U.S. District Court Disallows $82 Million Refund Claim as Transaction was Tax Shelter

Oct 11, 2011   

In WFC Holdings Corp. v. U.S., No. 0:07-cv-03320 (D. Minn. 9/30/11) a refund claim based on capital loss deduction was disallowed because the underlying transaction was a tax shelter with no business purpose other than tax avoidance.

In the matter before the District Court, the taxpayer was the parent corporation of an affiliated group of corporations.   After a series of acquisitions, the taxpayer was left with a large quantity of excess leased space that it no longer needed, but which it was liable for (“underwater”).

KPMG marketed a tax product to clients called an “economic liability transaction.” The “economic liability transaction” involved a transfer of the “underwater” leases and a related stock sale to an investment bank. The taxpayer agreed to pay for KPMGs work on the “economic liability transaction.”  KPMGs employees developed the “economic liability transaction” with the understanding that a taxpayer needs a non-tax business purpose to justify the transaction.

The district court held that the transfer of “underwater” leases to a subsidiary and a related sale of stock was a sham tax shelter that the taxpayer had purchased from KPMG.  The court considered the lease restructuring transaction and, viewing the transaction as a whole, determined that the taxpayer had failed to establish a legitimate business purpose for the transaction other than tax benefits. The court concluded that the stock sale lacked economic substance and, moreover, did not accomplish the stated goal. The court stated that the lease restructuring transaction was designed, marketed, and implemented as a tax shelter, and the taxpayers actions indicated an absence of any real potential.

A full version of the opinion is available here.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS and the Department of Justice “ Tax Division regarding tax shelters and transactions the IRS considers to lack business purpose. You can contact an attorney by emailing us at: contact@fidjlaw.com.