In the Supreme Court of the United States
COLTEC INDUSTRIES, INC., PETITIONER
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT
BRIEF FOR THE UNITED STATES IN OPPOSITION
PAUL D. CLEMENT
Counsel of Record
EILEEN J. O'CONNOR
Assistant Attorney General
JUDITH A. HAGLEY
Department of Justice
Washington, D.C. 20530-0001
1. Whether the court of appeals applied the correct standard of review in determining that petitioner's un derlying transaction lacked economic substance (and that petitioner was therefore not entitled to claim a capital-loss tax deduction related to that transaction).
2. Whether the court of appeals applied the correct substantive standard in determining that petitioner's transaction lacked economic substance.
In the Supreme Court of the United States
COLTEC INDUSTRIES, INC., PETITIONER
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT
BRIEF FOR THE UNITED STATES IN OPPOSITION
The opinion of the court of appeals (Pet. App. 1a-33a) is reported at 454 F.3d 1340. The opinion of the Court of Federal Claims (Pet. App. 34a-123a) is reported at 62 Fed. Cl. 716.
The judgment of the court of appeals was entered on July 12, 2006. A petition for rehearing was denied on September 19, 2006 (Pet. App. 124a). The petition for a writ of certiorari was filed on November 8, 2006. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1).
1. a. In 1996, petitioner, a diversified manufacturing company, decided to sell one of its subsidiaries. Petitioner expected to generate a taxable capital gain of over $240 million from the sale. In an effort to reduce or eliminate its tax liability resulting from that gain, peti tioner contacted its tax adviser, the now-defunct ac counting firm Arthur Andersen. To that end, Arthur Andersen proposed that petitioner use a tax-planning scheme that it had been marketing to other corporate clients with sizable contingent liabilities. Petitioner had such contingent liabilities because one of its subsidiar ies, Garlock (and its subsidiary, Anchor Packing Com pany), had previously manufactured and distributed asbestos products. Pet. App. 2a-3a; C.A. App. 703, 2282, 2540-2546, 7200-7201.
Although Arthur Andersen's tax-planning scheme was complex, the ultimate goal was simple: namely, to allow the taxpayer to circumvent the prohibition on im mediate deductions for contingent liabilities by convert ing those liabilities into an artificial capital loss. The tax-planning scheme involved three steps. First, the parent company would reorganize a dormant subsidiary corporation into a special-purpose entity. Second, the parent company would transfer property and contingent liabilities to the newly reorganized subsidiary in ex change for stock. Third, the parent company would sell the stock to a third party for its (nominal) fair market value. For tax purposes, the parent company would use the value of the transferred property as the tax basis for the sale, without taking into account the amount of the contingent liabilities, under the basis rules applicable to intracorporate tax-free transfers. As a result, the par ent company would accrue a significant capital loss from the sale of the stock, because the tax basis for the sale would be considerably higher than the amount received. The resulting capital loss could then be used to offset any capital gain realized by the taxpayer during the rel evant tax year. Pet. App. 2a-3a, 5a.
Petitioner decided to implement Arthur Andersen's tax-planning scheme. First, petitioner selected a dor mant subsidiary corporation, renamed it Garrison Liti gation Management Group, and reorganized it into a special-purpose entity. Second, petitioner transferred property to Garrison in exchange for stock and Garri son's agreement to pay Garlock's contingent liabilities. Specifically, petitioner caused one of Garlock's other subsidiaries, Stemco, to issue a $375 million promissory note to Garlock, and then caused Garlock to issue an offsetting $314 million promissory note in return to Stemco. Petitioner then transferred the $375 million promissory note from Garlock to Garrison, in return for Garrison's assuming Garlock's asbestos-related liabili ties (which had been estimated for purposes of the tax shelter, using generous assumptions, at $375 million). Garrison issued 100,000 shares of common stock to Garlock-the shares that would ultimately give rise to Coltec's claimed capital loss. (Garrison also issued a controlling block of shares to petitioner.) Third, Garlock sold the 100,000 shares of Garrison stock to two banks, in return for $500,000. As part of that sale, petitioner agreed to indemnify the banks against any asbestos-re lated claims. Pet. App. 3a-5a & n.2, 53a, 57a.
