According to the IRS companies are allowed to file what are known as "consolidated returns" - returns filed assuming that they are part of the same parent corporation and assuming that one of the companies involved is at least 80% owned by the other company.

Though such a rule seems simple enough on paper, in practice it can very easily trip up the unwary filer. For instance, take the real world case of Fairfax Financial Holdings now being discussed in the news. According to its website Fairfax is a financial services holding company. From 2003-2006 Fairfax sought to offset its own losses against income from a subsidiary, named Odyssey Re Holding Corporation, and Fairfax thus reduced its tax bill by $400 million - or so it thought.

You see the issue was that Fairfax did not initially own an 80% stake in Odyssey. So, in an attempt to reach the 80% ownership threshold Fairfax, instead of simply outright buying the requisite ownership stake, wrote an i.o.u to one of Bank of America's Cayman Island affiliates. Bank of America then borrowed the shares needed for the neccessary ownership stake in Odyssey, and transferred them to Fairfax who, in turn, reimbursed Bank of America. Here is the problem now facing a Fairfax trying to be too clever for its own good - do those machinations meet the IRS definition of "ownership" needed to reach the 80% threshold for a consolidated return that would then in turn have allowed Fairfax to claim the $400 million reduction in its tax bill (through the aforementioned offset of income from Odyssey against its own losses)?

Needless to say this is an issue for Fairfax and the IRS. Nevertheless, for our purposes it points to an interesting lesson regarding some basic precepts of tax compliance - and, in regards to Fairfax a potentially bad outcome (according to many tax experts - not just our attorneys) all because it ignored a very simple lesson which we have been teaching our clients for years. A lesson with an answer that those of you who subscribe to the TIR Answer Center should be able to sit back and know. A lesson and answer that though predicated on numerous factors likely turns on an identification of exactly what elements of the many in this real world fact pattern stand out as of particularly singular importance in determining whether or not Fairfax's actions rose to a level of non-compliance that may have landed this filer in extroadinary hot water with the IRS.