Bush Budget Seeks To Close ‘Cash-Rich Split-Off’ Corporate Tax Shelter

By Leroy Baker, Tax-News.com, New York

11 February 2005

Proposals contained in President Bush’s 2006 budget document seek to restrict the use of a corporate tax shelter in which companies attempt to reduce tax by buying back their stock held by other companies.

The scheme, known as a ‘cash-rich split-off,’ allows firms to use cash for up to 90% of the buyback value, while the remaining 10% can be paid for by selling a small business asset, which has to have been operated for five years or more.

However, under new revenue-raising and tax compliance measures contained in the 2006 budget proposals, firms could only use cash for a maximum of half the value of the buyback, with a significant asset having to be traded for the remainder.

According to the Wall Street Journal, the Treasury Department estimates that the proposed change would raise $87 million in tax revenue over the next 10 years.

Although this figure is relatively small, a Treasury Department official explained to the Journal that this is because firms are likely to be deterred from using the structure.

Recommended