TIFD III-E Inc. & Castle Harbour LLC v. United States, Nos 3:01cv1839 & 3:01cv1840 (D. Conn. Nov. 1, 2004):

• New York Times: I.R.S. Loses Another Ruling on Tax Shelters:

A federal judge has dealt another blow to the Internal Revenue Service in its battle against questionable tax shelters, ordering the agency to refund to a private entity controlled by General Electric more than $62 million stemming from a transaction the I.R.S. had deemed a sham.

Judge Stefan R. Underhill of the United States District Court of Connecticut said in a ruling on Monday that a G.E.-controlled entity named TIFD III-E was entitled to the refund because of its work as the main tax partner of a commercial aircraft-leasing partnership. The partnership, Castle Harbour I-Limited Liability Company, was set up in 1993 by GE Capital, a unit of General Electric.

The ruling is the third such defeat in two months for the I.R.S., which recently lost two important decisions concerning tax-related transactions that it regarded as being invalid for deductions, involving Black & Decker and Coltec Industries.

• Wall Street Journal: Court Backs Unit Of GE in IRS Case Over Tax Shelters:

A federal court sided with a unit of General Electric Co. in a tax dispute with the government, marking the third setback in two weeks for the Internal Revenue Service’s crackdown on corporate-tax shelters. The U.S. District Court in Connecticut rejected the IRS’s argument that TIFD III-E Inc., a subsidiary of GE Capital Corp., sought to avoid $62 million of federal income taxes during the 1990s by using a series of sham transactions to shelter profits from GE’s aircraft-leasing business.

The ruling comes on the heels of two other rulings last month by separate federal courts, rejecting the government’s arguments that Black & Decker Corp. and Coltec Industries Inc. had used abusive tax strategies whose sole purpose allegedly was to avoid federal income taxes. In his opinion in the GE case, signed Monday, U.S. District Judge Stefan Underhill of Bridgeport, Conn., ordered the IRS to refund the $62 million that the GE unit previously paid, with interest. The government hasn’t decided yet whether to appeal any of the three cases. In a statement, the IRS’s chief counsel, Donald Korb, said the IRS was “disappointed by the opinion” in the GE case, but said the agency “remains confident” in its legal position on the matter.

• Washington Post: All Tax Shelters Are Not Illegal, Another Court Tells IRS:

For the third time in less than a month, the government this week lost a multimillion-dollar case in which a federal judge concluded that a deal that saved a company large sums of taxes had a legitimate business purpose and thus was not an illegal tax shelter. In two of the cases, the judges specifically told the Internal Revenue Service that if it has a problem with the outcomes, the solution lies with Congress, not the courts. In the most recent case, a U.S. district judge in Connecticut determined Monday that an arrangement by which General Electric Co., through subsidiaries and partnerships, shifted $310 million in income to two Dutch banks that don’t pay U.S. taxes was not a sham and, as a result, GE was entitled to a $62 million tax refund.

Coltec Industries, Inc. v. United States, No. 01-072T (Ct. Fed. Cl. 10/29/04):

• New York Times: I.R.S. Loses a Tax Shelter Ruling:

A judge has ruled against the Internal Revenue Service in its effort to prove that it does not owe Coltec Inc. an $82 million refund in connection with what the agency contends is an abusive tax shelter. The ruling is the second setback in two months for the I.R.S. in its fight against what it regards as questionable tax shelters. Coltec is an industrial concern formerly involved in mining. Last month, a federal judge ruled that the agency owed the Black & Decker Corporation a tax refund of more than $57 million stemming from a transaction that the agency deemed to be abusive, or not valid for tax deductions. The I.R.S. can appeal both the Coltec and Black & Decker decisions.

In an opinion dated last Friday, the judge, Susan G. Braden of the United States Court of Federal Claims in Washington, wrote that Coltec had not engaged in an abusive tax shelter but rather in a legitimate business activity when it set up an entity to handle asbestos-related claims.

• Wall Street Journal: Court Backs Coltec On Tax Shelter In 2nd Blow to IRS:

A federal court sided with Coltec Industries Inc. in a tax dispute with the U.S. government, marking the second major defeat in the past two weeks for the Internal Revenue Service in its crackdown on corporate-tax shelters. The U.S. Court of Federal Claims in Washington rejected the IRS’s argument that Coltec, a maker of aircraft-landing systems, avoided federal income taxes by using a series of sham transactions to generate large capital losses. Coltec used the losses to offset capital gains that it realized on the 1996 sale of a business unit.

The IRS had argued that the transactions lacked economic substance, even if they technically may have complied with the tax code. Judge Susan Braden rejected that argument and awarded Coltec an $82.8 million refund. Judge Braden wrote that “where a taxpayer has satisfied all statutory requirements established by Congress, as Coltec did in this case, the use of the ‘economic substance’ doctrine to trump ‘mere compliance with the code’ would violate the separation of powers” clause of the U.S. Constitution. A spokesman for the Justice Department’s tax division, which represented the government, said it hasn’t decided whether to appeal. The ruling, filed Oct. 29, was similar to one last month by a U.S. district court in Baltimore in a case upholding Black & Decker Corp.’s right to a $57 million tax refund.