The District Court yesterday granted summary judgment to Black & Decker and rejected the IRS’s attempt to disregard the form of Black & Decker’s transfer of $560 million in contignet employee health care claims to a newly-created healthcare management subsidiary (“BDHMI”). Black & Decker Corp. v. United States, No. WDQ-02-2070 (D. MD. Oct. 20, 2004). Although Black & Decker conceded for purposes of its summary judgment motion that tax evasion was its sole motivation, the court concluded that the transaction had economic substance apart from tax benefits:
It is undisputed that BDHMI: (1) “assumed the responsibility for the management, servicing, and administration of plaintiff’s employee and retiree health plans;” (2) has considered and proposed numerous healthcare cost containment strategies since its inception in 1998, many of which have been implemented by B & D; and (3) has always maintained salaried employees. Moreover, as a result of the BDHMI transaction, BDHMI became responsible for paying the healthcare claims of B & D employees, and such claims are paid with BDHMI assets. The BDHMI transaction, therefore, had very real economic implications for every beneficiary of B & D’s employee benefits program, as well as for the parties to the transaction.
One response to “District Court Grants Summary Judgment to Black & Decker in Tax Shelter Case”
Please post any thoughts on how the CT Fed Court holding in LTCM can be reconciled with Md Fed Judge Quarles Black & Decker opinion copied below. Thanks
———————————————-
REVISED MEMORANDUM OPINION AND ORDER
Black & Decker Corporation (“B & D”) has sued the United
States of America for a refund of over $57 million dollars in
federal taxes, plus interest, which it contends were
erroneously assessed and collected for tax years 1995 through
2000. Pending is B & D’s motion for summary judgment on the
complaint and the counterclaim. No hearing is necessary.
Local Rule 105.6 (D. Md.). For the reasons discussed below, B
& D’s motion for summary judgment will be granted.
BACKGROUND
In 1998, B & D sold three of its businesses. As a result
of these sales, B & D generated significant capital gains.
That same year, B & D created Black & Decker Healthcare
Management Inc. (“BDHMI”). B & D transferred approximately
$561 million dollars to BDHMI along with $560 million dollars
in contingent employee healthcare claims in exchange for newly
issued stock in BDHMI (“the BDHMI transaction”). B & D sold
its stock in BDHMI to an independent third-party for $1
million dollars.
In December 2001, because it believed that its basis in
the BDHMI stock was $561 million dollars, the value of the
property it had transferred to BDHMI, B & D claimed
approximately $560 million dollars in capital loss on the
stock sale, which it reported on its 1998 federal tax return.
B & D used a portion of the capital loss to offset its capital
gains from selling the three businesses in 1998, and used the
remaining loss to offset gains in prior and future tax years.
Because the Service had not paid B & D’s claims by June
2002, B & D filed suit for the refunds. In February 2004,
following an audit of B & D by the Service, B & D’s claims for
refunds were denied, and the Service assessed additional
taxes, penalties, and interest for tax years 1998 and 1999.
The Service then filed a counterclaim for judgment on the
taxes, penalties, and interest.
STANDARD OF REVIEW
Under Rule 56(c) of the Federal Rules of Civil Procedure,
summary judgment is appropriate when there is no genuine issue
as to any material fact, and the moving party is entitled to
summary judgment as a matter of law. In Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 249 (1986), the Supreme Court
explained that, in considering a motion for summary judgment,
“the judge’s function is not . . . to weigh the evidence and
determine the truth of the matter but to determine whether
there is a genuine issue for trial.” A dispute about a
material fact is genuine “if the evidence is such that a
reasonable jury could return a verdict for the nonmoving
party.” Id. at 248. Thus, “the judge must ask . . . whether
a fair-minded jury could return a verdict for the [nonmoving
party] on the evidence presented.” Id. at 252.
