  In the OBH case, it appears that one way to avoid the rules of §246A is to intentionally keep poor or hard to trace records. While it was not the fact that everything ran through one account that kept OBH from incurring the §246A limitations, better records and separate accounts would have made any direct connections obvious and easier to trace.

OBH Finding The court found that there was no evidence that OBH used the funds from the indebtedness to purchase the stock. The traces that Mr. Powell conducted in order to conclude that there was initially a connection were found to be arbitrary and inconclusive.

OBH Tests When the court applied the purpose prong to the OBH transactions, it expanded it to include three tests, how tenuous the relationship is between the indebtedness and the acquisition of the stock, the testimony of the taxpayer, and the government’s ability to rebut the taxpayer’s case.