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ARTICLE · 05 JULY 2016

Chemtech Affirmed By Fifth Circuit

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The district court held that the substantial-understatement and negligence penalties applied against Chemtech I for tax years 1997 through 1998, which subjected Chemtech I to a 20 percent penalty.

United StatesTax
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On May 17, 2016, the US Court of Appeals for the Fifth Circuit affirmed a decision by the district court for the Middle District of Louisiana in Chemtech Royalty Associates v. United States and upheld accuracy-related penalties imposed on Chemtech under Section 6662. 5 The district court held that the substantial-understatement and negligence penalties applied against Chemtech I for tax years 1997 through 1998, which subjected Chemtech I to a 20 percent penalty.

Background

Dow Chemical Company ("Dow") created Chemtech I ("Chemtech"), a limited partnership, and contributed 73 patents to the partnership, which Dow later leased back in return for royalty payments. Dow deducted its royalty payments to Chemtech. In 1998, Dow terminated Chemtech in response to a change in the US tax law. The Service conducted a partnership level audit for Chemtech, disregarded the partnership form of Chemtech for tax purposes, reasoning that Chemtech was a sham transaction. The Service

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