DEFINITION of Incestuous Dealing
Incestuous dealing is a transaction or series of transactions among related parties designed to create advantageous financial benefits for one or more of the parties involved. Often, the purpose of incestuous dealing is to evade taxation. Although this type of business transaction may not be technically illegal in the eyes of the Internal Revenue Service (IRS), it still may be considered dishonest or a shady practice that the tax authority will eventually attack.
BREAKING DOWN Incestuous Dealing
Incestuous dealing can be associated with transfer pricing, a long and common practice of multinational corporations to minimize tax bills. Transfer pricing is not illegal, but if the practice is abused by a company, it will invite some scrutiny by tax authorities. A company with subsidiaries flung across the globe may choose to conduct intercompany transactions that would result in booking more profits in jurisdictions with lower (or zero) tax rates and less profits in jurisdictions with higher tax rates. There is an "arm's length" principle in intercompany dealings, but as long as so-called tax havens exist, multinational corporations will continue to conduct these types of incestuous dealings.
From Appalachia to Wall Street
Banjo playing can be heard on Wall Street. Sometimes we're talking first or second cousins, such as the case of the Nigerian Barge Deal; sometimes we're talking brother and sister, as was the case with some collateralized debt obligations (CDOs) just before the subprime market implosion. As investor demand suddenly disappeared for CDOs, investment banks on Wall Street that packaged and marketed the securities found themselves with too much unsold inventory. These banks, including Merrill Lynch, UBS, Bear Stearns, Lehman Brothers, Goldman Sachs and others, began to buy one another's unsold inventory. In this case, the incestuous dealing on Wall Street for these products was not related to tax evasion; instead, it was a frantic effort to avoid huge losses that the bankers and traders must have known were coming.