Court Rules Dow Chemical Not Entitled To $22m Tax Refund In 'Janitors' Case

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

27 January 2006

The Internal Revenue Service received a boost in its ongoing campaign to stamp out abusive corporate tax shelters, after an Appeal Court ruled that Dow Chemical Co. is not entitled to a $22.2 million refund in back taxes paid by the firm after the IRS disallowed deductions for insurance policies taken out on behalf of thousands of its employees.

The US Court of Appeals for the Sixth Circuit in Cincinnati decided that Dow Chemical had used the 'janitors insurance' scheme with the sole intent of reducing its tax bill and that the "sham" policies had no economic substance.

Under the janitors insurance scheme, so-called because the company takes out life-insurance policies on its employees ranging from janitors up to executives - often without their knowledge - the firm seeks to deduct interest payments on loans taken out against the insurance policies, while letting the policy appreciate in value tax-free.

Dow bought the policies in 1988 and 1991 and paid premiums using loans from the insurers. The company then claimed deductions of more than $33 million for interest it paid on the loans.

Arguing that the policies had no purpose other than to offset taxes, the IRS disallowed the deduction.

A 2003 decision issued by the US District Court in Bay City, Michigan, found in favor of Dow Chemical, but this ruling was overturned by the Court of Appeals on Monday.

The courts have sided with the IRS on a number of previous rulings in similar cases involving companies such as American Electric Power Inc., CM Holdings Inc. and Winn-Dixie Stores Inc.

Dow Chemical could appeal the ruling to the US Supreme Court, and the firm is said to be considering its options.

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