5th Circuit Upholds IRS Penalties Against Dow

NEW ORLEANS (CN) - Sham partnerships with foreign banks helped Dow Chemical Co. nab more than $1 billion in tax deductions, the 5th Circuit ruled.

The Wednesday decision affirms a finding last year that Dow created two Chemtech partnerships with no genuine business purpose "other than tax avoidance."

The foreign banks were not true partners in the complex partnerships because "the banks were guaranteed a return just under 7 percent each year and a valid partnership is not formed where, among other things, one partner receives a guaranteed, specific return," according to he ruling.

"Because under these specific facts, the court did not clearly err in holding that Dow lacked the intent to share the profits and losses with the foreign banks, we affirm its sham-partnership holding," Judge Jerry Smith wrote for a three-judge panel.

The International Revenue Service assessed a 20 percent penalty to Chemtech for transactions between 1993 to 2006 for substantial-understatement and negligence.

A spokeswoman for the Midland, Mich.-based chemical corporation expressed disappointment with the ruling which it said "was not supported by the facts and applicable laws."

"Dow has paid and accrued all taxes, interest and penalties relating to the transaction," the spokesman said in an email. "However, Dow appealed the U.S. District Court ruling maintaining that the taxes at issue were wrongly assessed by the IRS.

"We are evaluating our options."

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