The Internal Revenue Service has lost a third court case within two weeks in its battle against what it deems questionable tax shelters.
The latest one involves TIFD III-E Inc., a subsidiary of GE Capital Corp., a unit of General Electric. Judge Stefan Underhill of U.S. District Court in Connecticut ordered the IRS to refund TIFD $62 million plus interest, according to press reports. Underhill rejected the agency’s claim that the company tried to avoid paying federal income taxes by using a series of sham transactions to shelter profits from GE’s aircraft-leasing business.
The ruling is similar to the decisions in two other recent cases heard in other federal courts. On October 29, Judge Susan Braden of the U.S. Court of Federal Claims in Washington rejected an IRS claim against Coltec Industries Inc., a manufacturer of aircraft-landing systems, and ordered the agency to pay Coltec a refund of more than $82 million. Earlier, a judge in U.S. District Court in Baltimore ordered the IRS to refund Black & Decker Corp. more than $57 million.
In recent years, noted The Wall Street Journal, the IRS has maintained that many tax-avoidance strategies are abusive tax shelters because they lack “economic substance,” even if they abide by the letter of the law. In the Coltec case, Judge Braden rejected this argument, adding that Congress had declined to include that guidance in the tax code, reported the Journal.
In the GE case, Judge Underhill allowed the economic-substance argument — but he ruled that even though one of GE’s principal motivations was to avoid taxes, the transactions did in fact contain some economic substance and complied with the tax code, according to the report. “Under such circumstances,” he reportedly wrote, “the IRS should address its concerns to those who write the tax laws.”
In 1993, GE Capital created a subsidiary so it could transfer aircraft plus cash to reduce its risk in the aircraft-leasing business, the Journal explained. The company, which sold stakes in the subsidiary to two Dutch banks, was able to avoid paying a large tax bill by allocating nearly all the subsidiary’s income to the Dutch banks, which in turn did not pay U.S. income taxes, added the paper.