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Was Heinz's Two-Step Redemption a Sham?

Ethan Yale

University of Virginia School of Law

Tax Notes, Vol. 117, No. 4, October 22, 2007
Georgetown Law and Economics Research Paper No. 1015125

Heinz's wholly owned subsidiary purchased on the market over $131 million worth of Heinz's common shares. A few months later, the subsidiary sold 95% of the Heinz shares to Heinz, and sold the 5% balance to an unrelated third party. Heinz claimed a $124 million tax loss from this series of transactions, even though it suffered no corresponding economic loss. The Court of Federal Claims held that the series of transactions was a sham and, in the alternative, should be recharacterized under the step-transaction doctrine. This Article critiques the parties' arguments and the court's analysis. The two key take-aways are (1) that Heinz's transaction did not yield the tax benefit claimed for technical reasons that the government (inexplicably) didn't raise at trial and (2) that it is ambiguous whether the Court of Federal Claims properly applied the judge-made substance-over-form principles it relied on in its judgment, so reversal is a real possibility (unless the Federal Circuit agrees to take notice of the transaction's technical defect for the first time on appeal).

Number of Pages in PDF File: 14

Keywords: tax law, tax shelters, tax policy, corporate tax

JEL Classification: K34

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Date posted: September 19, 2007 ; Last revised: June 23, 2010

Suggested Citation

Yale, Ethan, Was Heinz's Two-Step Redemption a Sham?. Tax Notes, Vol. 117, No. 4, October 22, 2007; Georgetown Law and Economics Research Paper No. 1015125. Available at SSRN: http://ssrn.com/abstract=1015125

Contact Information

Ethan Yale (Contact Author)
University of Virginia School of Law ( email )
580 Massie Road
Charlottesville, VA 22903
United States

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