1. Shell companies, or “single-purpose” entities,
havecomeintothelimelightin recentyearswith
the hacking of what are referred to as “the
Panama Papers.” Many politicians and pundits
of the media are quick to rush to judgment on
such structures, claimingthat these entities are
used solely for the purpose of avoidingU.S. tax
liability.
However, currentlawsandregulationshave
altered the landscape for persons wishing to
hide money overseas. The days of openingan
offshoreaccount through a foreign shell com-
pany to hide money from the IRS have most
likely cometoan end. With that said, thereare
legal, legitimate business and tax reasons for
such structures.
FATCA
Whendiscussingthetaxramificationsofaforeign
shell company, itishardnottoconsider theIRS’s
implementation of the Foreign Account Tax
Compliance Act (FATCA), which has severely
dampened any reasonableexpectation that these
shell companies could be used to successfully
avoid U.S. taxes. In March 2010, Congress en-
acted theFATCA, which targets noncompliance
by U.S. taxpayers with foreign accounts, and cre-
ates a channel for U.S. taxpayers to report their
ownership in foreign financial accounts and cer-
tain offshore assets. An in-depth discussion of
FATCA isbeyondthescopeof thisarticle, butitis
nonetheless relevant in understanding that
FATCA severelyclosesthegapfor U.S. tax avoid-
ancewithaforeignentity, whether itbeacorpora-
tion, LLC, or trust.
FATCA requires foreign financial institu-
tions (FFIs) to report to the IRS information
about financial accounts held by U.S. taxpay-
ers, or by foreign entitiesin whichU.S. taxpay-
ers hold a substantial ownership interest. FFIs
areencouraged to either directly register with
theIRS to comply with theapplicableFATCA
regulations, or comply with a FATCA inter-
governmental agreement (IGA). A FATCA
IGA is an agreement between theIRS and the
taxing authorities of other jurisdictions in
which both jurisdictions agreeto exchangein-
formation relatedtocertain taxpayers.
Since 2010, the IRS has entered into IGAs
with113differentjurisdictions, andthatnum-
ber isexpectedtoincreasein thenear futureas
governments exchange additional informa-
tion. With the increase of IGAs, the reality is
that the world is moving toward a global re-
Although shell
companies have
long had the
reputation of
existing for the
purpose of
hiding money
overseas, they
are in fact a
useful tax
planning tool.
GEORGE L. METCALFE JR., is an associate with Richman Greer,
wherehefocuses his practiceon taxation, international and domestic
estateplanning, corporatelaw, and probatelaw. Hemay bereached at
gmetcalfe@richmangreer.com.
THE ESTATE AND
TAX PLANNING
BENEFITS OF SHELL
CORPORATIONS
GEORGE L. METCALFE JR., DECEMBER ISSUE
252 Pr ac t ic al t ax St r at egieS Dec ember 2016

2. porting system that will no longer support the
use of foreign shell companies to hide money
that would otherwise be taxable.
Thelegalandpractical
benefitsofashellcompany
Because FATCA impedes most plans of using
shell companies for tax avoidance, one may won-
der what purpose such entities serve. The truth is
that there are many valid and legal reasons for
employing such structures, besides the obvious
benefits of careful tax planning.
Asset protection. The most obvious legal
benefit afforded by shell companies is the
shield they provide their owners. Generally,
the judgment creditors of an individual sin-
gle-purpose entity will be required to usurp
all of the assets held in that entity before col-
lecting on the personal assets owned by the
shareholder, partner, or membership holder.
These considerations are practical when plan-
ning for clients who are susceptible to litiga-
tion and liability in their individual profes-
sions, such as doctors, lawyers, and corporate
officers.
