IRS Suffers Yet Another Abusive Tax Shelter Court Defeat

by Mike Godfrey, Tax-News.com, Washington

05 November 2004

The Internal Revenue Service this week suffered a third court defeat in the space of two weeks in a case involving alleged use of abusive tax shelters, it has emerged.

In the case in question, the IRS was ordered earlier this week by Judge Stefan R. Underhill of the United States District Court of Connecticut to refund TIFD III-E Inc, a subsidiary of General Electric Corp., more than $62 million.

At the heart of the case was a complex set of transactions involving three GE subsidiaries which formed a partnership, Castle Harbour, in 1993, to which GE contributed a number of aircraft in addition to cash and stock worth more than $500 million in total.

The partnership’s three shareholders, of which TIFD III-E was one, then sold their stake to two Dutch banks and for tax purposes, the subsidiary's income was allocated to the banks, which did not pay US income taxes.

Judge Underhill disagreed that the transactions had no economic substance, as the Dutch banks had invested in Castle Harbour, and observed that "the economic reality of such a transaction is hard to dispute." However, he also acknowledged that one of GE’s principle motives was avoidance of tax.

"In short, the transaction, though it sheltered a great deal of income from taxes, was legally permissible," he wrote in his judgement.

However, he added: "Under such circumstances, the IRS should address its concerns to those who write the tax laws."

The IRS was recently ordered by judges to pay $82.8 million and $57 million in tax refunds to Coltec Industries and Black & Decker respectively after similar abusive tax shelter arguments were rejected.

The IRS has not indicated whether it will appeal any of the decisions.

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