Was Heinz's Two-Step Redemption a Sham?

14 Pages Posted: 19 Sep 2007 Last revised: 23 Jun 2010

Ethan Yale

University of Virginia School of Law

Abstract

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).

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

JEL Classification: K34

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: https://ssrn.com/abstract=1015125

Ethan Yale (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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