Dow Chemical is still not entitled to $1 billion in federal tax deductions it claimed by creating “sham partnerships” that in part involved its Louisiana Operations in Plaquemine—and its penalties for doing so have now risen, according to a recent decision by the 5th Circuit U.S. Court of Appeals.
In a decision filed in Baton Rouge federal court this week, a three-judge panel in May affirmed U.S. District Judge Brian Jackson’s ruling adding a 40% penalty for any alleged “gross valuation misstatement” of taxes. It will apply only to tax years 1997 through mid-1998. The estimated cost of that penalty was not available prior to this morning’s deadline.
It was the latest blow to the international chemical company in a lawsuit it filed in 2005, challenging the IRS’ disallowance of $1 billion in tax deductions claimed between 1993 to 2006 involving partnerships known as Chemtech I and Chemtech II.
In 2013, Jackson handed down a 74-page ruling, concluding both were “shams” with no legitimate business purpose, created mainly to avoid paying taxes. The following year, a unanimous three-judge panel of the 5th U.S. Circuit Court of Appeals upheld that decision, but directed him to consider the additional penalty. Jackson did so, and this new appellate decision affirms that.
At issue are a decade of transactions with partnerships that Goldman Sachs Group and the Atlanta law firm King & Spalding promoted. Chemtech I, which existed from 1993 to 1997, was a type of tax shelter marketed by Goldman to large companies under the name Special Limited Investment Partnerships, or SLIPS.
According to filings in the case, Dow paid royalty fees to Chemtech I for the use of its own patents. Chemtech paid foreign banks a fixed fee of about 7% interest on their $200 million investments. The company then moved the remaining cash to its own subsidiary corporation, Chemtech Portfolio, which then loaned the money back to Dow. No one but Dow ever licensed any of those patents.
For tax purposes, Dow claimed a royalty expense deduction on its corporate income tax returns. But the cash was returned to Dow without triggering any significant income tax, because the bulk of it was allocated to the foreign banks. And those foreign banks weren’t required to pay taxes.
To Chemtech II, Dow paid millions to rent its own Louisiana Operations between 1998 and 2003. After Chemtech paid its partners and management fees, the excess cash went to Chemtech Portfolio, which loaned the bulk of the money back to Dow Chemical International. The arrangement allowed deductions tied to the depreciation of a $715 million chemical plant that had a tax basis of just $18.5 million.
In a statement this morning to Daily Report, Dow Chemical spokeswoman Rachelle Schikorra said the company “completely disagrees with the decision handed down by the Fifth Circuit” not to reverse the penalties imposed by the U.S. District Court on the Chemtech I transaction.
“Dow believes the facts were mischaracterized and maintains that it had substantial authority for its position that the third-party investors in the Chemtech partnerships were partners for tax purposes,” she says. “Dow has paid and accrued all taxes, interest and penalties relating to both Chemtech I and Chemtech II however will evaluate all legal options to have the penalties reversed.”
—Penny Font