On its income tax return for 1996, petitioner claimed that Garlock's basis in the Garrison stock was $379.2 million (representing the $375 million Stemco note and $4.2 million in other property contributed by Garlock to Garrison). Petitioner did not reduce this basis by the $375 million in contingent liabilities assumed by Garri son. Because Garlock sold the stock for only $500,000, it claimed a capital loss on the transaction of $378.7 mil lion. That loss more than offset petitioner's gains for that tax year; in fact, petitioner carried over the unused portion of the loss to offset gains in future years. Peti tioner recognized that loss only for tax purposes; the loss was not reported on petitioner's public financial statements, although a loss of that size would plainly have been material. Pet. App. 5a.
2. The Internal Revenue Service (IRS) disallowed the claimed loss and assessed tax deficiencies totaling more than $82 million. Pet. App. 6a. The loss was disal lowed on two grounds. First, the IRS determined that petitioner had erroneously excluded the amount of the contingent liabilities from the basis for the stock under the statutory provisions governing the calculation of basis in intracorporate tax-free transfers. See 26 U.S.C. 358.1 Second, and more relevant here, the IRS deter mined that, even if petitioner had correctly calculated the basis for the stock under those provisions, petitioner was not entitled to claim a loss under the economic-sub stance doctrine. That doctrine provides that a claimed tax deduction may be disallowed if the underlying trans action lacks economic substance, i.e., if "there was noth ing of substance to be realized by [the taxpayer] from th[e] transaction beyond a tax deduction." Knetsch v. United States, 364 U.S. 361, 366 (1960); see Gregory v. Helvering, 293 U.S. 465, 469-470 (1935).
3. After paying the assessed amount, petitioner filed a refund suit in the Court of Federal Claims. After a bench trial, the court entered judgment in favor of peti tioner. Pet. App. 34a-123a. With regard to the govern ment's statutory arguments, the court first held that the contingent liabilities were subject to exclusion from peti tioner's basis because they did not even constitute "lia bilities" under 26 U.S.C. 358(d)(1). Pet. App. 77a-78a. In the alternative, the court held that the contingent liabilities were subject to exclusion under 26 U.S.C. 358(d)(2), because they would "give rise to a deduction" under an incorporated statutory provision, 26 U.S.C. 357(c)(3). Pet. App. 91a-93a. The court also held that the transaction did not trigger a statutory anti-abuse provision, 26 U.S.C. 357(b)(1), because "the principal purpose of [petitioner] entering into the Garrison trans action was not solely to avoid federal income tax," Pet. App. 84a-85a, and because "Garrison's assumption of Garlock's contingent asbestos liabilities had a 'bona fide' business purpose." Id. at 91a.
The Court of Federal Claims also rejected the gov ernment's argument that the loss should be disallowed because the relevant underlying transaction lacked eco nomic substance. Pet. App. 109a-119a. The court con cluded that, "where a taxpayer has satisfied all statutory requirements established by Congress, * * * the use of the 'economic substance' doctrine to trump 'mere compliance with the Code' would violate the separation of powers." Id. at 119a. And the court added that, even assuming that the economic-substance doctrine were applicable, it would conclude that petitioner's transac tion had economic substance, based on its determination that "[petitioner] satisfied the tax avoidance and busi ness purpose tests in" the statutory anti-abuse provi sion, 26 U.S.C. 357(b)(1). Pet. App. 115a.
