Section of Taxation Publications
  VOL. 58
NO. 4
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Playing the Economic Substance Trump Card: Black & Decker v. United States
Stephen C. Lessard



It is the Government’s trump card; even if a transaction complies precisely with all requirements for obtaining a deduction, if it lacks economic substance it ‘simply is not recognized for federal taxation purposes, for better or for worse.’ ” In Black & Decker Corp. v. United States , the United States District Court for the District of Maryland granted Black & Decker Corporation’s (B&D) motion for summary judgment in its suit for a refund of federal taxes that B&D claimed were erroneously assessed and collected. The disputed taxes resulted from the Service’s denial of deductions taken by B&D in a business transaction involving the transfer and sale of stock in Black & Decker Healthcare Management Inc. (BDHMI), a liability management joint venture, pursuant to a section 351 transfer of property. Ignoring issues of statutory interpretation raised by both parties, the district court focused on the government’s assertion that the transaction was a tax avoidance vehicle, or sham, that must be disregarded for tax purposes. The court held that the transaction had economic substance and therefore could not be disregarded as a sham.

This Note examines the application of the economic substance doctrine in determining whether a business transaction is a sham and will argue that the Black & Decker court incorrectly applied the economic substance doctrine before it expressly resolved issues requiring statutory interpretation. Part I discusses the historical development of the economic substance doctrine and its recent embodiment in case law. Part II sets forth the facts of the case and the district court’s opinion. Part III argues that the district court incorrectly analyzed the issue, applying the economic substance doctrine prematurely. Black & Decker contrasts with Coltec Industries, Inc. v. United States , a similar decision that rejected application of the economic substance doctrine in favor of formal statutory interpretation. Part IV concludes with a discussion of some of the ramifications of the Black & Decker decision and the future of the economic substance doctrine.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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