The 6 th U.S. Circuit Court of Appeals in January 2006 declared that Dow can’t take the tax deductions because its COLI program amounted to an economic sham that was properly disallowed by the Internal Revenue Service (IRS) (See Dow Loses COLI Legal Battle ).
The appellate court overturned a ruling by U.S. District Judge David M. Lawson of the U.S. District Court for the Eastern District of Michigan in Dow’s favor.
According to the court documents,Dow purchased COLI policies from Great-West Life Assurance Co. on the lives of 4,051 employees in 1988. In 1991, Dow purchased COLI policies from Metropolitan Life Insurance Co. on the lives of 17,061 employees.
Dow paid premiums either by borrowing money from Great-West and MetLife, using the cash values of the policies as collateral, or making partial withdrawals from the unencumbered cash values of the policies.
Between 1988 and 2000, Dow paid $377,062,000 in premiums and $131,986,000 in interest to Great-West. From 1991 to 2000, Dow paid $849,890,000 in premiums and $239,371,000 in interest to MetLife.
In the taxable years 1989 to 1991, Dow claimed on its federal tax return deductions totaling $33,004,360 for interest paid on loans used to pay the COLI premiums.
IRS determined that the COLIs were economic shams, threw out the deductions, and imposed tax deficiencies and interest of $22,209,570. The company appealed unsuccessfully to the IRS and then sued the government to get back the $22 million.
The 6 th Circuit ruling in Dow Chemical Co. v. United States,U.S. , No. 06-478, cert. denied 2/20/07 is here .