To pay for Continental, Schaeffler Group borrowed about 11 billion euros from a consortium of banks. At the time, Schaeffler’s lenders, including Royal Bank of Scotland, were desperate, too, having suffered enormous losses on home mortgages. They wanted to avoid any more write-downs that might result if the company defaulted on the loans. So in 2009 and 2010, Schaeffler’s lenders restructured the debt in a devilishly complex series of transactions.
By 2012, these maneuvers had caught the eye of the Global High Wealth group. Paul Doerr, an experienced revenue agent, would head the audit. Eventually, the IRS discerned what it came to believe was the transaction’s essence: The banks had effectively forgiven nearly half of Schaeffler’s debt.
To the IRS, that had significant tax implications. In the wealth team’s view, Georg Schaeffler had received billions of dollars of income — on which he owed taxes.
The auditors’ view reflects a core aspect of the U.S. tax system. Under American law, companies and individuals are liable for taxes on the forgiven portion of any loan.
Source: The Top 0.5% Underpay $50 Billion a Year In Taxes and Crushed the IRS Plan to Stop Them — ProPublica