Supreme Court Will Not Hear Dow Chemical Co. COLI Case
The Supreme Court has denied Dow Chemical Company’s petition for certiorari in its corporate-owned-life-insurance (COLI) case. Dow Chemical Co. v. United States, 75 U.S.L.W. 3207 (Feb. 20, 2007). Dow is the only COLI litigant thus far to convince a trial court that its COLI program had economic substance aside from the tax benefits from interest deductions on plan borrowings. However, last year the U.S. Court of Appeals for the Sixth Circuit Court, over a strong dissent, reversed the trial court’s ruling. Dow Chemical v. United States. 435 F.3d 594 (6th Cir. 2006). Thus, the appeals court disallowed Dow’s interest deductions. Litigants in COLI cases typically try to demonstrate that a program has economic substance aside from tax benefits by showing, among other things, that the plan has positive cash flow and unborrowed inside build-up (net equity) over time. Dow convinced the trial court that its plan met both of these requirements. However, the Sixth Circuit held as a matter of law that Dow could not demonstrate economic substance because it based much of its analysis on speculative future cash infusions. According to the Sixth Circuit, in analyzing whether a transaction has economic substance for tax purposes, a trial court cannot consider evidence of an intent to make future cash infusions unless the party shows that it is required by contract to make the infusions or unless they are consistent with past practice. The tax bar in general perceived this unworkable legal standard as a misapplication of Supreme Court precedent in the economic substance area. Dow highlighted the issue in its petition for certiorari to the Supreme Court, and the U.S. Chamber of Commerce, among other amici supporting Dow’s position, argued that the holding has the potential to wreak havoc in normal corporate tax planning, well beyond the COLI context. The Supreme Court, evidently unmoved by this argument, let the lower court’s ruling stand. This may not be the end of the story as far as the Supreme Court is concerned. There are a number of other COLI cases in the administrative process, and at least one case, Xcel Energy v. United States, Civ. No. 04- 1449 (D. Minn.), is scheduled for trial in the near future. See the accompanying tidbit on the Magistrate’s decision in Xcel. The Supreme Court usually does not take cases unless they create a clear conflict among the lower courts. The Sixth Circuit’s holding presents an opportunity for a conflict arising from one of the other cases to be decided in the next few years.
T3: Taxing Times Tidbits, 31 Taxing Times, Vol. 3, Issue 2 (May 2007)