GE Lands Latest Blow In Tax Shelter Tussle With US IRS

by Glen Shapiro, LawAndTax-News.com, New York

14 October 2009

A federal court in Connecticut has ruled in favor of General Electric (GE) in its long-running legal battle with the US Internal Revenue Service (IRS) concerning tax benefits that the company claimed from a partnership structure set up with two Dutch banks in the early 1990s.

The case in question involves an entity known as Castle Harbour, set up by GE in partnership with ING and Rabo Merchant Bank in 1993. GE used the arrangement to shift USD310m in lease income from an old fleet of aircraft to the two Dutch banks, which enabled the aircraft to be re-depreciated for tax purposes, a method which saved GE about USD62m in tax over a five-year period. The IRS disputed the arrangement, however, and argued that the transactions were motivated solely by the desire to save tax and lacked economic substance.

GE paid the outstanding tax demanded by the IRS, but appealed the decision in the courts. After GE won the first round in 1994, the IRS counter-appealed and the ruling was overturned by a federal appeals court in 2006. The case was sent back to the original trial judge, US District Judge Stefan Underhill, who was directed to decide whether the banks were equity or debt partners of GE.

In his latest verdict, delivered on October 8, Judge Underhill concluded that the two Dutch banks were equity partners for tax purposes, and that "Castle Harbour properly allocated income among its partners."

"The final partnership administrative adjustments issued by the IRS were in error," Judge Underhill wrote.

“Even if the Dutch Banks are later held not to have been partners in Castle Harbour, the partnership’s tax position treating the banks as partners was supported by substantial authority and a reasonable basis,” he argued.

Whilst GE has naturally welcomed the latest court ruling, they should keep the champagne on hold for a while yet, as the IRS, which is currently reviewing Judge Underhill's latest ruling, is widely expected to appeal and stands a good chance winning again.

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