Appeal Court Allows IRS Chance To Prove Tax Shelter Case

by Leroy Baker, Tax-News.com, New York

06 February 2006

A US appeals court has ordered a lower court to re-examine a case in which the Internal Revenue Service had accused the tool maker Black and Decker of avoiding tax through its use of a banned tax sheltering arrangement.

In doing so, the Court of Appeals for the Fourth Circuit in Virginia overturned a 2004 decision by a lower court judge, who had dismissed the agency's case against Black & Decker (Research).

The case centres on a complex set of transactions which Black & Decker says it undertook legitimately in an attempt to create a $561 million capital loss. However, the IRS argues that the transactions were a sham with no economic purpose other than to avoid tax.

Black & Decker has countered that a law banning the use of 'contingent liability shelters' wasn't in effect at the time of the transaction.

Originally, Black & Decker had claimed it was owed $57 million in tax refunds from the IRS, but the agency refused to accept the claim and in turn counter-sued the company for tax, interest and penalties totalling $215 million, according to court documents.

Sending the case back to the lower court, Judge M. Blane Michael wrote on behalf of the three judge panel that: "We conclude that neither the IRS nor the taxpayer [Black & Decker] is entitled to summary judgment under the controlling tax statutes."

The judges also noted that there remained "unresolved issues of material fact."

Welcoming the decision, the Department of Justice said in a statement that the ruling would help "maintain the integrity" of the federal tax system.

"In remanding the case for trial, the decision gives the government the opportunity to prove that the transaction was a sham, devoid of any economic substance apart from the tax consequences," observed Assistant Attorney General Eileen J. O’Connor.

"Those who pay the amount of tax the law requires deserve the assurance that we will take all appropriate steps to stop the proliferation of abusive tax avoidance schemes that undermine the integrity of our nation's tax laws," she added.

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