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HARRIET WHO?

October 27, 2005

Harriet Miers won't be the next Supreme Court justice, and thus we lose an exciting opportunity to learn more about contingent deferred swaps. The nation now eagerly awaits the next nomininee and his/her views on tax issues (and some other stuff, I suppose).

If oral arguments heard this week by the Fourth Circuit in the Black & Decker appeal are any indication, the IRS tax-shelter enforcement team has to hope it's not J. Michael Luttig. Sheryl Stratton of Tax Analysts covered the arguments (available here only to Tax Analysts subscribers). Ms. Stratton makes Judge Luttig look like an ornery git:

During the October 25 oral argument, Circuit Judge Michael Luttig barely let Richard Farber, the Justice Department attorney, utter his opening lines before demanding to know why Black & Decker doesn't prevail "on the face of the statute."

The government's position "does not square with section 357(c)(3)," Judge Luttig asserted. There is nothing ambiguous about the statute, he said. The liabilities are obviously deductible by Black & Decker or BDHMI; therefore, under the plain text of the statute, the taxpayer prevails, he concluded.

The exception to the general rule of basis reduction for liabilities assumed does not apply when the liabilities are stripped away from the underlying business in the transfer, Farber responded.

Circuit Judge Blane Michael tried to get Farber to point out the statutory ambiguity, but Judge Luttig instead began to lecture the government. Taxpayers, of which he is one, he said, "are entitled to know what the law is." The statute is "as clear as day," Judge Luttig insisted, calling the government's construction of it "untenable."

Black & Decker contributed $561 million cash to a new subsidiary, which assumed contingent future health costs valued at $560 million. The subsidiary then loaned the cash back to Black & Decker on a note. It then sold the subsidiary to a retired executive for $1 million, claiming a $560 million capital loss. A district court upheld the deduction. The deduction strikes me as shaky, but I'm not a judge, and Black & Decker must be glad Judge Luttig is.

Link: Complete Tax Update Miers coverage

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