The political instability in many countries
also provides a very important reason to cre-
ate foreign single-purpose entities for some
foreign clients. For many foreign taxpayers
living in countries with political turmoil and
unstable governments, privacy with respect
to third parties is an important goal. There
are numerous cases in which foreign taxpay-
ers have been attacked and even killed when
outside parties have learned about their par-
ticular holdings and assets. As mentioned
earlier, FATCA has challenged the specific
goal of maintaining privacy with such struc-
tures. However, it is still possible to use these
structures for privacy while remaining com-
pliant with U.S. tax laws.
Joint ventures. Joint ventures pose some of the
most common practical uses of shell companies.
In many cases, joint ventures will require each
participant to create an entity for his or her spe-
cific share of the venture. Such structure is often
used by a participant to separate and organize
each participant’s share of the profits, costs, and
tax deductions. A participant may want to add an
insurance policy or hedge the risks associated
with a particular investment that would otherwise
complicate the relationship between the parties to
the venture, or not be permissible through the op-
erating entity.
In other circumstances, the shell com-
pany may provide a “face” for a particular
venture, and serve the sole purpose of organ-
izing the investment structure. There are
many reasons a shell company may be bene-
ficial for a joint venture that are unrelated to
tax avoidance.
Succession planning for domestic business.
The traditional structure for estate planning
does not always serve a client’s testamentary
goals. Estate planners have often implemented
the single-purpose entity for the succession plan
of a client’s closely-held business. In these sce-
narios, the single-purpose entity owns all of the
client’s ownership interest in an operating com-
pany, and provides provisions with respect to
the future management of such interest. In
many ways, the shell company provides lan-
guage similar to a trust with the management of
a business entity, while having no actual busi-
ness operation.
Removal from force heirship rules of other juris-
dictions. Shell companies have also been effective
in assisting clients who are dual citizens. Some ju-
risdictions have “forced heirship” laws that re-
quire a decedent to pass property to their chil-
dren, regardless of the decedent’s wishes. The
shell company serves as an important estate plan-
ning tool in restructuring the ownership of an
asset located in a forced heirship jurisdiction.
Consider the example of a client who is a
citizen of Italy and the U.S., and wants to leave
all of his property to his spouse, instead of an
estranged child. The client owns real estate in
Italy, but lives in the U.S. Under the laws of
Italy, the client is required to devise property to
his estranged child, regardless of his wishes.
To validly and legally ensure that his wishes
are met, the client may create a shell company
in the U.S. or other jurisdiction, which will
own the Italian real estate that would be subject
to Italian inheritance law if he owned outright.
By using the shell company, the client has
changed his ownership in the real estate into an
ownership interest in an entity, which is sub-
ject to the laws of the jurisdiction where the en-
tity is organized. Furthermore, the client has
achieved the goal of being tax compliant while
ensuring that his testamentary goals are met.
Taxandestateplanningforforeign
taxpayersandoverseasassets
Economic globalization and the increase of cross-
border transactions have led to dramatic changes
253Practical tax StrategieSDecember 2016SHeLL cOrPOrATIONS

3. in the practice of tax and estate planning, espe-
cially with the rise in foreign investment in the
U.S. Foreign taxpayers make up somewhere be-
tween 10%-30% of the average tax practitioner’s
clientele. This reality has required tax practition-
ers and accountants to become more creative
problem solvers in implementing structures that
best serve their client’s needs.
In some situations, the traditional “five-
point” estate plan (which includes the pour-
over will, revocable trust, living will, durable
power of attorney, and designation of health
care surrogate) will be of limited assistance to a
foreign client in planning for wealth transfer
and income taxes. While the five-point estate
plan may be of limited assistance to a foreign
taxpayer from a tax planning perspective, there
are practical uses for these structures, such as
alternatives to probate and some privacy con-
siderations. Most tax practitioners will need to
employ a foreign entity or a string of foreign
entities to achieve maximum tax optimization,
depending on the assets the client owns and the
complexity of structuring the client’s invest-
ments.
