Friday, February 03, 2006

Fourth Circuit issues opinion in sham transaction case

In Black and Decker Corp. v. United States, we see Black and Decker trying this nifty trick:

A corporate taxpayer paid $561 million to a controlled subsidiary in exchange for 10,000 shares of the subsidiary's stock and the subsidiary's assumption of a $560 million contingent liability of the taxpayer. The taxpayer then sold the shares for $1 million, claimed a $560 million capital loss on its federal income tax return, and sought a refund based on that loss.

Needless to say, the IRS declined to pay and is going after Black and Decker for use of an illegal tax shelter. The District Court granted Black and Decker summary judgment on the "sham transaction doctrine," but the Fourth Circuit reversed and remanded for further proceedings.

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