Ninth Circuit Rejects Government’s Hyper-Technical Interpretation of the Internal Revenue Code

Apr 18, 2011   

In Washington Mutual Inc. v. United States (9th Cir. No. 09-36109), the Ninth Circuit Court of Appeals upheld economic substance over form, but this time for a taxpayer instead of the Government. The full opinion can be found here.

The transaction at issue in the case involved the receipt of regulatory rights by the taxpayer in exchange for incurring the cost of relieving the Government of impending liabilities. The taxpayer argued that the transaction was in substance a purchase of regulatory rights, and also argued that the assets could have a fair market value basis, by operation of Internal Revenue Code section 597. The government objected to both theories on hyper-technical grounds. The district court agreed with the government, holding that the regulatory rights had no basis at all.

Before the Ninth Circuit, the government argued that technical requirements in the reorganization rules trumped the economic reality that the taxpayer had purchased those rights. The Ninth Circuit rejected that argument and ruled in favor of the taxpayer. According to the Ninth Circuit, “absent specific provisions, the tax consequences of any particular transaction must reflect the economic reality” of the transaction. The majority opinion noted that the Governments hyper-technical reading of the Internal Revenue Code based on the “G” reorganization rules did not respect the economic reality of this “all-encompassing transaction.”