Planning for the estate tax. When dealing with
foreign taxpayers, a tax practitioner should con-
sider a foreign shell company for ownership of as-
sets such as U.S. real estate, U.S. securities, and
other closely held U.S. businesses depending on
the other shareholders or partners. A foreign en-
tity is by definition a “shell company” because it
will have no other purpose except holding the
shares of another entity or owning the underlying
investment, and thus, will not have any opera-
tions of a business. When the underlying invest-
ment is deemed to be situated within the U.S. (a
U.S. situs asset) under Section 2104, a foreign en-
tity can be employed effectively as an insulator of
U.S. estate taxes, although the foreign taxpayer
may be required to sacrifice from an income tax
perspective.
Considering that the estate tax exemption
for foreign taxpayers is $60,000, the U.S. estate
tax should always be at the forefront of every
practitioner’s structure when planning for for-
eign families and their testamentary goals. In
most cases, the estate tax benefits of employing
a foreign single-purpose entity to own an in-
vestment substantially outweigh the sacrifices
made on the income tax consequences of such
structure. In addition, employing such an en-
tity allows a foreign taxpayer to have flexibility
with potential gifts made in the future to their
loved ones.
The use of foreign entities for U.S. citizens
or persons domiciled in the U.S. makes less
sense for estate tax purposes, due to the fact
that all citizens and persons domiciled in the
U.S. are subject to estate tax on all of their
worldwide assets. In addition, because of the
Code’s income tax anti-deferral regime, U.S.
persons owning a substantial interest in a for-
eign entity may find themselves in a detri-
mental income tax position for such owner-
ship structure. Likewise, the benefits afforded
to foreign taxpayers who own a foreign entity
are not reciprocated to persons domiciled in
the U.S.
Planning for income taxes. A U.S. person for
income tax purposes may be less inclined to
own certain foreign entities that run the risk of
qualifying as a controlled foreign corporation
or a passive foreign investment company
(PFIC). A foreign entity owned by a U.S. person
will be classified under one of these classifica-
tions for U.S. income tax purposes and subject
the U.S. taxpayer to the Code’s anti-deferral
regime.
The anti-deferral regime requires that a
U.S. taxpayer pay income tax at the corpora-
tion and shareholder level regardless of
whether a distribution from the corporation
actually took place. If the foreign entity is
treated as a PFIC, the IRS will impute an in-
terest component at the shareholder level,
and tax the imputed interest to the U.S. per-
son. When planning for a U.S. person to in-
vest overseas, a pass-through entity is the best
structure in most cases. Ultimately, a tax
practitioner will need to consider the tax-
payer’s needs and other variables, such as the
laws of the jurisdiction.
With respect to foreign taxpayers, a for-
eign shell company can serve as a favorable
tool for income tax planning depending on
the classification of such entity. Foreign enti-
ties can use the pass-through taxation rules
afforded to partnerships and LLCs, as long as
they do not qualify as a “per se” corporation
under the Code and regulations. In some
254 Practical tax StrategieS December 2016 SHeLL cOrPOrATIONS
While the IRS’s reliance on Section 269 has
made it difficult to disallow certain benefits
for tax avoidance purposes, a tax practitioner
must be wary of potential challenges on such
grounds, in addition to the potential for a
substance-over-form, step transaction, or
sham transaction doctrine challenge.

4. cases, the underlying investment may require
such a structure.
Although a pass-through structure may as-
sist a foreign taxpayer’s income tax plans, it
may also place the taxpayer in an uncertain tax
position for estate tax purposes due to the lack
of related IRS guidance.
Section 269 and potential tax avoidance treat-
ment. The broad language employed by Section
269 may alarm certain taxpayers who use the
structure of a holding company or shell company
to acquire other companies. However, it is impor-
tant to note that the IRS has had mixed results in
relying on Section 269 to disallow certain credits
and deductions for the acquiring taxpayer.
