In a recent decision, Baker Hughes, Inc. v. United States, (5th Cir., 2019), the Fifth Circuit affirmed a district court summary judgment ruling that a U.S. parent company’s $52 million payment to its Russian subsidiary was not an ordinary and necessary business expense pursuant to § 162 of the Internal Revenue Code. The payment was made to prevent liquidation of the subsidiary by the Russian government, as the subsidiary was undercapitalized (in contravention of the Russian Civil Code). The court disallowed the claimed deduction as it was “untethered to any actual expense” of the subsidiary.
Tax Foresight correctly predicted that the $52 million payment was not an ordinary and necessary business expense. It made this prediction based on several factors, including:
The expense resulted in a payment or benefit to a subsidiary or another company that shares the same parent company as the taxpayer,
The benefits accruing from the expense extend beyond the tax year for which the deduction is sought, and
The taxpayer has not frequently incurred this type of expense in the past
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