By G.L.C., on August 27th, 2008
Many companies have used tax shelters known as Lease In Lease Out (LILO) and Sale In Lease Out (SILO) to claim deductions. A string of recent court decisions are being seen as a major victory for the Internal Revenue Service in its fight to outlaw the use of such tax shelter. The IRS designated LILOs as “listed transactions” back in 2000 and SILOs in 2005.
In BB&T vs. United States of America, the Court held that to have a tax deduction for lease or interest expense, you must actually incur them. And to incur them, you must have a genuine lease and genuine indebtedness.
In AWG Leasing Trust vs. United States of America , a federal district court denied tax benefits to a U.S. partnership related to its alleged purchase of a German waste-to-energy facility as an abusive SILO transaction.
In Fifth Third Bancorp of W. Ohio vs. United States of America, a federal district court jury, applying the economic substance doctrine, denied tax benefits related to a bank’s leasing arrangement for passenger rail cars as an abusive LILO transaction.
LILO involved corporate leasing of infrastructure on paper only while SILO involved corporate sale on paper only. In both tax shelters, the infrastructure is leased back to the owners. LILO and SILO as tax shelters have been under scrutiny from lawmakers. In 2003, the Treasury and Senate Finance Committee held an investigation on these tax shelters.
The IRS has over the years been using various incentives to entice users of tax shelters to come forward. With the tax shelters becoming more sophisticated, the IRS had to spend time to figure out who is buying what and leasing what.
According to the IRS many companies including large banks had bought more than thousands of tax shelter to improperly defer taxes and bolster their balance sheets. Bolstered by this recent ruling, the IRS is now offering a chance to such companies a chance to settle. The settlement has five main features:
- The taxpayer must agree to concede 80 percent of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007
- The IRS agrees to disregard 80 percent of any reported taxable rental income with respect to SILO or LILO transactions for each tax year through 2007
- The taxpayer must agree to report in 2008, 80 percent of the original issue discount (OID) connected with the SILO or LILO transactions for each tax year through 2007
- The taxpayer must exercise best efforts to terminate its SILO or LILO transactions on or before December 31, 2008
- The taxpayer must agree to recognize as ordinary income any termination gain, whether realized under an actual or deemed termination.
Companies that do not accept this offer could end up fighting a loosing battle. With three court decisions in its favor, the IRS is having a strong hand.
By G.L.C., on August 26th, 2008
In 1911, Dr. Miles Medical Co, a maker of relaxants and other medicines, sued a distributor, John D. Park & Sons Co., for selling at cut rate prices. The company lost the case when the Supreme Court held that it was trading too close to cartel-like trading. The judgment in the case Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) became a precedent in antitrust law and came to be known as Dr. Mile Rule. Under that rule minimum prices manufacturers set on what dealers can charge customers for their products are deemed as illegal per se under the Sherman Act, no matter what evidence might be presented.
This precedent has now been revered by the Supreme Court in Leegin Creative Leather Prods. v. PSKS, Inc., 127 S. Ct. 2705 (2007). The Supreme Court in a 5-4 decision held that minimum pricing pacts between manufacturers and retailers could benefit customers under certain circumstances and should be considered on a pact by pact basis. The pact could foster competition by giving retailers enough profit to promote a brand or offer better services. The Supreme Court upheld the manufacturer’s right to enforce minimum prices on its own products.
Before this judgment, a manufacturer would be violating the antitrust law by punishing or discriminating against a retailer who sells at cut rate prices. This judgment gives the manufacturers new powers and can change the face of discount retailing in the United States. Manufacturers can now require retailers to abide by minimum pricing pacts or have their supplies cut off.
This ruling has in effect allowed price fixing to make a comeback. It undermines the free market by limiting the consumer’s power to decide for himself whether to buy at rock bottom prices from a no frills retailer or pay the full price at a retailer offering better services and other benefits. From a consumer’s point of view, it is very difficult to prove that such minimum price fixing pacts are anti-competitive.
The judgment has failed to consider one important aspect of retail trade – competitive environment. A uniform price might not work for all retailers.
This judgment will most probably result in many manufacturers fixing the minimum price at which the retailers must sell their products. This could feed inflation. Among the dissenting judges, one judge estimated that legalizing price setting could add $300 billion to consumer costs every year.
Manufacturers have welcomed this decision. Many manufacturers look upon discounts as tarnishing their image. Many have used this decision to get price fixing allegations against them dismissed. Cendant Corporation, the owners of Avis and Budget rent-a-cars, was facing price fixing allegations in a case filed in the U.S. District Court in Anchorage, AK, filed by one of its franchisees. The very next day after the Supreme Court’s ruling, Cendant asked the court to dismiss the allegations. The court dismissed the allegations citing the Supreme Court judgment.
Welcome to the new era of legalized price fixing.
By B.P.T., on August 2nd, 2008
Since a recent blog touched on the gold standard (plus an amusing crack about it being dropped 75 years ago), I thought it would be interesting to look back at history and how the gold standard has evolved legally over the years and possible current effects. History has not only altered the gold standard itself but the gold clauses as well, the axing of which effectively gave the entire theory a big punch in the gut back in 1935.
