TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, January 24, 2006

Sixth Circuit Concludes that Dow Chemical's COLI Lacked Economic Substance

The Sixth Circuit yesterday issued its opinion in Dow Chemical v. United States, No. 03-2360 (6th Cir. 1/23/06).  The majority for the 2-1 panel agreed with the IRS that Dow Chemical's corporate-owned life insurance (“COLI”) policies on the lives of thousands of its employees lacked economic substance and thus disallowed deductions for interest incurred on loans used to pay the COLI premiums and for fees related to the administration of the policies.

Judge Ryan filed a spirited dissent:

My colleagues conclude that, as a matter of law, future profits contingent on taxpayer action are an appropriate component of the economic substance calculus only when that action comports with the taxpayer’s actual past conduct related to the transaction in question. I disagree. In my opinion, there is no such precedential rule of law and no warrant for creating one in this case. The validity of Dow’s COLI plans as investments having economic substance turns on the district court’s findings of fact and the sufficiency of evidence supporting those findings. I would affirm the judgment in favor of Dow because I believe that the district court correctly applied the law of this circuit to factual findings that are not clearly erroneous....

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