Coltec Industries, Inc. v. United States
United States Court of Appeals for the Federal Circuit
454 F.3d 1340 (2006)
- Written by Kelli Lanski, JD
Facts
Coltec Industries, Inc. (Coltec) (plaintiff) was a publicly traded company with many subsidiaries. Coltec sold one of its businesses for a gain of approximately $240,900,000. Coltec asked its tax advisors for strategies to offset this gain in its tax returns, and they suggested that Coltec reorganize a dormant subsidiary, transfer property and some of Coltec’s liabilities to that subsidiary in exchange for stock, and then sell the subsidiary to a third party for a nominal fee. Coltec did so, later admitting that one reason it agreed to the strategy was to avoid taxes. The subsidiary assumed Coltec’s asbestos liabilities in exchange for a $375,000,000 note. Ultimately Coltec claimed a loss of over $378,000,000 relating to the subsidiary, offsetting all of Coltec’s gains. The Internal Revenue Service disallowed the loss, and Coltec sued the United States (defendant) in federal court. The district court awarded Coltec its full claimed refund, and the United States appealed, arguing that Coltec was not entitled to deduct its losses because the sale of its reorganized subsidiary had no basis in economic reality. Coltec argued that the transaction was a legitimate way to manage its asbestos-related liabilities and to protect Coltec against piercing the corporate veil by plaintiffs in asbestos cases.
Rule of Law
Issue
Holding and Reasoning (Dyk, J.)
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