The gold standard, a backing of currency with gold grams in an amount determined by the government, has its roots as far back as ancient Rome, but a bit closer to home, it had major beginnings in the U.S. in the 1900 Gold Standard Act, which set the value of gold per troy ounce. For the most part, the gold standard gave up the ghost during the inflationary years of the Great Depression, but what really hit home for many people was the repealment of the Gold Clauses. (Many governments still retain gold reserves however, to give added credibility to the value of currency.)
The gold clauses were contract clauses that basically allowed an obligee to collect his or her money in gold, rather than dollars, upon demand. In 1933, Congress nixed these clauses with a resolution making these types of clauses against public policy.
A series of U.S. Supreme Court cases, The Gold Clause Cases, addressed the constitutionality of this resolution in cases that addressed the clause in private railroad bonds, Liberty Gold Bonds, and U.S. Gold certificates. The court held the resolution repealing these clauses was within Congress’ power and effectively zapped the power of gold clauses across the country, disallowing obligees – including those of the government who owned U.S. bonds – from demanding payment in gold rather than dollars.
No controversial decision is without dissenters, and in the Gold Clause Cases, the four horsemen (Justices James McReynolds, Willis Van Devanter, George Sutherland, and Pierce Butler, who basically voted against anything FDR wanted) voted against the majority, saying, “This amounts to a declaration that the Government may give with one hand and take away with the other. …The impending legal and moral chaos is appalling.” Whether or not the impending doom predicted by the horsemen actually came to pass is perhaps debatable, but it was more likely not nearly as dire as they expected.
What’s interesting is how that plays out even today. While Roosevelt re-adopted the gold standard, which was again later dropped, the gold clauses were not reinstated until the 70’s, where it was authorized only for use in private contracts (this is in stark contrast to earlier contracts, which obligated the federal government to make payment in gold).
The interesting current twist is a case that is currently awaiting a decision in the 6th U.S. District Court. The case involves a lease between a landlord and a lessee who took over an existing lease. The original lease included the 70’s approved private contract gold clauses – the question is, did the new lessee take on that portion of the contract or was a new contract effectively made? The Northern District of Ohio said the gold clause was bunk, and there’s no obligation to pay up in gold rather than good old greenbacks (which would give the owners a potentially much higher payout in terms of real value, given the dollar’s slide). What will the 6th District say? My guess is likely the same as the lower court, but if not, it might be more fodder for the gold standard proponents. Whatever the decision, watching history repeat itself will remain entertaining, interesting, and relevant.
By G.L.C., on July 22nd, 2008
Law and economics – is there a connection between the two? The purpose of law is to regulate society in such a way as to provide, among other things, economic benefits. Economics provides fundamental organizing principles for the whole body of law and a scientific theory to study the effects of legal sanctions on behavior. It simplifies the law and focuses on the real-life effects of the law such as protection of weak contract parties.
Although Adam Smith studied the economic effect on mercantile legislation in the 18th century, economic analysis of law is relatively new. The origin can be traced to two path breaking articles – “The Problem of Social Cost” by Ronald Coase published in 1960 and “Some Thoughts on Risk Distribution and the Law of Torts” by Guido Calabresi published in 1961. Over the years, this field has developed in a variety of directions. It has been one of the most successful of all the outward expeditions of economics since the 1960s. There are two basic questions involved in economic analysis of law – what are the effects of legal rules on the behavior of the concerned parties, and are these effects of legal rules socially desirable? The objective of this field is to apply an economic approach to all areas of law. In the U.S., this field is most active in the area of antitrust laws. Recent decisions of the Supreme Court have been shown to be influenced increasingly by the discipline of law and economics (e.g., the Microsoft case). Although the U.S. is the birth place of law and economics, it is now gaining ground worldwide.
Why should an economist have any knowledge about the law? Economics does not operate in an institutional vacuum. Economists can model their theories on real life situations.
There are two main features which make the study of law and economics an important field. Firstly, the courts allocate and reallocate resources, and the courts’ decisions necessarily affect the use of society’s limited resources. The second feature is that the legal system is concerned with behavior, just like economics. Law tries to influence behavior by establishing rules of conduct and imposing sanctions for their breach. These rules and sanctions must be made with the resource implications in mind.
Major economic, political, and social changes inevitably question the public policies underlying legal rules. With so much economic and social changes, it has become important to take stock of our laws, to inquire if they truly reflect the society’s ever changing values, and to assess their economic and social implications.
The two apparently dissimilar subjects of law and economics should be integrated to make their application more effective. It is an integral part of any democratic set up and enables policymakers to implement their strategies on basic healthcare, education, etc. Ownership, endowment, and numerous other economic concepts have a legal underpinning. The integration of law and economics is good not only for both disciplines but also to the societal goals they are serving in the development process.
By B.P.T., on July 18th, 2008
After this term’s recent Supreme Court case ruling slashing the punitive damages award that Exxon had been penalized in the disastrous Valdez spill, tort and maritime lawmakers, corporate lawyers, and CEO’s around the world are paying attention. What started as a $500 billion award in punitive damages (compared to $287 million in compensatory damages) was slashed first by the 9th Circuit Court of Appeals from $500 billion to $2.5 billion and again by the U.S. Supreme Court to about $500 million- closer to the 1:1 ratio Justice Souter argued for in his theory that punitive damages should be “reasonably predictable.”