4. The court of appeals vacated and remanded. Pet. App. 1a-33a.
a. The court of appeals, like the trial court, ulti mately concluded that petitioner's claimed capital loss "falls within the literal terms of the statute." Pet. App. 17a. The court of appeals did reject the trial court's con clusion that contingent liabilities did not even constitute "liabilities" under 26 U.S.C. 358(d)(1), reasoning that "[i]t is widely recognized that when one party in an ex change assumes a contingent liability of another party, that contingent liability, like all other liabilities, forms an integral part of the purchase price in the exchange." Pet. App. 9a. But the court of appeals agreed with the trial court that the contingent liabilities were neverthe less subject to exclusion from petitioner's basis under 26 U.S.C. 358(d)(2), because they would "give rise to a de duction" under an incorporated statutory provision, 26 U.S.C. 357(c)(3). Pet. App. 12a-13a. Finally, while the court of appeals also agreed with the trial court that the transaction was not subject to the statutory anti-abuse provision, 26 U.S.C. 357(b)(1), it reached that conclusion on a different ground: namely, that, while the relevant provisions "are not a model of statutory draftsmanship," Section 357(b)(1) was inapplicable because it was not incorporated into Section 358(d)(2), the statutory provi sion governing exclusions from basis in intracorporate tax-free transfers. Pet. App. 14a-17a.
b. Unlike the trial court, however, the court of ap peals held that the relevant underlying transaction lacked economic substance. Pet. App. 17a-33a. The court of appeals first rejected as "untenable" the trial court's holding that the economic-substance doctrine violated the separation of powers. Id. at 17a. The court of appeals explained that, "[o]ver the last seventy years, the economic substance doctrine has required disregard ing, for tax purposes, transactions that comply with the literal terms of the tax code but lack economic reality." Id. at 18a. The court of appeals reasoned that, "[i]n re jecting the economic substance doctrine, the [trial] court failed to follow binding precedent of the Supreme Court and this court and its predecessor court, the Court of Claims." Id. at 17a. "Even if we were to assume that the decisions of the Supreme Court and our predecessor court recognizing the economic substance doctrine are not binding," the court of appeals continued, "we cannot agree that the doctrine is somehow unconstitutional." Id. at 20a. The court reasoned that "[t]he economic sub stance doctrine represents a judicial effort to enforce the statutory purpose of the tax code." Id. at 21a. "In this regard," the court added, "the economic substance doctrine is not unlike other canons of construction that are employed in circumstances where the literal terms of a statute can undermine the ultimate purpose of the statute." Ibid.
The court of appeals then considered, and rejected, the trial court's alternative holding that the underlying transaction had economic substance in any event. Pet. App. 23a-33a. The court of appeals explained that, "[w]hile the [economic-substance] doctrine may well also apply if the taxpayer's sole subjective motivation is tax avoidance even if the transaction has economic sub stance, a lack of economic substance is sufficient to dis qualify the transaction without proof that the taxpayer's sole motive is tax avoidance." Id. at 24a (footnote omit ted). The court stated that "the economic substance of a transaction must be viewed objectively rather than subjectively." Id. at 25a. And the court noted that, in applying the economic-substance doctrine, "the transac tion to be analyzed is the one that gave rise to the al leged tax benefit," id. at 26a, and that "arrangements with subsidiaries that do not affect the economic interest of independent third parties deserve particularly close scrutiny," id. at 27a.
Having stated those general principles, the court of appeals determined that the relevant underlying trans action lacked economic substance. Pet. App. 28a-33a. At the outset, the court noted that "[t]he ultimate con clusion as to business purpose is a legal conclusion, which we review without deference." Id. at 28a. At the same time, the court observed that "the underlying rele vant facts are in large part undisputed." Ibid.
The court of appeals proceeded to determine that the trial court had erred in two respects. First, the court of appeals noted that the trial court had determined that the creation of Garrison to manage petitioner's asbestos liabilities served a bona fide business purpose. Pet. App. 29a. The court of appeals explained, however, that the trial court erred by focusing on the wrong transac tion, because the transfer of management activities was not "the transaction that gave the taxpayer a high basis in the stock and thus gave rise to the alleged benefit upon sale." Ibid. Instead, the court of appeals rea soned, the relevant transaction was "Garrison's assump tion of Garlock's asbestos liabilities in exchange for the $375 million note." Ibid. The court concluded that, as to that transaction, "[petitioner] has not demonstrated any business purpose to be served by linking Garrison's as sumption of the liabilities to the centralization of litiga tion management." Id. at 29a-30a (footnote omitted).
