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Dow Chemical Loses $1 Billion Tax Shelter Case

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Baton Rouge, La. (February 27, 2013)

By Michael Cohn

The Justice Department has won a tax shelter case involving Dow Chemical, in which the company was accused of creating approximately $1 billion in phony tax deductions in a scheme designed by Goldman Sachs and lawyers at King & Spalding.

A federal court in Baton Rouge, La., on Monday rejected two tax shelter transactions entered into by Dow Chemical that purported to create approximately $1 billion in phony tax deductions.  In addition to rejecting the tax benefits from the shelter transactions, Chief Judge Brian A. Jackson also imposed penalties. 

The schemes were allegedly created by Goldman Sachs and the law firm of King & Spalding, according to prosecutors, and involved creating a partnership that Dow operated out of its European headquarters in Switzerland.

Chief Judge Jackson wrote in his 74-page opinion that the government was correct to reject the artificial tax benefits created by these schemes that were designed to exploit perceived weaknesses in the tax code and not designed for legitimate business reasons.  

The judge noted that “tax law deals in economic realities, not legal abstractions.” Jackson also wrote that penalties were appropriate because any reasonable and prudent person should have known that the artificial tax benefits created by the scheme were “too good to be true.”  He noted in his opinion that “Dow viewed its tax department as a profit center,” and had at its disposal “numerous lawyers and tax professionals.”  

Assistant Attorney General Kathryn Keneally of the Justice Department’s Tax Division praised the Louisiana court’s opinion. 

“It is offensive to all taxpayers who pay their fair share when our largest corporations believe that they can claim hundreds of millions of dollars in tax deductions that are manufactured by abusive tax schemes,” Keneally said in a statement. She thanked the agents and attorneys at the Internal Revenue Service who assisted the Justice Department, as well as Tax Division trial attorneys, Thomas Sawyer, Robert Welsh, Thomas Koelbl and Philip Schreiber.

Dow had sued the U.S. government asking it to pay back taxes the chemical giant had paid 1993 to 2003. "Dow paid all taxes at issue plus interest, but requested the U.S. District Court to agree that the taxes were wrongly assessed by the IRS," a spokeswoman said in a statement sent to Reuters.

"Dow is disappointed by the trial court's decision.” The company added that it believed the judge’s opinion was not supported by the facts and applicable law and it is exploring all of its options, including appeal.

3 Comments

Goldman Sachs cooking up these phony schemes, so no sanction for them?? Or are they just Too Big To Prosecute?

Posted by: Just Me | March 1, 2013 2:48 AM

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welcome to the club DOW. IRS nailed 3 of my clients on the bogus 419 plans promoted by insurance co. 10 yrs. ago.

Posted by: leocpa1946 | February 28, 2013 7:51 AM

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Hooray!

Posted by: JAscher | February 28, 2013 7:20 AM

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