Laidlaw Transportation Case

Laidlaw Transportation, Inc. And Subsidiaries, Petitioners V. Commissioner of Internal Revenue, Respondent

Facts

Due to the rapid expansion, LTL acquired many companies to expand its bus transportation business and hazardous waste services business. LTI was a holding company for LTL’s U.S. businesses. And LIL is LTL’s another wholly-owned company. In order to compete with the corporate’s rivals , WMI and BFI, in purchasing U.S. companies. The accountants of the company, Coopers and Lybrand advised that LTL’s Canadian subsidiary, LIL, could form a Netherlands subsidiary to fulfill an intercompany loan strategy. This strategy was able to help the companies in Canada and U.S. deduct the interests. LTL was able to deduct interest that it paid

DeGroote and Haworth inquired three banks whether they were interesting in financing LII to purchase GSX with a long term investment. However, every investment bank proposed that the aquisition of GSX should not be financed solely with bank loans, equity and subordinated debt should be considered at the same time. Besides, in their proposal, the banks suggested to issue stocks to public. This proposal was rejected by both of LTL and LII since GSX’s audited financial statements was not separated. In addition, the equity contribution was not favorable for LII. Debt from LIIBV was much favorable comparing with the debt from commercial banks. As a consequence, the company decided to apply their intercompany loan strategy to acquire

Due to the LII’s credit lines set by banks, its debt to equity ratio should not exceed 2:1, therefore, the total debt should no more than $247.8 million dollars. However, after acquiring GSX, the debt for LII was up to $491.1 million. The debt to equity ratio for LII was 3.1: 1 while its rivals’ ratio were lower than 2:1. LTI also did not comply with the loan agreements after acquiring GSX. As a result, LTI and LII had to negotiate its loan with banks again since it failed to fulfill the ratio requirements that were made by commercial banks. The principle, Haworth requested to fix the loan agreement between LIIBV and U.S. subsidiaries. He made following requests to director of LIIBV: 1) the interest rates should be set as the prime rate of ABN bank plus 2%, the maturity date was fixed; 2) Financial ratio agreements should be omitted; 3) No limitation on the loan to subsidiaries as far as the loan was available; 4) two loan accounts would be set up for LTI; 5) the changes on the amount of the loan would be recorded on a grid promissory