The Justice Department's Tax Division hailed its victory in what it called an "important tax shelter case" that was decided in a Texas district court.
The case involved tax benefits of more than $150 million claimed by a Houston company, Enbridge Energy. The Justice Department said Enbridge attempted to inflate the tax deduction by concealing its direct purchase of stock in the Bishop Group Ltd., a pipeline business in Kansas City, Mo. The court held that an intermediate corporation known as the K-Pipe Merger Corp. that purportedly made the stock purchase was "a mere conduit" that was involved solely to increase Enbridge's tax deductions.
The court also held that another partnership involved in the deal, known as the Butcher Interest Partnership, was a sham. Midcoast Energy originally conceived the shelter scheme, and Enbridge acquired Midcoast in 2001.
"We're disappointed in the decision," said Enbridge spokesman Larry Springer. "Right now we're in the process of evaluating the opinion in the case and considering the next steps."
In February 2001, the Internal Revenue Service issued a notice designating certain "intermediary" transactions - also called "midco" transactions - as transactions whose tax consequences the IRS might challenge. This lawsuit is the first case involving a "midco" transaction to be decided by a federal court.
In its ruling, the district court denied a claim by Enbridge for an immediate refund of more than $5.4 million. The ruling will prevent Enbridge from taking anticipated future depreciation deductions of more than $150 million. In addition, the court held that Enbridge was liable for penalties of 20 percent because it used an intermediary solely to avoid or evade federal income taxes and it initially attempted to conceal the transaction from the IRS.
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