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FOURTH CIRCUIT HELPS IRS OFF THE MAT IN BLACK & DECKER TAX SHELTER CASE
February 03, 2006
It could be a sham.
That's what the Fourth Circuit Court of Appeals ruled yesterday in reversing a serious IRS loss in a tax shelter case against Black & Decker. The Fourth Circuit order the district judge to hold a trial on whether the tax shelter involved is a "sham."
The tax shelter, marketed to 30 taxpayers by a national accounting firm, was designed to both accelerate and double-up deductions for contingent long-term health care costs. In simplified form, the basic transactions are:
1. Black & Decker formed a new corporation with a capital structure that excluded it from the Black & Decker consolidated return.2. Black & Decker contributed $561 million of cash and $560 million of contingent health care liabilities to the Newco. (Black & Decker also remained liable on the liabilities if Newco didn't pay them).
3. Black & Decker sold the newco to a retired executive for $1 million and claimed a $560 million loss.
4. Newco also expected to deduct the liabilities as it paid them against interest income on the $560 million cash.
End result: acceleration of long-term health deduction to the current year, albeit as a capital loss (but the company had capital gains it wanted to offset. There is a great chart illustrating the transaction at andrewmitchel.com.
The sham issue trial could be interesting. Black & Decker has conceded that the transaction was done only for tax purposes. It ended up with the cash back in its own pockets, it was still liable on the future health care costs, and it would fund the Newco's payments on the health care costs by repaying the loan. Except for running the costs through Newco, it looks like very little changed. It will be an interesting test of whether the tax law will respect a non-economic deal strictly on the basis of formalities.
Links:
Fourth Circuit decision
District Court ruling
TaxProf Blog coverage
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