Dow Chemical Loses Chance to Defend Asset-Backed Financing

By Erin McManus

The U.S. Supreme Court declined to hear Dow Chemical Co.'s appeal of a lower court’s rejection of its creative attempt to monetize depreciated patents while claiming substantial tax deductions ( Chemtech Royalty Assocs., LP v. United States, U.S., No. 16-347, cert. denied 1/9/17 ).

Dow challenged both the tax bill and penalty for its asset-backed financing arrangement through which it contributed patents to partnerships and claimed $2 billion in deductions for royalty payments and depreciation through the partnerships while allocating only a small fraction of the income of the partnerships. The U.S. Court of Appeals for the Fifth Circuit ruled that the foreign banks Dow claimed were partners really weren’t, and the partnerships were shams.

The foreign banks—Bank of Brussels Lambert, Dresdner Bank A.G., Kredietbank N.V., National Westminster Bank Plc and Rabo Merchant Bank N.V.—“invested $200 million in return for a priority return of interest-like payments of 6.947% per year. In theory, the foreign banks had minimal participation (1%) in Chemtech I’s residual profits. But Dow was able to control the extent of the foreign banks’ profit participation through a contractual provision that enabled it to remove profitable patents from Chemtech I’s patent portfolio,” according to the Fifth Circuit’s May 2016 opinion.

The Supreme Court’s Jan. 9 rejection also leaves in place the Fifth Circuit’s ruling that Dow couldn’t claim that it had substantial legal authority for the earlier years of the transaction, because the case cited by Dow didn’t involve the contribution-leaseback transactions. Dow could have avoided the penalty if it could show that the court in the case it relied on ruled favorably for a taxpayer that engaged in a similar transaction.

The Internal Revenue Service declined to comment. Dow’s legal counsel didn’t respond to a request for comment.

To contact the reporter on this story: Erin McManus in Washington at emcmanus@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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