In Pacific Management Group et al. v. Commissioner (T.C. Memo 2018-131), the Tax Court has established that a reorganization with the intent of postponing tax payments on a flow of income yet to be distributed should be considered a distribution of dividends.
In particular, the controlling corporation had set up various subsidiaries with the sole purpose distributing management and contractual factoring fees to its shareholders. The court held that an ulterior motive was at play, aimed at trying to disguise the flow of income in order to avoid paying taxes on the distribution of dividends to the company’s shareholders.
Based on the evidence gathered, having verified that the subsidiaries were actually shell companies and having conducted in depth legal and economic analyses on the factoring and management contracts, the court stated that the latter were lacking in the qualities and quality typical of those traded at market value and, thus, devoid of any economic significance.
For these reasons, the court declared that the flow of income between the parent company and the beneficiaries of management and factoring contracts to be an actual distribution of dividends to shareholders.