Chemtech Royalty Associates L.P. v. United States of America

The United States District Court for the Middle District of Louisiana decided in favor of the US Department of Justice in a tax shelter matter involving Chemtech Royalty Associates L.P. (Chemtech), a limited partnership and special purpose entity created by Dow Chemical Company. Chemtech was created as part of a tax transaction referred to as a Special Limited Investment Partnership (SLIP). The transaction involved transferring a portfolio of existing Dow patents to an overseas partnership (Chemtech), which then licensed the patents back to the parent company. At issue, among other things, was whether Dow would be allowed to deduct the royalty expenses paid for the use of the patents from its US tax returns, and whether it would be able to write off the depreciation of an existing chemical plant as part of a similar transaction. Following a one-week trial, Chief Judge Brian Jackson found that the transactions at issue should be disregarded for tax purposes because they failed economic substance doctrine tests and had no legitimate business purpose other than the generation of tax benefits. He imposed a 20% penalty for tax years 1997 through 2003.

An Analysis Group team, including Managing Principals Jeffrey Malinak and Justin McLean, and Vice President Ajay Jyoti, was retained by the Justice Department's Tax Division to assist counsel in this matter and support economic expert Professor R. Glenn Hubbard, Columbia Business School dean and Analysis Group academic affiliate. Professor Hubbard provided expert reports and testimony. In the decision, Judge Jackson cited Professor Hubbard's analyses and testimony extensively, finding his polar approach to analyzing debt and equity "persuasive." Further, Judge Jackson wrote in his decision, "… the Court finds the testimony of Dr. Hubbard credible, and adopts his approach to the distinction between debt and equity in this case." Judge Jackson also agreed with Professor Hubbard's assessment that the foreign banks participating in the transaction should not be treated as true Chemtech equity partners.