Second, the court of appeals noted that the trial court had determined that the overall transaction was de signed to strengthen petitioner's position against poten tial veil-piercing claims. Pet. App. 30a. While recogniz ing that petitioner's executives had testified about the veil-piercing benefits that they allegedly perceived from the transaction, id. at 31a, the court of appeals con cluded that "[the] subjective views of [petitioner's] exec utives, even if credited, * * * are insufficient to estab lish economic substance." Ibid. Instead, the court rea soned, "there is no basis in reality for the idea that a corporation can avoid exposure for past acts by transfer ring liabilities to a subsidiary." Id. at 32a. The court explained that "the transaction here could only affect relations among [petitioner] and its own subsidiaries-it has absolutely no effect on third party asbestos claim ants." Ibid.
Having noted those two errors, the court of appeals stated that it "s[aw] nothing indicating that the transfer of liabilities in exchange for the note effected any real change in the 'flow of economic benefits,' provided any real 'opportunity to make a profit,' or 'appreciably af fected' [petitioner's] beneficial interests aside from cre ating a tax advantage." Pet. App. 33a. Because "Garri son's assumption of Garlock's liabilities in exchange for the Stemco note served no purpose other than to artifi cially inflate Garlock's basis in its Garrison stock," the court concluded, "[t]hat transaction must be disregarded for tax purposes." Ibid.
5. Petitioner filed a petition for panel rehearing, which the court of appeals denied without recorded dis sent. Pet. App. 124a.
Petitioner contends (Pet. 14-17) that the court of ap peals erred by applying de novo review to the district court's ultimate determination that its transaction had economic substance, and also contends (Pet. 18-28) that the court of appeals erred by focusing solely on whether its transaction lacked economic substance as an objec tive matter and not on whether petitioner had a non-tax business purpose for engaging in the transaction. The court of appeals' decision is correct, and further review is not warranted on either issue.
1. As a preliminary matter, petitioner does not con tend that the court of appeals' ultimate holding-i.e., that petitioner's underlying transaction lacked economic substance-directly conflicts with the holding of any other court of appeals. Nor could it, because the only other court of appeals to have considered a similar tax shelter also reversed the trial court's determination that the transaction at issue had economic substance (and, in that case, remanded for further proceedings). See Black & Decker Corp. v. United States, 436 F.3d 431, 440-443 (4th Cir. 2006).
2. Instead, petitioner contends (Pet. 14-17) that the court of appeals erred by applying de novo review to the district court's ultimate determination that its transac tion had economic substance.2 That claim does not war rant further review.
a. In this case, after noting that "the underlying rel evant facts are in large part undisputed," the court of appeals explained that a trial court's "ultimate conclu sion" as to whether a transaction had economic sub stance is reviewed "without deference." Pet. App. 28a. That description of the applicable standard of review is correct. As this Court explained in holding that a trans action involving a sale-leaseback arrangement had eco nomic substance, "[t]he general characterization of a transaction for tax purposes is a question of law subject to review," whereas "[t]he particular facts from which the characterization is to be made are not so subject." Frank Lyon Co. v. United States, 435 U.S. 561, 581 n.16 (1978).3 That standard of review, moreover, is consis tent with the standard of review applicable to similar "mixed" questions of law and fact. See, e.g., Ornelas v. United States, 517 U.S. 690, 696-697 (1996) (applying de novo review to "ultimate determinations of reasonable suspicion and probable cause," while recognizing that clear-error review applies to the "determination of his torical facts" underlying that ultimate determination); cf. Salve Regina Coll. v. Russell, 499 U.S. 225, 233 (1991) (noting that more deferential review of "mixed" questions is warranted only where "the district court is better positioned than the appellate court to decide the issue in question or * * * probing appellate scrutiny will not contribute to the clarity of legal doctrine") (in ternal quotation marks omitted).