Section 269 states that:
If—
any person or persons acquire, directly or indirectly, con-
trol of a corporation, or
any corporation acquires, directly or indirectly, property
ofanothercorporation,notcontrolleddirectlyorindirect-
ly,immediatelybeforesuchacquisition,bysuchacquiring
corporationoritsstockholders,thebasisofwhichproper-
ty,inthehandsoftheacquiringcorporation,isdetermined
byreferencetothebasisinthehandsofthetransferorcor-
poration,
and the principal purpose for which such acquisition was
made is evasion or avoidance of Federal income tax by se-
curing the benefit of a deduction, credit, or other al-
lowance,whichsuchpersonorcorporationwouldnototh-
erwiseenjoy,thentheSecretarymaydisallowsuchdeduc-
tion, credit, or other allowance.
The IRS has relied on Section 269 when at-
tempting to disallow the benefit of an acquired
subsidiary’s net operating losses (NOLs) to the
acquiring holding company to offset income
tax. A prime example of such a challenge by the
IRS was in Plains Petroleum Co.1
In Plains Petroleum Co., the parent-acquir-
ing company entered into a stock purchase
agreement with Tri-Power, a company with
substantial NOLs, in which Tri-Power would
become a subsidiary of the parent company.
Subsequently, the parent company transferred
all of its oil and gas properties to the newly ac-
quired subsidiary, and from 1987 to 1993,
avoided paying income tax on the income gen-
erated from the transferred properties, due to
the subsidiary’s substantial NOLs. The Tax
Court found that the purchase of the subsidiary
was pursuant to a pre-existing plan to replace
the parent company’s reserves and diversify op-
erations. Therefore, the court held that business
considerations, not tax avoidance, were the
principal purpose for the acquisition.
It is important to note that although the
asset drop-down to the subsidiary fell squarely
within Reg. 1.269-3(b), the formal documented
policy partaken by the parent in Plains Petro-
leum established a nontax avoidance motive
for the acquisition.
Although the IRS failed to establish a tax
avoidance purpose in Plains Petroleum, a re-
cent Seventh Circuit case, In re South Beach Se-
curities, Inc.,2
may have provided Section 269
with some “teeth.” In the case, the shell com-
pany provided in a disclosure statement that its
purpose for a bankruptcy reorganization was
to monetize the NOLs of the acquired com-
pany. In South Beach Securities, after relying on
Section 269 and a long line of precedent re-
garding the substance-over-form transaction,
the Seventh Circuit affirmed the district court,
because the parent company’s proposed reor-
ganization plan was filed for the sole purpose
of income tax avoidance.
While the IRS’s reliance on Section 269 has
made it difficult to disallow certain benefits for
tax avoidance purposes, a tax practitioner must
be wary of potential challenges on such
grounds, in addition to the potential for a sub-
stance-over-form, step transaction, or sham
transaction doctrine challenge. To ensure that
Section 269 does not pose a problem for a shell
company’s ownership of stock, a practitioner
should always consider the purposes involved
for such structure and be ready to defend those
purposes should the IRS decide to rely on Sec-
tion 269 in the future.
Conclusion
The shell company will often be associated with
tax avoidance due to a history of using it for
abuses and illegal purposes. However, the days of
hiding money overseas for the illegal purpose of
dodging taxes have come to an abrupt halt. Un-
doubtedly, such structures have been operated for
illegal purposes, but one must consider and lever-
age the legal purposes in employing them. Ac-
cordingly, while the use of shell companies to
maximize a taxpayer’s investment and minimize
his or her potential tax liability incites ideas of
fraud and dishonesty to the casual observer, such
structures are legal and highly effective in accom-
plishing a taxpayer’s legitimate needs. I
255Practical tax StrategieSDecember 2016SHeLL cOrPOrATIONS
1
Tcm 1999-241.
2
606 F.3d 366, 105 AFTr2d 2010-2390 (cA-7, 2010), aff’g
421 br 456, 104 AFTr2d 2009-5663 (Dc IL, 2009).