Section of Taxation Publications
  VOL. 56
NO. 4
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
The Continuing Battle Over Foreign Tax Shelters in the D.C. Circuit: Boca Investerings Partnership v. United States
Francisco J. Navarro


In Boca Investerings Partnership v. United States, the United States Court of Appeals for the District of Columbia Circuit revisited the use of foreign tax shelters by U.S. corporations. The D.C. Circuit held that losses incurred by a U.S. company through a partnership between that company and a foreign corporation, not subject to U.S. tax, cannot be justified without a non-tax business purpose for the partnership. However, in denying a deduction for partnership losses, the D.C. Circuit went further than it had in prior cases and stated that a non-tax business purpose can exist only where there is a business need for the partnership. In other words, the partnership must be necessary to achieve a legitimate business objective or else the court will treat transactions engaged in by the partnership as nothing more than tax avoidance schemes. The D.C. Circuit’s opinion is important because of its far-reaching language. The application of a business purpose test rather than a business need test, can have a significant impact on a taxpayer. A business purpose test has traditionally required a taxpayer to show a reason for the transaction other than avoiding taxes. A business need test presumably will require a taxpayer to show that the transaction is necessary to achieve a business objective. Therefore, transactions that are inefficient or have unnecessary steps may be treated as shams for tax purposes.

Part I of this note sets forth the facts underlying the transactions at issue in the Boca cases. Part II discusses the decisions of the district court and the D.C. Circuit. Part III argues that the D.C. Circuit erred in finding for the Service merely because it had found for the Service in other similar cases. This case was different and should have been treated as such. This note will also argue that the new test promulgated by the D.C. Circuit is an unwise infringement on corporate independence.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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