As petitioner correctly notes (Pet. 14), several courts of appeals have stated that a district court's determina tion as to whether a transaction had economic substance was reviewable only for clear error. See, e.g., Nicole Rose Corp. v. Commissioner, 320 F.3d 282, 284 (2d Cir. 2002); ASA Investerings P'ship v. Commissioner, 201 F.3d 505, 511 (D.C. Cir.), cert. denied, 531 U.S. 871 (2000); ACM P'ship v. Commissioner, 157 F.3d 231, 245 (3d Cir. 1998), cert. denied, 526 U.S. 1017 (1999); Yosha v. Commissioner, 861 F.2d 494, 499 (7th Cir. 1988); Rice's Toyota World, Inc. v. Commissioner, 752 F.2d 89, 92 (4th Cir. 1985). Those decisions, however, contain minimal analysis-and, with regard to at least some of those decisions, it is unclear whether the courts were deferring to the ultimate determination on economic substance, or merely to underlying factual determina tions that may have been dispositive of that ultimate determination. Moreover, to the extent that those courts did hold that a district court's ultimate determi nation on economic substance was reviewable only for clear error, those decisions cannot be reconciled with this Court's statement of the applicable standard of re view in Frank Lyon.
b. In any event, this case does not provide the Court with a suitable opportunity to revisit any question con cerning the standard of review applicable to a district court's ultimate determination on economic substance, because petitioner did not preserve any argument that
such a determination should be subject to deferential review. In the court of appeals, petitioner argued, at most, that the trial court's underlying factual findings were reviewable only for clear error-and never sug gested that the trial court's ultimate determination was also subject to clear-error review. See, e.g., Pet. C.A. Br. 33 n.18 (generically stating that "[t]he [Court of Federal Claims'] factual determinations may be dis turbed only if they were clearly erroneous"); cf. id. at 32 n.17 (criticizing the government for "assert[ing] that the CFC made a legal error" instead of "directly disputing the CFC's findings of fact"). Accordingly, it is unsur prising that the court of appeals, without extended dis cussion, stated that a trial court's "ultimate conclusion" on economic substance should be reviewed "without def erence." Pet. App. 28a.4
This case would constitute a poor vehicle for consid ering the standard-of-review question now raised by petitioner for another reason. In vacating the decision of the Court of Federal Claims, the court of appeals did not overturn any of that court's factual findings, but in stead held (1) that the trial court erred by focusing on the wrong transaction, see Pet. App. 28a-30a, and (2) that the trial court erred by concluding that the transaction at issue could have strengthened petitioner's position against potential veil-piercing claims, see id. at 30a-33a. Although petitioner contends (Pet. 23-28) that the trial court did not err in either respect, petitioner does not dispute that each of those errors was legal, rather than factual, in nature. Petitioner does not ex plain how the clear-error standard of review could meaningfully be applied to the trial court's resolution of those subsidiary legal issues. A fortiori, it would have been incongruous for the court of appeals to have en gaged in clear-error review of the trial court's ultimate determination that the transactions at issue had eco nomic substance, when that determination rested on the trial court's (erroneous) resolution of those subsidiary legal questions. Because the court of appeals did not pass on any subsidiary factual issues in reversing the trial court's ultimate determination on economic sub stance-and indeed recognized that "the underlying relevant facts are in large part undisputed," Pet. App. 28a-this case is an exceptionally weak candidate for application of a deferential standard of review.
