Court of Appeals Affirms Tax Benefits in ADR Trades
CHICAGO - On June 14, the U.S. Court of Appeals ruled in favor of a McDermott Will & Emery client, Alliant Energy Corporation, successor in interest to IES Industries, Inc. in IES Industries, Inc. and Subsidiaries v. United States of America with respect to two important tax issues.
In the first issue, the Court of Appeals reversed the lower court's opinion (which followed a U.S. Tax Court ruling in Compaq Computer Corporation) which concluded that IES Industries’ trades in American Depository Receipts (ADRs) were shaped solely by tax avoidance considerations. The Court of Appeals disagreed, concluding that the company’s trades were valid for tax purposes. The court found that the ADR trades were bona fide because they yielded an economic profit, notwithstanding that the transactions also decreased United States income taxes.
"This decision reaffirms the validity of legitimate tax planning in business transactions," commented Thomas Borders, tax partner at McDermott Will & Emery and counsel for IES Industries. "Given this court decision, efficient and effective tax planning can be integrated into business transactions that have real economic consequences."
The argument set forth by the IRS, which described IES Industries’ trading program as a corporate tax shelter, was rejected by the court. The court concluded that the ADR trades had both economic substance and a business purpose. Therefore, the transactions could not be characterized as a sham and disregarded for tax purposes as the IRS claimed. The court found that the company exercised good business judgment in limiting the risks created by the transactions and that it had a "subjective intent to treat the ADR trades as money-making transactions."
On a separate issue, the appeals court affirmed a lower court ruling in favor of IES Industries, which concluded that it could deduct in advance fifteen years of payments for nuclear decontamination cleanup costs. Alliant Energy’s subsidiary, IES Utilities, Inc., like all other utilities that used nuclear fuel, became obligated to pay the Department of Energy special clean-up assessments over a 15 year period beginning in 1992. Congress imposed the assessments on all domestic nuclear utilities to help cleanup government nuclear fuel enrichment plants that had provided services to these utilities in prior years.
IES Industries, an accrual method taxpayer, argued that the 1992 deduction was proper because the liability was fixed in 1992 and arose out of the uranium enrichment services provided by the Department of Energy. The government contended that the assessments were not based on the prior uranium enrichment services. The court ruled in favor of the company stating "[w]e think the government's position is untenable on these facts."
It is not known at this time how the government will respond to this opinion.
