ATLANTA -- The U.S. 11th Circuit Court of Appeals here upheld a lower court ruling that Winn-Dixie Stores, Jacksonville, Fla., was not entitled to deduct interest or fees incurred in borrowing against insurance policies it owned on the lives of more than 36,000 employees.
local newspaper reported that the company owed the government $1.6 million.
According to the appeals court ruling, in 1993 Winn-Dixie purchased whole-life insurance policies on almost all its full-time employees, with Winn-Dixie as the beneficiary. The company then borrowed against those policies at an interest rate of more than 11%.
The program's high interest rate and the administrative fees caused the company to lose money in pretax terms, the court continued. However, the deductibility of the interest and fees after taxes "yielded a benefit projected to reach into the billions of dollars over 60 years," the appeals ruling said.
Winn-Dixie discontinued the program in 1997, the court said, when this sort of borrowing was explicitly banned by a change in the tax code.
However, the original tax court as well as the appeals court ruled that Winn-Dixie had violated the "sham-transaction doctrine." The appeals court said, "That doctrine provides a transaction is not entitled to tax respect if it lacks economic effects or substance other than the generation of tax benefits."
