Dillon Trust Company, et al. v. United States of America

Analysis Group was retained by the US Department of Justice (DOJ) in a transferee-liability case brought by the Dillon Trust Company, a family trust founded in the 1930s. In 2002, the plaintiffs sold two companies holding high-value, low-basis liquid assets to the Humboldt Shelby Holding Corporation (HSHC), a group formed expressly to purchase the companies. The price HSHC paid for the two companies did not appear to account for the significant unrealized capital gains taxes associated with the two companies’ assets. Moreover, HSHC funded its purchase of the two companies by taking a short-term loan using the companies’ assets as collateral so that the unrealized gains of the companies’ liquid assets would be realized immediately after the purchase. HSHC did not pay the realized capital gains taxes, claiming that capital gains were offset by losses generated by subsequent transactions conducted by HSHC that were later ruled to be illegal “Son-of-BOSS” tax shelters. The IRS informed the Dillon Trust that it was liable, as a transferor in the transaction, to pay over $70 million for HSHC’s taxes, including penalties and interest. The Dillon Trust paid the taxes, but then sued the government for a refund.

An Analysis Group team led by Managing Principal Michael Cliff and Vice Presidents Della Cummings, Ajay Jyoti, and Joseph Maloney supported two testifying experts: Managing Principal R. Jeffrey Malinak and academic affiliate Jennifer Blouin of The Wharton School of the University of Pennsylvania. Both experts filed reports and testified at trial on economic questions regarding whether the Dillon Trust met the conditions necessary under New York State law to be considered the transferor of the assets, and therefore liable for the taxes.

Mr. Malinak opined on the valuation of the two companies before their sale to HSHC, the reasonableness of bids received for the companies, and the solvency of the companies before the sale and of HSHC immediately following the sale. Professor Blouin opined on a number of topics, including the lack of non-tax motivations or economic benefits from the sale of the two companies, as well as the numerous “red flags” in the transaction that could have indicated that HSHC’s purchase was potentially motivated by tax fraud. Both experts also rebutted the plaintiffs’ experts.

A judge in the US Court of Federal Claims agreed with both Professor Blouin’s and Mr. Malinak’s testimony and quoted them extensively in his decision dismissing the Dillon Trust’s complaint. “From Malinak and Blouin we therefore conclude that there was no legitimate economically rational explanation for [HSHC’s bid],” the judge wrote.