3. Petitioner also contends (Pet. 18-28) that the court of appeals erred by focusing solely on whether its trans action lacked economic substance as an objective matter and not on whether petitioner had a non-tax business purpose in engaging in the transaction. While the courts of appeals have articulated the substantive standard for determining whether a taxpayer's transactions had eco nomic substance in somewhat different ways, they have applied that standard consistently, and the court of ap peals in this case articulated that standard correctly. Further review is therefore not warranted at this time.
a. The court of appeals held in this case that "the economic substance of a transaction must be viewed ob jectively rather than subjectively," Pet. App. 25a, and added that, "[w]hile the [economic-substance] doctrine may well also apply if the taxpayer's sole subjective mo tivation is tax avoidance even if the transaction has eco nomic substance, a lack of economic substance is suffi cient to disqualify the transaction without proof that the taxpayer's sole motive is tax avoidance." Id. at 24a (footnote omitted). That statement of the applicable standard is correct. As the court of appeals noted, this Court's cases "have repeatedly looked to the objective economic reality of the transaction in applying the eco nomic substance doctrine." Id. at 25a; see, e.g., Frank Lyon, 435 U.S. at 573 (noting that "the Court has looked to the objective economic realities of a transaction rather than to the particular form the parties em ployed"); Gregory v. Helvering, 293 U.S. 465, 469-470 (1935) (stating that "the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended," and concluding that "[t]he rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute") (emphasis added).
Petitioner contends (Pet. 20) that the court of ap peals adopted a "disjunctive" standard and thereby held that a transaction could lack economic substance either if it lacked economic substance as an objective matter or if the taxpayer lacked a non-tax business purpose in en gaging in the transaction. It is clear from the language quoted above, however, that the court of appeals did not address the question whether the economic-substance doctrine could apply solely on the basis that the tax payer lacked a non-tax business purpose for the transac tion, where the transaction had economic substance as an objective matter. Because the court of appeals left open that question, the decision below does not conflict with the decisions of other courts of appeals framing the standard in "disjunctive" terms-and petitioner does not so contend. See Pet. 20-21.5
b. Petitioner seemingly suggests (Pet. 21-22) that the court of appeals' decision conflicts with the decisions of various courts of appeals applying a "unitary" stan dard, under which courts have considered a taxpayer's intent as "inform[ing] the analysis of whether the trans action had sufficient substance * * * to be respected for tax purposes." ACM P'ship, 157 F.3d at 247; see, e.g., Rose v. Commissioner, 868 F.2d 851, 853 (6th Cir. 1989) (stating that "[a] taxpayer's subjective business purpose * * * may be relevant to [the economic-sub stance] inquiry"); Sochin v. Commissioner, 843 F.2d 351, 354 (9th Cir.) (noting that "consideration of busi ness purpose" was "simply [a] more precise factor to consider in the application of this court's traditional sham analysis"), cert. denied, 488 U.S. 824 (1988). The court of appeals in this case, however, did not hold that a taxpayer's intent was irrelevant to the economic-sub stance inquiry. As petitioner at one point concedes (Pet. 18), the better reading of the court of appeals' decision is that it viewed proof that the taxpayer had a non-tax business purpose for the transaction-as a "pertinent" factor in that inquiry: i.e., as probative, but not dispositive, evidence that the transaction had economic substance as an objective matter. Pet. App. 23a; cf. id. at 31a-32a (noting that "[the] subjective views of [peti tioner's] executives [with regard to veil-piercing bene fits] * * * are insufficient to establish economic sub stance" where "there is no basis in reality" to support the existence of those benefits). Moreover, as petitioner also concedes (Pet. 23), even if the court of appeals' deci sion were read as discounting a taxpayer's intent alto gether, it is at best questionable whether petitioner would prevail in this case if the existence of a non-tax business purpose were merely relevant to, but not dispositive of, the economic-substance inquiry. The court of appeals' decision therefore does not conflict with decisions applying a "unitary" standard.
c. Petitioner's primary contention (Pet. 19-20) is that the court of appeals' decision conflicts with decisions of the Fourth and District of Columbia Circuits applying a "conjunctive" standard, under which a transaction could lack economic substance only if it lacked economic sub stance as an objective matter and if the taxpayer lacked a non-tax business purpose in engaging in the transac tion. Petitioner suggests (Pet. 23) that, if that standard were applied in this case, petitioner would prevail, based on the trial court's findings that "the principal purpose of [petitioner] entering into the Garrison transaction was not solely to avoid federal income tax," Pet. App. 84a-85a, and that "Garrison's assumption of Garlock's contingent asbestos liabilities had a 'bona fide' business purpose." Id. at 91a.
