"It's somewhat aggressive," observes attorney Cummings. He recalls the IRS's advice to field agents in 2002 to disallow arrangements like one the agency cited, in which the substitution of a domestic subsidiary's assets for those of a foreign sub's amounted to an indirect guarantee of the parent's debt. The Huntsman transaction, says the former IRS official, "is one step away from that. It's a pledge of notes versus assets, and there's no authority on that." If the transaction is not as aggressive as the one disallowed in the 2002 case, "it's the next best thing," says Cummings.
Still, Lehman's Willens notes that the agency's advice to field agents doesn't carry as much legal weight as a private letter ruling, let alone a revenue ruling. Willens also says that the tax court chided the IRS for a 1976 revenue ruling that the court claimed amounted to an attempt, as Willens puts it, "to bootstrap their way to a court victory" in the Ludwig case. And even in the 2002 field-service advisory, adds Willens, the IRS acknowledged that its rules stop short of saying that any "facilitation" of a financing is the same thing as an indirect guarantee.
John Deshong, vice president for capital tax at privately held engineering firm Bechtel Corp., contends that such arrangements may pass muster so long as the notes aren't heavily encumbered at the behest of lenders. "Watch your negative covenants," he warns, pointing out that he was careful to do that when, as tax vice president of Edison Mission Energy, he arranged a similar transaction in December 2003. That deal has not yet been reviewed by the IRS.
So why did S&P decide to rate Huntsman's transaction absent a ruling? Essentially, the rating agency is betting that the IRS wouldn't prevail in tax court. And so, presumably, is Huntsman.
Ronald Fink is a deputy editor of CFO.
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