APPELLATE COURT REJECTS CORPORATION'S USE OF TAX SHELTER

WASHINGTON, D.C. - The United States Court of Appeals for the Second Circuit on Friday rejected the Quintron Corporation's use of a tax shelter to avoid tax on $22 million of income. The court of appeals also upheld a $1.3 million penalty against that corporation for its negligent disregard of the tax rules.

Eileen J. O'Connor, Assistant Attorney General for the Department of Justice's Tax Division, hailed the decision as a "significant victory for the American taxpayer in the difficult battle against corporate tax shelters."

Quintron Corporation manufactured products for military flight simulators. It sold that business to Loral Corporation in 1993. The sale triggered a large tax liability, and Quintron sought to shelter its tax gain. On that same day in 1993, Quintron acquired interests in computer leases and immediately sold them. Quintron claimed that the sale of the lease interests generated a $22 million tax deduction, which completely offset its 1993 tax liability. The IRS refused to let Quintron take the $22 million deduction.

After a trial last year, the Tax Court agreed with the IRS that Quintron was not entitled to the deduction. The Tax Court also upheld a $1.3 million penalty that the IRS had imposed against Quintron.

On Friday the federal court of appeals rejected Quintron's appeal. The appeals court agreed with the Tax Court that Quintron's momentary involvement in the computer leases could not create a $22 million tax deduction. The appeals court also upheld the penalty, rejecting Quintron's argument that its reliance on a lawyer and an accountant should shield it from the penalty.

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