## Facts

- Black & Decker Corporation (BDC) provided health-insurance benefits to current and retired employees and anticipated substantial future health-care claims that were uncertain in amount and timing.
- Seeking losses to offset unrelated taxable gains, BDC formed a wholly owned subsidiary, Black & Decker Healthcare Management, Inc. (BDHMI), treated as a separate taxpayer.
- BDC transferred approximately $561 million to BDHMI in exchange for BDHMI stock and BDHMI’s assumption of an estimated $560 million contingent liability tied to future employee health-care costs.
- BDC then sold the BDHMI stock to an unrelated party for about $1 million.
- On its tax return, BDC claimed a stock basis largely equal to the $561 million contribution, without reducing basis for BDHMI’s assumption of the contingent liability, and reported an approximate $560 million capital loss.
- The IRS disallowed the refund claim, contending the transaction created an artificial loss and that stock basis should be reduced by the assumed contingent liabilities.
- In refund litigation, the district court granted summary judgment for BDC and denied the government’s motion, concluding the transaction had sufficient business purpose and economic substance.
- The government appealed.

## Issues

1. Whether, under the statutory rules governing transfers to controlled corporations and assumptions of liabilities (including I.R.C. § 351 and related provisions), BDC was required to reduce its stock basis by the contingent health-care obligations assumed by BDHMI, thereby eliminating or reducing the claimed capital loss.
2. Whether the claimed loss could be disallowed solely through statutory interpretation at the summary-judgment stage.
3. Whether the transaction should be disregarded under the sham transaction/economic substance doctrine as lacking meaningful non-tax purpose or economic effect.

## Decision

- The Fourth Circuit held that the controlling statutory framework did not entitle either party to summary judgment on the basis-reduction question involving contingent liabilities.
- The court affirmed the denial of the government’s summary-judgment motion.
- The court reversed the grant of summary judgment to BDC.
- The court remanded for further proceedings because the economic substance/sham inquiry turned on disputed issues of material fact.

## Legal Principles

- Statutory provisions addressing transfers to controlled corporations and the effect of assumed liabilities on stock basis may not conclusively resolve treatment of contingent liabilities on summary judgment when the statutory scheme does not clearly compel one outcome.
- The sham transaction/economic substance doctrine can disallow tax benefits from a transaction that formally complies with the Internal Revenue Code if the transaction lacks meaningful economic effect or non-tax purpose.
- The presence of a corporate entity and an asserted business purpose does not categorically insulate related transactions from sham-transaction scrutiny.
- Economic substance determinations are commonly fact-intensive and may require trial-level findings when material facts are disputed.

## Conclusion

The Fourth Circuit declined to decide the claimed capital loss purely as a matter of statutory basis computation, and it required further factual development to determine whether the contingent-liability structure had economic substance or functioned as a tax-motivated sham.


Black & Decker Corp. v. United States, 436 F.3d 431 (4th Cir. 2006)