A federal court judge ruled in favor of General Electric in a tax case involving $62 million in tax benefits from a partnership arrangement that the IRS had claimed was a sham.
The case, which could have implications for other cases involving tax shelters and listed transactions, involved an entity known as Castle Harbour that GE set up in 1993 with two Dutch banks, ING and Rabo Merchant Bank. Under the arrangement, GE was able to shift approximately $310 million in income from old aircraft leases to the two banks by re-depreciating a fleet of airplanes that had already been depreciated, thereby saving about $62 million in taxes over five years, according to Bloomberg.com.
After the IRS protested the arrangement, claiming that the only purpose was to reduce GEs tax expenses, GE paid the $62 million, but took the IRS to court. In 2004, U.S. District Judge Stefan Underhill of Bridgeport, Conn., ruled in favor of GE, but his ruling was overturned in 2006 by an appeals court. It said he needed to consider an alternative argument and decide if the banks were equity partners or lenders. On Wednesday, Underhill took that argument into account and again ruled in GEs favor.
Even if the Dutch Banks are later held not to have been partners in Castle Harbour, the partnerships tax position treating the banks as partners was supported by substantial authority and a reasonable basis, he wrote. Accordingly, penalties against the taxpayer are unwarranted.
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