Compass Lexecon’s Client Triumphs in Gerdau Macsteel Tax Litigation

On August 30, 2012, United States Tax Court Judge L. Paige Marvel issued a tax court opinion in favor of Respondent (our client) in Gerdau Macsteel, Inc. & Affiliated Subsidiaries, Petitioners v. Commissioner of Internal Revenue Service. Petitioner sought to report a tax loss of approximately $38 million to shelter its taxable gains from Federal income tax by entering into a series of interrelated transactions in late October 1997 that included the transfer of cash and the assumption of certain contingent liabilities in exchange for newly issued class C stock. The Court held that the Class C stock is non-qualified preferred stock because it “does not participate in corporate growth to any significant extent” and, accordingly, Petitioners are not entitled to deduct the claimed capital loss. The Court also held that the transactions underlying the claimed capital loss lacked economic substance. David J. Ross of Compass Lexecon provided expert testimony on these issues, and the Court “generally found Ross' conclusions to be more persuasive than those of the other two experts” who testified at trial. IRS counsel are Jill A. Frisch and Dennis M. Kelly.