Back from the Shadows: Section 269 and the IRS’s Renewed Crackdown on Tax Avoidance

Historically underutilised, Section 269 prohibits a company from acquiring control of another when the primary purpose is to obtain tax benefits – such as deductions, credits or deferrals – that would not otherwise be available. Although it has existed for decades, it had largely faded from the spotlight until recently, with the last major academic discussion of the statute dating back to the 1970s and early 1980s.

The catalyst for its resurgence was a Chief Counsel Advice (CCA) issued by the IRS, which involved a US taxpayer using check-the-box planning and a fiscal year-end change to defer income under the GILTI rules introduced by the 2017 tax reform. Specifically, a foreign subsidiary elected to be treated as a corporation and adopted a November 30th year-end, thereby enabling an 11-month window of tax deferral. The IRS ruled that this restructuring violated Section 269, as the principal purpose was deemed to be tax avoidance.

Featherman and Bodoh outline the technical facts of the case, emphasising that while the strategy complied with the letter of existing rules, the IRS disqualified the benefits based on the substance-over-form principle enshrined in Section 269. The implications are significant: even standard tax elections and structuring techniques – previously seen as routine – may now trigger scrutiny.

The podcast explores the broader implications, noting this move could cast a long shadow over common planning strategies, such as forming blocker corporations or utilising foreign entities for tax deferral. While the CCA is not binding precedent, it signals the IRS’s willingness to apply general anti-abuse doctrines more aggressively, even in cases lacking clear statutory or regulatory anti-abuse provisions.

Importantly, the partners express concern not just about IRS enforcement, but about auditors and attestation firms overreacting to this CCA. Bodoh notes that the vagueness of Section 269 creates room for overly conservative audit positions that could chill legitimate business transactions.

Though the specific facts of the CCA are unusual, and may not be broadly applicable, it is clear that taxpayers and advisers must now account for Section 269 in structuring decisions.