Dell Considered Novel Tax Strategy in Buyout

http://dealbook.nytimes.com/2013/07/24/dell-considered-novel-tax-strategy-in-buyout/?_r=0

"the slides appeared in a Dell filing as recently as May 20. No other tax structure regarding the buyout has emerged in filings, and it is unclear how large shareholders, including Carl C. Icahn and his ally, Southeastern Asset Management, viewed it. Mr. Icahn was not available for comment on Tuesday. Calls to a Southeastern spokeswoman were not returned.

David Frink, a Dell spokesman, declined to comment on Tuesday on the rejected strategy or its successor. So did Brian Marchiony, a JPMorgan spokesman.

What is clear is that Dell was presented with a maneuver that some tax lawyers said appeared legal but aggressive.

Under a section labeled "political," the slides ask whether use of the strategy could "raise issues" or "impact" government contracts, indication of concern that it could have faced a backlash.

The apparent reason is the strategy resembles a corporate inversion, a stamp in recent decades for tax-dodging corporations like Tyco International and Nabors Industries. Those companies prompted Congressional investigations and tougher I.R.S. rules after they moved their headquarters to the offshore haven of Bermuda, with a post-office box holding company as the parent to the main United States subsidiary that housed operations and management.

Mr. Willens said the strategy would most likely have passed technical muster under I.R.S. rules but would also have brought "political and popular heat to Dell, and reputational risk."

The proposed strategy involved conducting the buyout through a newly created foreign entity that would have effectively owned Dell. Under United States tax laws, that foreign entity would have legally escaped United States corporate taxes because it would have been a partnership for United States tax purposes.

At the same time, the foreign entity, whose jurisdiction was not specified, would have been treated under tax laws in that unspecified jurisdiction as a corporation and would have been subject to foreign taxes. Those two contrasting tax outcomes, embodied in one structure, would have created a "foreign hybrid," able to navigate different national tax regimes and access offshore cash while paying little or no United States taxes.

The "unprecedented" piece in the JPMorgan strategy was the proposal that Dell designate the foreign hybrid as a partnership, securities filings show. The foreign hybrid would have held a new entity called Denali, which would have held Dell shares, and Denali would have owned Dell's foreign subsidiaries. (Mr. Dell was known in secret negotiations on the buyout as "Mr. Denali.")"

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