In Aventis, Inc. v. Commissioner, 166 T.C. No. 1 (2026), the United States Tax Court issued a significant opinion regarding the validity of a Financial Asset Securitization Investment Trust (FASIT) structure. Although Congress repealed the FASIT rules in 2004, this case provides a critical retrospective analysis of statutory compliance for securitization vehicles and the boundaries of the substantial compliance doctrine. The Court ruled in favor of the Commissioner, determining that the taxpayer’s arrangement failed to qualify as a FASIT from inception and that the purported debt instrument held by a foreign affiliate was, in substance, equity. Consequently, the petitioner was liable for deficiencies exceeding $38 million for the tax years 2008 through 2011.

Overview of the Transaction and Facts

The petitioner, Aventis, Inc., a domestic subsidiary of the French multinational Sanofi, S.A., sought to securitize intercompany loans to secure financing and achieve tax efficiencies. In 2000, Aventis entered into a securitization transaction with its French affiliate (SAAN), an advisor (Dynamo), and a bank (Chase).

The structure was intended to qualify as a FASIT under I.R.C. §§ 860H through 860L. Under the FASIT rules, valid "regular interests" were treated as debt for federal tax purposes, allowing the FASIT to deduct interest payments. The transaction involved the issuance of three distinct interests:

A "Class I Note" issued to Dynamo, designated as the ownership interest.
A "Class II Note" issued to Chase, designated as a regular interest.
"Series A/E Stock" issued to SAAN (the French affiliate) for $559.5 million, designated as a regular interest.

The tax strategy relied on the characterization of the Series A/E Stock. Aventis treated the dividends paid on this stock as deductible interest payments under the FASIT rules. Simultaneously, SAAN treated these payments as exempt dividends under French tax law.

Following the repeal of the FASIT rules effective January 1, 2005, the arrangement relied on a grandfather provision which allowed existing FASITs to continue "to the extent that regular interests issued by the FASIT before such date continue to remain outstanding in accordance with the original terms of issuance". The IRS subsequently disregarded the FASIT, allocating the income generated by the assets directly to Aventis.

The Taxpayer’s Request and Positions

Aventis petitioned the Tax Court, arguing that the arrangement was a valid FASIT during the years in issue (2008–2011). The petitioner contended that the Series A/E Stock met the statutory definition of a "regular interest." Alternatively, Aventis argued that even if the arrangement failed to strictly comply with all statutory requirements, it "substantially complied with the requirements of the FASIT rules" and should be respected. Finally, Aventis argued that if the FASIT was invalid, it was not the "beneficial owner" of the assets and thus should not be taxed on their income.

Court’s Analysis of FASIT Validity

The Tax Court’s primary analysis focused on whether the Series A/E Stock qualified as a "regular interest" under section 860L(b)(1). The statute requires that a regular interest must "unconditionally entitle[] the holder to receive a specified principal amount" and provide for interest payments based on a fixed or permitted variable rate.

Failure to Specify Principal Amount The Court found that the Series A/E Stock failed the principal amount requirement. The stock did not entitle SAAN to a return of its original issue price; rather, it offered a "liquidation preference" equal to the fair market value (FMV) of the FASIT assets less expenses. The Court noted that "The FASIT arrangement did not provide the Series A/E Stock with a specified principal or similar amount because the liquidation preference was tied to the FMV of the FASIT assets". Because the stock bore the risk of FMV variations and FASIT expenses, the Court held: "The preferred stock was not a valid regular interest when the purported FASIT was implemented because it did not unconditionally entitle A to a specified principal amount".

Failure to Meet Fixed or Permitted Variable Rate Requirements The FASIT rules required interest payments to be based on a fixed rate or a permitted variable rate, such as a weighted average rate. The dividends on the Series A/E Stock were declared at the discretion of the board of directors and calculated based on residual FASIT earnings. The Court rejected the petitioner’s argument that the structure effectively provided a weighted average rate, stating, "[T]he preferred stock was not a valid regular interest when the purported FASIT was implemented because it did not entitle A to interest payments based on a fixed or permitted variable rate".

Operational Failures and the Grandfather Clause

The Court further held that even if the FASIT were valid initially, operational deviations would have terminated its status. Specifically, the petitioner allocated income from a money market account in a manner that deviated from the transaction documents, resulting in "the Series A/E Stock’s receiving more interest than the weighted average". Furthermore, when Chase withdrew in 2003, the petitioner failed to update interest calculation formulas, resulting in payments that were not a permitted modification to a weighted average rate.

Regarding the FASIT repeal, the Court found that Aventis failed to satisfy the grandfather clause. The parties extended the FASIT term in 2005 by waiving a required 90-day notice provision, which constituted a modification of terms. Consequently, "P failed to meet the requirements of the grandfather clause that was enacted when I.R.C. §§ 860H through 860L were repealed in 2004".

Rejection of the Substantial Compliance Doctrine

Aventis argued that any deviations were minor and that it had substantially complied with the statute. The Court firmly rejected this application of the doctrine to substantive statutory requirements. The Court cited precedent that when requirements relate "to the substance or essence of the statute," courts require "strict adherence to all statutory and regulatory requirements". The Court concluded that the requirements for a regular interest under section 860L(b)(1) were essential, not procedural. Therefore, "P’s failure to strictly comply with statutory requirements cannot be excused by the substantial compliance doctrine because they were essential statutory requirements rather than procedural or directory regulatory requirements".

Beneficial Ownership and Debt vs. Equity Analysis

Having invalidated the FASIT, the Court addressed whether Aventis was the beneficial owner of the assets. The Court applied a four-factor test: "(1) the risk of investment loss, (2) the opportunity for investment gain, (3) the ability to select and control the securities for investment, and (4) the right to exercise other prerogatives of ownership". Because Aventis held legal title, had the right to replace assets, and controlled the receivables, the Court held that "P has failed to show that it was not the beneficial owner of the assets" and "P must recognize the interest income generated by the FASIT assets".

Finally, the Court analyzed whether the Series A/E Stock should be treated as debt or equity under general tax principles to determine if the "dividends" were deductible as interest. Applying the Fin Hay factors, the Court found that the instrument was equity. Key factors included the parties’ intent to treat it as stock for French tax purposes, the instrument’s voting rights, its subordinated status, and the lack of a fixed maturity date. The Court noted that "Babcock & Brown’s promotional materials and petitioner’s approval presentation characterized SAAN’s interest as stock or preferred stock".

Conclusions

The Tax Court ruled entirely in favor of the Commissioner. The holding serves as a stark reminder that statutory securitization vehicles require strict adherence to code requirements. The Court concluded:

"The preferred stock was not a valid regular interest when the purported FASIT was implemented. . . ."
"P failed to meet the requirements of the grandfather clause. . . ."
"P’s failure to strictly comply with statutory requirements cannot be excused by the substantial compliance doctrine. . . ."
"[T]he preferred stock was in substance equity, and therefore P is not entitled to business interest deductions in the amounts it paid to A as dividends for each year in issue".

Prepared with assistance from NotebookLM.