As petitioner notes (Pet. 19), the Fourth and District of Columbia Circuits have articulated the substantive standard for determining whether a taxpayer's transac tions had economic substance in "conjunctive" terms. See, e.g., Horn v. Commissioner, 968 F.2d 1229, 1237 (D.C. Cir. 1992) (stating that "a transaction undertaken for a nontax business purpose will not be considered an economic sham even if there was no objectively reason able possibility that the transaction would produce prof its"); Rice's Toyota World, 752 F.2d at 91 (providing that, "[t]o treat a transaction as a sham, the court must find that the taxpayer was motivated by no business purposes other than obtaining tax benefits * * * and that the transaction has no economic substance because no reasonable possibility of a profit exists"). The court of appeals in this case, moreover, expressly rejected the Fourth Circuit's formulation of the standard, on the ground that it was "not consistent with the Supreme Court's pronouncements in cases such as Frank Lyon." Pet. App. 24a n.14.
Any divergence between the court of appeals' formu lation and those of the Fourth and District of Columbia Circuits, however, does not warrant further review at this time, because petitioner identifies no case in which either of those courts has actually held that a transac tion had economic substance solely on the basis that the taxpayer had a non-tax business purpose for the trans action, even though the transaction lacked economic substance as an objective matter. See Rice's Toyota World, 752 F.2d at 92-95 (affirming trial court's determi nations both that the transaction lacked economic sub stance as an objective matter and that the taxpayer had no non-tax business purpose for the transaction); cf. Horn, 968 F.2d at 1236, 1238 (noting trial court's deter mination that "the taxpayers engaged the transactions in such a way as to create the tax benefits while com pletely avoiding economic risk" and the parties' assump tion that "no evidence has shown a nontax business pur pose," but concluding that the applicable statute never theless expressly authorized the claimed tax benefits).
Indeed, in the wake of more recent decisions from each circuit, it is far from clear whether the "conjunc tive" test articulated by those circuits differs in any meaningful way from the tests articulated by other cir cuits. In a case involving the same type of tax shelter at issue here, the Fourth Circuit, while reiterating its "con junctive" formulation from Rice's Toyota World, ex plained that both prongs of its formulation were "di rected to the same question: whether the transaction contained economic substance aside from the tax conse quences." Black & Decker, 436 F.3d at 441 (citation omitted). In the same case, moreover, the Fourth Cir cuit made clear that "a taxpayer's mere assertion of sub jective belief in the profit opportunity from a transac tion[,] particularly in the face of strong objective evi dence that the taxpayer would incur a loss, cannot by itself establish that the transaction was not a sham." Id. at 443 (internal quotation marks and citation omitted). For its part, the District of Columbia Circuit, without so much as citing its earlier formulation in Horn, stated in a later case that, under the economic-substance doc trine, "the absence of a nontax business purpose is fa tal." ASA Investerings P'ship, 201 F.3d at 512. The court added that "a transaction will be disregarded if it did not appreciably affect [taxpayer's] beneficial inter est except to reduce his tax." Id. at 514 (internal quota tion marks and citation omitted).
