"Manning Up": Twenty-First Century Tales Of Tax Avoidance And Examination Options On The I.R.S.'S Table

Published date04 April 2022
Subject MatterIntellectual Property, Tax, Patent, Income Tax, Tax Authorities
Law FirmRuchelman PLLC
AuthorMr Andreas Apostolides


"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."

– Justice Learned Hand, Helvering v. Gregory (1934)1

"If tax compliance were an industry, it would be one of the largest in the United States."

– Nina E. Olson, National Taxpayer Advocate (2013) 2

The U.S. tax system is a "self-assessment" model: upon determining how tax provisions apply to their transactions, taxpayers pay any tax due, and report the transactions to the I.R.S. in sufficient detail to permit the I.R.S. to confirm that liability was correctly calculated.3

Paradoxically, the tax system is so complex that it incessantly creates ambiguity and opportunity for abuse. Determining one's tax obligations is often difficult, even for taxpayers with simple profiles. When enterprising taxpayers with complicated facts are tempted to test the boundaries, the I.R.S. must devote significant resources to establishing and policing those boundaries.

The term "tax shelter" is defined in the Code as a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement if a significant purpose of such partnership, entity, plan or arrangement is the avoidance or evasion of Federal income tax.4

In this article we look at two very different taxpayers, and their participation in tax shelters – as well as reasons for which each became in recent weeks the focus of the tax press and/or the public at large.


Bristol-Myers Squibb (also referred to as "B.M.S.") is a New Jersey-based pharmaceutical company ranked #75 on the Fortune 500 list in 2021.5 Formed by the 1989 merger of Bristol-Myers and Squibb, two major New York pharmaceutical companies, the company is a global manufacturer of drugs used to fight cancer, HIV/AIDs, and cardiovascular disease, among other disorders.6

In 2012, a wholly owned U.S. subsidiary of B.M.S. transferred appreciated intangible property – apparently, patents to leading pharmaceutical drugs – in exchange for shares of a foreign unlimited liability company treated as a partnership for U.S. Federal income tax purposes.7 The stated purpose of the transaction was to "better align the geographical and operational focus" of the B.M.S. global affiliated group. The net effect of amortization claimed by the partnership, some of which was allocated back to the U.S., was to reduce B.M.S.'s U.S. tax bill by approximately $1.4B.

As part of entering into this transaction, an outside adviser was retained to value the contributed assets using a discounted cash flow analysis; the produced valuation report allocated fair market value almost entirely to each patent's "on-patent" period, i.e., the remaining period of validity; the report assumed precipitous decline in each patent's value upon expiration; the adviser also valued the contribution as a percentage of the total assets of the foreign partnership, including certain high-basis, high-value property contributed by a related foreign partner.

Meanwhile, the property contributed by the related foreign partner was non-depreciable or otherwise had a tax basis roughly corresponding to its fair market value.

B.M.S. received two opinions supporting the claimed tax benefits, including one from PricewaterhouseCoopers ("PwC") and the white shoe law firm of White & Case LLP

The Field Advice

In a letter providing advice for audit agents around the country (the "F.A.A." or "Field Advice"),8 the I.R.S. Office of Chief Counsel analyzed the transaction in detail. It noted that Code §704(c), a rule also mentioned in the 2015 notice which allocates taxable appreciation in contributed property to be allocated back to the contributing partner, was applicable.

As outlined in the Advice, Code §704(c), aided by a special partnership anti-abuse rule,9 permitted the I.R.S. to place the foreign partnership on a so-called curative accounting method. The method would prevent the U.S. affiliate from benefiting from Irish patent amortization while causing all the U.S. patents' gain to be allocated to the tax-indifferent foreign partner. To do so, the I.R.S. invoked an anti-abuse rule specific to Code §704(c) matters.

Unlike the general partnership anti-abuse rule,10 which requires a "principal...

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