Justice Department Prevails in Tax Shelter Case Involving $1 Billion in Tax Deductions
The Dow Chemical Company Had Engaged in Tax Transactions Designed by Goldman Sachs and Lawyers at King & Spalding
A federal court in Baton Rouge, La., on Monday rejected two tax shelter transactions entered into by The Dow Chemical Company that purported to create approximately $1 billion in phony tax deductions. In addition to rejecting the tax benefits from the shelter transactions, Chief Judge Brian A. Jackson also imposed penalties.
As stated in the opinion, the schemes were created by Goldman Sachs and the law firm of King & Spalding, and involved creating a partnership that Dow operated out of its European headquarters in Switzerland. Chief Judge Jackson wrote in his 74-page opinion that the government was correct to reject the artificial tax benefits created by these schemes that were designed to exploit perceived weaknesses in the tax code and not designed for legitimate business reasons. Judge Jackson noted that “tax law deals in economic realities, not legal abstractions.” Judge Jackson also wrote that penalties were appropriate because any reasonable and prudent person should have known that the artificial tax benefits created by the scheme were “too good to be true.” Judge Jackson noted in his opinion that “Dow viewed its tax department as a profit center,” and had at its disposal “numerous lawyers and tax professionals.”
Assistant Attorney General Kathryn Keneally of the Justice Department’s Tax Division hailed the Louisiana court’s opinion. “It is offensive to all taxpayers who pay their fair share when our largest corporations believe that they can claim hundreds of millions of dollars in tax deductions that are manufactured by abusive tax schemes,” said Keneally. Keneally thanked the agents and attorneys at the Internal Revenue Service who assisted the Justice Department, as well as Tax Division trial attorneys, Thomas Sawyer, Robert Welsh, Thomas Koelbl and Philip Schreiber.
United States v. Chemtech Royalty Associates, L.P., etc.
Memorandum Ruling (PDF)