Thus Judge Goeke admonishes Barnes Group, Inc. and Subsidiaries, in 2013 T.C. Memo. 109, filed 4/16/13.

Barnes is a publicly-traded Delaware metalsmithy founded in 1857 with worldwide reach. Barnes wanted to acquire new businesses, and had ginormous sums of untaxed cash stashed in Singapore. Barnes’ legal beagles claimed Singapore company law prevented ASA, Barnes’ Singapore subsidiary, from acquiring other companies’ stock. And Barnes’ high command wanted to bring the cash home anyway, tax-free of course.

So Barnes went shopping for a way to make it happen without paying tax. Deloitte and E&Y had nothing that pleased Barnes’ management, but PwC had a database with canned solutions for every problem.

Enter the reinvestment plan, a mix-and-match of loans and stock swaps among Barnes in the US and subsidiaries in Singapore, Canada, France and the UK.

The deal comes unglued over step transaction (interdependence of the steps) and our old friend economic substance.

Though Barnes tries to argue Singapore company law and some Delaware State tax benefit, Judge Goeke rebukes Barnes: “The only specific reference to Singapore law restrictions was in the PwC memo mentioning section 21 of the Singapore Companies Act. Oddly, petitioners do not cite section 21 of the Singapore Companies Act in their brief, nor do they explain the reason this restriction required involving Bermuda in the reinvestment plan. We will not attempt to do petitioners’ research or make their argument for them.” 2013 T.C. Memo. 109, at p. 52 (Citations omitted).

As for Delaware, “Petitioners have not explained what ‘state tax benefit’ they are referring to, and as noted supra, we will not attempt to do their research or make their argument for them. Furthermore, while we recognize that many large corporations create financing subsidiaries for various legitimate nontax business reasons, petitioners’ inability to show that the form of the plan was respected, discussed infra, renders any further consideration of petitioners’ ‘cash management’ argument moot.” 2013 T. C. Memo. 109, at pp. 53-54.

In short, do your homework.

Now for the clean room. Barnes had built some clean rooms wherein one could make green sheets, whatever they are, in one of Barnes’ warehouses. IBM used them for a while, then quitclaimed them to Barnes. Barnes reported gain on the deal, but now wants to claim it got back the clean rooms at the end of a lease, so Section 109 says no gain.

Judge Goeke: “Crucial in our determination is the fact that Barnes not only constructed the clean rooms in its warehouse, but also maintained control of and used those clean rooms for approximately 16 years making green sheets for IBM. In return Barnes was paid by IBM for its services; these payments reimbursed Barnes for all direct and indirect costs as well as a 10% fee. Although IBM had legal ownership of the clean rooms, Barnes was the party using those clean rooms in its own warehouse for its own benefit. The fact that the clean rooms were stored in the warehouse may have provided some indirect benefits to IBM (such as protection from the elements), but the direct benefit was to Barnes, which was able to use the clean rooms to obtain a profit as a result of its deal with IBM. We thus believe that IBM was not using or occupying Barnes’ warehouse and was therefore not a tenant to a lease.” 2013 T.C. Memo. 109, at pp. 58-59.

Judge Goeke notes that Second Circuit law rules here per Golson. After that Court’s gyrations to find a lease in Alphonso v. Com’r, Docket No. 11-2364-ag, dated 2/6/13, it might be worth Barnes’ team to do some homework and take an appeal. Oh yes, and read my blogpost “A New York Cooperative Conundrum – Part Deux”, 2/6/13.

Disclosure– A member of my immediate family works for PwC, but was not involved in this project. I did not very often have to tell her to do her homework or clean up her room.