Dow Chemical Loses Tax Case

A federal appeals court has ruled that Dow Chemical Co. is not entitled to a refund of $22.2 million in taxes it paid after the IRS challenged deductions on life insurance policies it had taken out on more than 21,000 employees.

Dow had claimed deductions of more than $33 million for interest it paid on loans that covered the life insurance premiums.

Dow bought the policies in 1988 and 1991 and paid premiums using loans from the insurers with the cash value of the policies as collateral.

The Cincinnati-based U.S. 6th Circuit Court of Appeals’ ruling Monday reversed a 2003 decision issued by U.S. District David M. Lawson in Bay City, Mich.

U.S. Circuit Judge Karen Nelson Moore called Dow’s dealings with the policies “economic shams” and said the policies had no economic effects other than creating tax losses.

After the Internal Revenue Service said Dow could not claim the interest expense as a deduction, the Midland, Mich.-based company paid the back taxes but sued for a refund.

Moore cited similar rulings in cases involving life insurance policies that were purchased by American Electric Power Inc., CM Holdings Inc. and Winn-Dixie Stores Inc.