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Sunday, August 30, 2009

District Court Rejects $690m Assignment of Future Income Tax Shelter

The U.S. District Court on Friday rejected a $690 million assignment of future income tax shelter in a 91-page opinion.  Schering-Plough Corp. v. United States, No. 05-2575 (D. N.J. Aug. 28, 2009) (citations omitted):

The Court holds that the 1991 and 1992 swap-and-assign transactions into which Schering-Plough entered should not be respected as sales of future income streams. The transactions were, in substance, loans. Furthermore, the transactions had no appreciable economic effect on the parties, and Schering-Plough lacked sufficient subjective non-tax motivations for entering into them; it therefore cannot reap the benefit of the tax-driven vehicle. Finally, by repatriating $690 million in offshore earnings, Schering-Plough cannot avoid—under the pretext of Notice 89-21—the obvious intent of Congress to capture a portion of such sums under Subpart F.

The Supreme Court has said:

As to the astuteness of taxpayers in ordering their affairs so as to minimize taxes . . . the very meaning of a line in the law is that you intentionally may go as close to it as you can if you do not pass it. This is so because nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions.

Subpart F does not leave room for a corporate taxpayer to opt out of making a "voluntary contribution." Subpart F prescribes an exaction—which the law demands—upon repatriation of foreign-earned revenue.

The repatriation transactions became immediately taxable when the Swiss subsidiaries advanced the lump-sum payments to their corporate parent in the United States. The Court therefore holds that Schering-Plough is not entitled to a refund.

(Hat Tip: Richard Jacobus.)

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