The U.S. Internal Revenue Service lost its request to delay Solyndra from carrying out its restructuring plan while the agency appeals a bankruptcy judge's approval of the failed solar-panel maker's plan to exit court protection.
The IRS was denied its bid for a so-called "stay" to keep Solyndra, which received a $535 million U.S. Energy Department loan guarantee before going bankrupt, from implementing its plan which the government claims will make its appeal moot because it would be too difficult to undo afterward.
"Here I find that the government has failed to prove a likelihood of success," on its appeal of U.S. Bankruptcy Judge Mary Walrath's plan approval, U.S. District Judge Gregory Sleet said at hearing Monday in Wilmington, Del.
"The government claims that the evidence clearly showed the principal purpose was tax avoidance but offers no proof to support its position," he added, saying the U.S. relies on "circumstantial" evidence rather than fact.
Walrath approved the plan last month over the government's objection that it couldn't be approved because the principal purpose of the plan was to allow Argonaut Ventures I and Madrone Partners, Solyndra's plan sponsors and indirect owners, to avoid taxes.
Under the plan, Solyndra will be liquidated while its parent, 360 Degree Solar Holdings, will exit court protection with so-called net operating loss carryforwards of as much as $975 million, which it may use against future income, according to court papers. The potential tax breaks may be as much as $341 million for 360 Degree investors Argonaut and Madrone.
The government claimed Walrath made "multiple errors" including her finding that the plan had many purposes rather than determine if tax avoidance was the primary one, according to court documents. The U.S. said it would be "irreparably harmed" if not granted the stay, because its appeal could essentially be rendered futile if the plan is consummated.
Sleet agreed with Walrath saying he couldn't find any clear error that the bankruptcy court made in its ruling, and echoed her finding that the reorganization plan had many purposes including resolving creditor claims and settling litigation. He said it is "not whether an injury exists but whether that injury is irreparable," and the IRS will get a second chance at contesting the tax breaks if they are used in the future.
"There has been nothing presented here other than rhetoric," that the IRS claims will allow it "to succeed where they failed in bankruptcy court," Maxim B. Litvak, a lawyer for Solyndra, said at Monday's hearing. "You are being asked to draw an inference from circumstantial evidence and ignore the factual evidence" that the plan had genuine purposes other than tax avoidance and the bankruptcy court was clearly erroneous, he told Sleet.
Under Solyndra's plan, the government will probably get nothing for its $528 million claim from the loan guarantee because creditors ranking ahead of the U.S. won't be fully repaid.
Argonaut and Madrone, whose $75 million loan in a February 2011 restructuring supplanted the U.S. as the top priority of repayment, won't receive a full recovery on their claims, according to testimony from financial adviser Eric Carlson at an Oct. 17 hearing.