In undertaking this inquiry, a court must view the facts
and the reasonable inferences drawn therefrom “in the light
most favorable to the party opposing the motion,” Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587
(1986), but the opponent must produce evidence upon which a
reasonable fact finder could rely. Celotex Corp. v. Catrett,
477 U.S. 317 (1986). The mere existence of a “scintilla” of
evidence in support of the nonmoving party’s case is not
sufficient to preclude an order granting summary judgment.
Anderson, 477 U.S. at 252.
ANALYSIS
The United States argues that the BDHMI transaction was a
tax avoidance vehicle that must be disregarded for tax
purposes. B & D counters that because the BDHMI transaction
had economic substance, it must be acknowledged.
The Service may ignore sham transactions for tax
purposes. Hunt v. Commissioner, 938 F.2d 466, 471 (4th Cir.
1991) (citing Hines v. United States, 912 F.2d 736, 739 (4th
Cir. 1990)). A sham transaction is designed solely to create
tax benefits rather than to serve a legitimate business
purpose. Id.
In the Fourth Circuit, a transaction will be treated as a
sham if the court finds “that the taxpayer was motivated by no
business purposes other than obtaining tax benefits in
entering the transaction, and that the transaction has no
economic substance because no reasonable possibility of profit
exists.” Rice’s Toyota World v. Commissioner, 752 F.2d 89, 90
(4th Cir. 1985).
The business purpose inquiry examines the motives of the
taxpayer in entering the transaction. Id. at 92. It is
undisputed that tax avoidance was a motivating factor for B &
D in conducting the BDHMI transaction, and for purposes of its
motion for summary judgment, B & D concedes that tax avoidance
was its sole motivation.
The second prong of the Rice’s Toyota test examines the
objective reasonableness of the transaction to determine
1Pl.’s Ex. 2 (United States’ Responses to Plaintiff’s First
Request for Admissions ¶ 5).
2.Id. at ¶ 29.
3. Id. at ¶ 30.
whether it contained economic substance aside from tax
benefits. Hunt, 938 F.2d at 471. A corporation and its
transactions are objectively reasonable, despite any taxavoidance
motive, so long as the corporation engages in bona
fide economically-based business transactions. N. Indiana
Public Serv. Co. v. Commissioner, 115 F.3d 506, 512 (7th Cir.
1997); Moline Properties, Inc. v. Commissioner, 319 U.S. 436,
438-39 (1943); Frank Lyon Co. v. United States, 435 U.S. 561,
583-84 (1978).
It is undisputed that BDHMI: (1) “assumed the
responsibility for the management, servicing, and
administration of plaintiff’s employee and retiree health
plans;”1 (2) has considered and proposed numerous healthcare
cost containment strategies since its inception in 1998, many
of which have been implemented by B & D;2 and (3) has always
maintained salaried employees.3 Moreover, as a result of the
BDHMI transaction, BDHMI became responsible for paying the
healthcare claims of B & D employees, and such claims are paid
with BDHMI assets. Pl.’s Ex. 17 (Mark Hirschey Depo. at 414).
The BDHMI transaction, therefore, had very real economic
implications for every beneficiary of B & D’s employee
benefits program, as well as for the parties to the
transaction.
The court may not ignore a transaction that has economic
substance, even if the motive for the transaction is to avoid
taxes. Rice’s Toyota, 752 F.2d at 96. Accordingly, the BDHMI
transaction cannot be disregarded as a sham.
Because it disregarded the BDHMI transaction, the Service
concluded that B & D underpaid its taxes in 1998 and 1999. As
a result, B & D was assessed additional taxes, penalties, and
interest. Counterclaim ¶ 4. Because the BDHMI transaction
must be recognized, however, the United States’ counterclaim
for judgment on the additional taxes, penalties, and interest
must fail.
Also pending are the parties’ cross-motions for summary
judgment on B & D’s defenses to the United States’
counterclaim. Because the United States’ counterclaim is
without merit, the cross-motions for summary judgment on B &
D’s defenses to it will be denied as moot.
October 22, 2004 /s/
Date William D. Quarles, Jr.
United States District Judge