Tax Court finds advance agreements are equity, not debt  

September 20: The U.S. Tax Court today issued a 100-page memorandum opinion addressing the appropriate characterization of advance agreements issued by Dutch subsidiaries to U.S. subsidiaries, and concluded that the advance agreements were more appropriately characterized as equity, rather than debt, for federal income tax purposes. Pepsico Puerto Rico Inc. v. Commissioner, T.C. Memo. 2012-269 (September 20, 2012)

Text of the opinion [PDF 164 KB]


The IRS asserted that the substance of the transactions—revealed primarily through taxpayer dialogue with the Dutch Revenue Service during negotiations to obtain a Dutch tax ruling—evidenced the taxpayer’s clear intentions in structuring the advance agreements, and supported characterizing the instruments, as a creditor-debtor arrangement.


The taxpayer disputed this characterization, and asserted that the form of the advance agreements comported with their substance and that when correspondence between the taxpayer and the Dutch Revenue Service was considered in the light of relevant testimony, allowed for a conclusion that the advance agreements were legitimate equity instruments for U.S. federal income tax purposes.


The Tax Court today issued its opinion finding that the taxpayer argument was more persuasive, and that the advance agreements exhibited more qualitative and quantitative indicia of equity than debt.



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©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.


The KPMG logo and name are trademarks of KPMG International.


KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.


The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Direct comments, including requests for subscriptions, to us-kpmgwnt@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

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