STATEMENT OF JOHN DICICCO, ACTING ASSISTANT ATTORNEY GENERAL FOR THE JUSTICE DEPARTMENT’S TAX DIVISION ON THE DECISION IN ENBRIDGE ENERGY V. UNITED STATES

WASHINGTON – Yesterday, the United States prevailed in an important tax shelter case in the Southern District of Texas involving claimed tax benefits of more than $150 million for a Houston company. “The decision affirms that the federal courts will not allow a taxpayer to avoid paying taxes by participating in a scheme to conceal the real transaction at issue,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division.

The taxpayer, Enbridge Energy, attempted to obtain inflated tax benefits by concealing its direct purchase of the stock of The Bishop Group Ltd., a pipeline business in Kansas City, Mo. The court held that an intermediate corporation known as the “K-Pipe Merger Corporation” that purportedly made the stock purchase was “a mere conduit” that was involved solely to increase Enbridge’s tax deductions. The court also held that another partnership involved in the deal, known as the Butcher Interest Partnership, was a sham. The deal was facilitated by Fortrend International.

The Internal Revenue Service (IRS) in February, 2001 issued a notice designating certain “intermediary” transactions – also called “midco” transactions – as transactions whose tax consequences the IRS might challenge. This lawsuit is the first case involving a “midco” transaction to be decided by a federal court.

In its ruling, the District Court denied a claim by Enbridge for an immediate refund of more than $5.4 million. The ruling also will prevent Enbridge from taking anticipated future depreciation deductions of more than $150 million. In addition, the court held that Enbridge was liable for penalties of 20% because it used an intermediary solely to avoid or evade federal income taxes and because it initially attempted to conceal the transaction from the IRS.

The shelter scheme was originally conceived by Midcoast Energy. Enbridge acquired Midcoast in 2001.

Mr. DiCicco thanked the Tax Division trial attorneys David Coffin and Herb Linder, who handled the case on behalf of the United States, and the Internal Revenue Service Chief Counsel attorneys who assisted the trial team.