Compaq V. Commissioner - Where is the Tax Arbitrage?

Abstract

The transactions that gave rise to the Fifth Circuit decision in Compaq Computer Corporation v. Commissioner and to the Eighth Circuit decision in IES Industries Inc. v. Commissioner have been characterized as blatant tax avoidance schemes, undeserving of respect by decent people. The pro-taxpayer decisions in those cases have been attacked as illogical and dangerous. Professors Klein and Stark attempt to cast a different light on the transactions. They offer a more benign characterization of the transactions and suggest that the proper judicial treatment is far from clear. Their analysis is based on the propositions that the transactions involved true economic arbitrage rather than classic tax arbitrage and that the foreign tax credit was not, analytically, a crucial element. They conclude that the circuit courts properly rejected the Commissioner's theory that the transactions were economic losers apart from taxes. They suggest, however, that the transactions could possibly have been rejected because of their contrived nature or because of the particular taxpayers' state of mind in entering into them.