As matters currently stand, therefore, it is at best uncertain whether either the Fourth Circuit or the Dis trict of Columbia Circuit would actually hold that a transaction had economic substance solely on the basis that the taxpayer had a non-tax business purpose for the transaction, even though the transaction lacked eco nomic substance as an objective matter. As the court of appeals in this case suggested, such a holding would be inconsistent with this Court's decisions on the economic- substance doctrine, which have focused on whether the transaction at issue had economic substance as an objec tive matter. See p. 15, supra. And it would allow a cor poration to obtain tax advantages for a transaction en tirely lacking in objective economic substance simply by coming forward with testimony from its executives con cerning the purported business motivations for the transaction. In the event that a court of appeals were to allow a taxpayer to avoid application of the economic- substance doctrine on that basis, a genuine conflict would then exist, and further review might be war ranted. At this time, however, there is no real conflict concerning the application of the economic-substance doctrine that merits this Court's intervention.
d. Finally, even if the courts of appeals' different formulations of the economic-substance standard would otherwise provide a sufficient justification for this Court's review, this case would constitute a poor vehicle because it arises in a context of only limited prospective importance. In 2000, Congress foreclosed taxpayers from using contingent-liability tax shelters of the type at issue here by amending the basis rules applicable to intracorporate tax-free transfers to provide for the re duction of basis in cases such as this one. See 26 U.S.C. 358(h) (2000 & Supp. III 2003). We are aware of only three other currently pending cases concerning the ap plication of the economic-substance doctrine to similar tax shelters. Particularly in light of the uncertainty con cerning the existence (and extent) of a meaningful con flict, the limited prospective importance of this context counsels against further review.6
The petition for a writ of certiorari should be denied.
PAUL D. CLEMENT
EILEEN J. O'CONNOR
Assistant Attorney General
JUDITH A. HAGLEY
1 Unless otherwise noted, all references in this brief to the relevant statutory provisions are to the 1994 edition of the United States Code.
2 The same question is presented in Dow Chemical Co. v. United States, petition for cert. pending, No. 06-478 (filed Oct. 4, 2006).
3 Petitioner contends (Pet. 17) that, in Frank Lyon, this Court distinguished between "how transactions are characterized under the tax code" and "factual findings of economic substance." However, the fairer reading of the language quoted above-and the other cases on which petitioner relies (Pet. 16)-is that the Court was distinguishing between an ultimate determination that a transaction has (or lacks) economic substance and subsidiary determinations on historical facts. Cf. Bazley v. Commissioner, 331 U.S. 737, 743 (1947) (concluding that the lower courts were operating under "no misconception of law" and that "the facts as found by the Tax Court bring them within [the applicable legal rule]"); Commissioner v. Court Holding Co., 324 U.S. 331, 333-334 (1945) (stating that "the findings of the Tax Court * * * must * * * be accepted by the [appellate] courts" and that an appellate court was not free to "draw different inferences from the record"). The distinction that petitioner posits would be entirely illusory, because how a transaction is characterized under the Internal Revenue Code will often turn on whether the underlying transaction had economic substance. In Frank Lyon, the Court made the state ment quoted above in the course of rejecting the government's contention that the taxpayer, although the nominal owner of the property purchased from and leased back to the bank, was not in substance the true owner entitled to take depreciation deductions. 435 U.S. at 581. Moreover, the Court cited as authority for its statement of the standard of review a Fourth Circuit decision that similarly involved the economic-substance doctrine. See id. at 581 n.16 (citing American Realty Trust v. United States, 498 F.2d 1194, 1198 (4th Cir. 1974)).
4 Moreover, petitioner did not seek rehearing (either by the panel or by the en banc Federal Circuit) on the standard-of-review issue. Instead, in its petition for panel rehearing, petitioner merely challenged various facets of the court of appeals' substantive holding that the transaction lacked economic substance. See, e.g., Pet. for Panel Reh'g 1-2 (listing issues presented).
5 Petitioner does not identify any case in which a court of appeals has actually held that a transaction lacked economic substance solely on the ground that the taxpayer lacked a non-tax business purpose in engaging in the transaction.
6 This case would additionally constitute a poor vehicle because, as the government argued below, petitioner's capital loss should be disallowed under the governing statutory provisions, regardless of the applicability of the economic-substance doctrine. Although the court of appeals ultimately rejected those arguments, it recognized that the relevant statutory provisions "are not a model of statutory drafts manship." Pet. App. 15a.