I finally finished reading Judge Katherine S. Hayden’s 91 page opinion of Schering-Plough Corp. v. U.S. that came out last week. I must say that the opinion is a tour de force. The Court held that certain “swap-and-assign” transactions should not be respected as sales of future income streams. Instead, the transactions should be treated, in substance, as loans.
In arriving at this conclusion, the Court analyzed various topics, including:
- interest rate swaps,
- assignment of one of the legs of the swaps for an up-front payment,
- testimony from experts,
- testimony from Schering-Plough employees,
- substance over form principles,
- subpart F income and section 956,
- conduit theories,
- sales of future streams of income versus loans,
- step transaction doctrine, and
- economic substance doctrine.
A number of cases in the past have had more success with economic substance arguments at the appellate level. I have no idea whether Schering-Plough plans to appeal. If they do, however, I would not give good odds of an overturn on appeal. Having said that, the weakest area for the government would seem to be in the area of a taxpayer being able to rely on a notice published by the I.R.S. (discussed on pages 88 to 90 of the opinion), under a detrimental reliance argument.