The Justice Department has won a tax shelter case involving Dow Chemical, in which the company was accused of creating approximately $1 billion in phony tax deductions in a scheme designed by Goldman Sachs and lawyers at King & Spalding.

A federal court in Baton Rouge, La., on Monday rejected two tax shelter transactions entered into by Dow Chemical that purported to create approximately $1 billion in phony tax deductions. In addition to rejecting the tax benefits from the shelter transactions, Chief Judge Brian A. Jackson also imposed penalties.

The schemes were allegedly created by Goldman Sachs and the law firm of King & Spalding, according to prosecutors, and involved creating a partnership that Dow operated out of its European headquarters in Switzerland. The case dates back to transactions Dow started in 1993 that involved patent transfers to company subsidiaries.

Chief Judge Jackson wrote in his 74-page opinionthat the government was correct to reject the artificial tax benefits created by these schemes that were designed to exploit perceived weaknesses in the tax code and not designed for legitimate business reasons.

The judge noted that:

tax law deals in economic realities, not legal abstractions.

Jackson also wrote that penalties were appropriate because any reasonable and prudent person should have known that the artificial tax benefits created by the scheme were “too good to be true.”

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