Hewlett-Packard Company and Consolidated Subsidiaries, Petitioner-Appellant,
Commissioner of Internal Revenue, Respondent-Appellee. Hewlett-Packard Company and Consolidated Subsidiaries, Petitioner-Appellant,
Commissioner of Internal Revenue, Respondent-Appellee.
and Submitted November 14, 2016 San Francisco, California
from a Decision of the United States Tax Court Ct. Nos.
I. Horowitz (argued), Marc J. Gerson, George A. Hani, and
Steven R. Dixon, Miller & Chevalier Chartered,
Washington, D.C., for Petitioner-Appellant.
T. Catterall (argued), Francesca Ugolini, and Gilbert S.
Rothenberg, Attorneys; Diana L. Erbsen, Deputy Assistant
Attorney General; Tax Division, United States Department of
Justice, Washington, D.C.; for Respondent-Appellee.
Before: Sidney R. Thomas, Chief Judge, and Alex Kozinski and
Michelle T. Friedland, Circuit Judges.
panel affirmed the Tax Court's decision on a petition for
redetermination of federal income tax deficiencies that
turned on whether an investment by taxpayer Hewlett-Packard
(HP) could be treated as equity for which HP could claim
foreign tax credits.
bought preferred stock in Foppingadreef Investments (FOP), a
Dutch company. FOP bought contingent interest notes, from
which FOP's preferred stock received dividends that HP
claimed as foreign tax credits. HP claimed millions in
foreign tax credits between 1997 and 2003, then exercised its
option to sell its preferred shares for a capital loss of
more than $16 million. The Tax Court characterized the
transaction as debt, thus upholding the deficiency for the
a circuit split over whether the debt/equity question is one
of law, fact or a mix of the two, the panel explained that
the best way to read circuit precedent is that the test is
"primarily directed" at determining whether the
parties subjectively intended to craft an instrument that is
more debt-like or equity-like, taking into account eleven
factors set forth in A.R. Lantz Co. v. United
States, 424 F.2d 1330, 1333 (9th Cir. 1970). The panel
concluded that the Tax Court didn't err in finding that
HP's investment is best characterized as a debt.
panel also upheld the Tax Court's determination that
HP's purported capital loss, which can be deducted, was
really a fee paid for a tax shelter, which cannot be
KOZINSKI, CIRCUIT JUDGE.
a timeless and tiresome question of American tax law: Is a
transaction debt or equity? The extremes answer themselves.
The classic equity investment entitles the investor to
participate in management and share the (potentially
limitless) profits-but only after those holding preferred
interests have been paid. High risk, high reward. The classic
debt instrument, by contrast, entitles an investor to
preferred and limited payments for a fixed period. Low risk,
predictable reward. But a vast hinterland of hybrid financial
arrangements lurks in the middle.
the boundless ingenuity of financial engineering, tax law
insists on pretending that an instrument is either debt or
equity, then treating it accordingly-with sharply different
consequences for the taxpayer. A corporation's interest
payments on debt are deductible, for example, while the
dividends it pays to equity holders are not. This
black-or-white tax treatment gives taxpayers an incentive to
conjure up complex instruments that give them the perfect
blend of economic and tax benefits. Taxpayer gamesmanship, in
turn, puts courts in the ungainly position of casting about
for bright lines along an ...