So what does this mean in terms of basic economics for both consumers and corporations? While it may theoretically take away a bit of the incentive to bring big tort cases against large companies and some environmental groups are concerned that big oil and other companies are more likely to cut corners without the threat of enormous, unpredictable punitive awards over their heads, the larger impact may be for the companies themselves.
In what started as a Due Process debate under the 14th Amendment, several corporations with large pending or potential lawsuits could be directly impacted. This continues a trend started several years ago, which began the slicing and dicing of seemingly arbitrary punitive damages in BMW v Gore, an Alabama case in 1996, where a jury awarded Gore, a man whose car had been slightly damaged and repainted before he purchased it, $4000 in compensatory and $4million in punitive damages. This punitive damage control also includes awards like the 2003 Campbell v State Farm case, when the high court cut a $145 million damage, which was later reduced to approximately $9 million.
The immediate impact may be felt sooner rather than later by big corporations and shareholders alike, whose holdings often fluctuate based on the daily headlines and potential pending lawsuits. Chevron is facing a potential $16 billion lawsuit in Ecuador over environmental issues. And what about the big MTBE water cleanup settlement recently? Several oil companies (including Chevron) have settled 59 cases for $422 million dollars over cleanup. Exxon Mobil did not settle. An agreement was reached several weeks before the Valdez ruling. Perhaps the other oil companies were worried about the possibility of large punitive damages if they failed to settle. And maybe Exxon will come out smiling. Again.
By Evelyn Black, on July 9th, 2008
I admit my heart sank when I read the news that on June 25 the United States Supreme Court reversed the $2.5 billion in punitive damages awarded to victims of the 1989 Exxon Valdez oil spill, the worst and most damaging oil spill in history. The court decided that over the course of 19 years of corporate litigation, Exxon had apparently suffered enough.
The Supreme Court reduced Exxon’s penalty to $500 million, a fifth of the original amount awarded and just about 1% of Exxon’s profit for last year. In 2007 alone, Exxon netted $40.6 billion in profit from sales that exceeded $404 billion, which is more than the gross domestic product of 120 different countries. Exxon’s profit for the first quarter of 2008 has exceeded $10 billion.
So, it’s not like they don’t have the money.
Exxon claims it has already spent $3.5 billion cleaning up the Alaskan coastline, and the court decided 5-3 that indeed that was plenty good enough for them. Justice Alito sat the decision out because he owns stock in Exxon. Lucky Samuel Alito. The five siding with Exxon interpreted the letter of the law and said they saw no precedent for a punitive award that large. Justices Ginsberg and Stevens dissented, noting that Congress has already chosen not to impose restrictions on punitive damages in such cases.
In reversing this award, the court violated the spirit of the law if not the letter of it, and to reverse the decision now, just as ordinary Americans are watching the American standard of living plummet as fast as oil prices rise, is like kicking a body that’s already down and nearly dead.
I have to ask, why did Exxon feel the need to pursue and argue that decision for 19 years ongoing after the fact; a decision which, even in its original $2.5 billion form, was but a small fraction of the money the corporation made in any single one of those 19 years since the spill occurred? What was the point of that? To demonstrate that they had the resources to do it? To argue until they won? Were they thinking, “Wow, we aren’t hated nearly enough yet. What can we do that will make even our few remaining friends wince and hide? I know! Let’s get back that paltry Exxon Valdez money!”
 What was the cost of the litigation itself? I have to wonder, what if the cost of all those corporate lawyers over all those 19 years had been put into some kind of subsidy for green energy initiatives? It’s a good thing it wasn’t, or we’d think we were living in Iceland or Sweden, and we wouldn’t want that! Sure we’d have enough heat and power to free up money for, I don’t know, healthcare or education or something, but that would be too much like socialism. Thank God we were saved from it by raw corporate greed and the reliable power of enormous amounts of money in the hands of a select few.
Because of their legal persistence, our capitalist way of life has been preserved.
A study conducted by NOAA determined that as of early 2007 about 26,000 gallons of oil remain in the contaminated sandy soil at the site of the Alaskan spill. But what’s 26,000 gallons after 19 years among friends? Certainly it’s a whole lot less than the 10.8 million gallons that covered over 11,000 square miles in 1989 the day of the spill and instantly killed between 250 and 500 thousand seabirds, 22 Orca whales, 250 bald eagles, and countless other creatures during years and years of slow, ineffective clean-up efforts that relied heavily on wildlife volunteers and local citizens who were working for hours and hours for free.
What exactly are 500 thousand seabirds and 250 bald eagles worth on the open market anyway? Can we even put a price on something like that? Maybe not. But we do know now what they are not worth.
 According to the Supreme Court, they’re not worth $2.5 billion.
I just hope they don’t decide to charge the citizens who live around Prince William Sound for those 26,000 gallons of good oil still lurking in their beach soil. It does belong to Exxon after all.
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