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Varnum Win for ABC Beverage Named a Top Ten Tax Case

December 15, 2014

A federal income tax matter for a Michigan-based bottling company that began almost 18 years ago has finally been decided in federal court, and the decision will have far-reaching consequences for years to come. The matter, ABC Beverage Corporation & Subsidiaries v. United States of America, was recognized nationally by Forbes as one of the Top Ten Tax Cases in 2014. It was also a hard fought victory for the client, which received a $3,453,180.70 check for its efforts from the United States. 

Serving ABC was the Varnum tax trial team lead by attorney Ron DeWaard along with Brion Doyle. Varnum corporate tax attorney Kaplin Jones provided substantive tax law guidance and also participated on the trial team.

DeWaard noted that the win was all the more gratifying due to the complex nature of the tax law at issue as well as the need for distinctly different strategic approaches between the jury trial and the appeal. At trial, the team needed to convince the jury to rule against the U.S. Department of Justice by presenting otherwise complicated and technical tax concepts in a compelling narrative understandable to the average person.  However, on appeal, the intricacies and gauntlet of contrary tax law was daunting. "We had to overcome a variety of legal arguments and distinguish precedent that included a series of Supreme Court decisions and case law from other circuits that at first blush appeared squarely against us," DeWaard said.

The matter dates back to the 1997 tax year when ABC Beverage, which makes and distributes soft drinks for Dr. Pepper Snapple Group Inc., acquired a company that held a long-term lease on a bottling facility in Hazelwood, Missouri. Shortly after acquiring the lease, ABC concluded that the rent due on its long-term lease was in excess by three times - of the plant's fair market rent because of a quirk in the lease caused rent to go sky high in the last year. ABC needed to purchase the facility for its operations, which was appraised at $2.75 million without the lease, and was forced to buy the facility for over three times the appraised value. Because ABC had to overpay for the facility, it subsequently deducted $6.25 million on its tax return as a business expense for terminating the lease.

The IRS disallowed the deduction because it believed the amount paid for the facility reflected a capital purchase and assessed a tax deficiency. ABC paid the deficiency and sued for a refund. ABC prevailed on its claim at trial, a jury decision that led to the multi-million dollar judgment in favor of ABC. The IRS appealed the decision.

In June 2014, the U.S. Sixth Circuit Court of Appeals affirmed the District Court decision, holding that ABC could deduct the excess purchase amount that exceeded the fair market value of the building as an ordinary business expense.

"Any trial victory against the IRS is significant," said Jones. "This one is particularly so because it was upheld on appeal to the Sixth Circuit and establishes that the taxpayer can look past the form of a transaction to its substance in order to claim a tax benefit." While the government relied upon the fact that a sale occurred so that the deduction of a portion of the purchase price was improper, ABC convinced the Court that the transaction in reality resulted in a lease termination as well as a purchase, where a deduction was appropriate for the termination portion.

Prior to this decision, there was very little precedent allowing a taxpayer to rely on the substance of a transaction in support of a deduction, whereas the IRS is commonly permitted to look past the form to the substance of a transaction for the purpose of denying a claimed deduction.

"This published decision opens up the possibility for similar types of tax challenges," Jones said.

The case has drawn attention from Kiplinger, Bloomberg BNA, KPMG and other corporate tax publications and practitioners. Most recently it was profiled by Forbes nationally as one of the top ten tax cases of 2014.

See also:

Forbes: http://www.forbes.com/sites/anthonynitti/2014/11/13/the-top-ten-tax-cases-and-rulings-of-2014-7-buy-a-building-get-an-immediate-deduction/

KPMG: https://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/jun13-2014-sixth-circuit.pdf

Bloomberg BNA: http://www.bna.com/sixth-circuit-sticks-b17179891382/

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