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 U.S. 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 U.S. 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.
Associated Experts & Staff