The Internal Revenue Service owes Black & Decker Corp. a $57 million tax refund because a tax shelter the company used had a valid business purpose, a federal judge ruled last week.
"The court may not ignore a transaction that has economic
Black & Decker, based in Towson, Md., had used a strategy called accelerating contingent liability, which allowed the company to immediately deduct costs that would normally be deductible over a number of years.
The IRS has listed the strategy as an abusive tax shelter, which was promoted by Deloitte & Touche LLP. What Black & Decker did was create Black & Decker Healthcare Management Inc. in 1998, the same year it generated a large capital gain after selling several business units. The company transferred $561 million in cash and $560 million in potential employee health care claims to the new healthcare company. In exchange, it received company stock, the Post reported.
Although Black & Decker sold the stock for $1 million, it reported to the IRS that the stock cost $561 million and that it should receive a refund based on a loss of $560 million. The IRS refused; the company sued.
"We are disappointed in the court's decision. We believe our position in this case is supported by the facts and the relevant law. The department is considering its options,” Eileen J. O'Connor, assistant attorney general for the Justice Department's Tax Division, said in a prepared statement. The department may appeal. The court granted the company's motion for summary judgment, disagreeing with the Justice Department's contention that the case should be decided at trial.
The Post reported that soon after transferring the $561 to the healthcare company, Black & Decker received a loan from the new company for the same amount, the IRS said. The loan required Black & Decker to make payments to the healthcare company that equal the cost of health care claims.
However, the judge said the transaction "cannot be disregarded as a sham,” because it “had very real economic implications for every beneficiary of [Black & Decker's] employee benefits program as well as for the parties to the transaction."