* Goldman Sachs, King & Spalding involved in case
* Justice says "phony tax deductions" were created
* Dow says exploring options, including appeal
By Patrick Temple-West
WASHINGTON, Feb 27 (Reuters) - The U.S. Justice Department said on Wednesday it has won a $1 billion tax shelter case against Dow Chemical Co that involved a Swiss partnership, Wall Street financial giant Goldman Sachs and international law firm King & Spalding.
The U.S. District Court for the Middle District of Louisiana rejected two tax shelter transactions entered into by the Dow Chemical Co "that purported to create approximately $1 billion in phony tax deductions," Justice said in a statement.
Chief Judge Brian Jackson also imposed penalties, the department said of the decision in the Baton Rouge court.
A Dow spokeswoman said in a statement that Dow sued the U.S. government for return of taxes paid for tax years 1993-2003.
"Dow paid all taxes at issue plus interest, but requested the U.S. District Court to agree that the taxes were wrongly assessed by the IRS," the spokeswoman said.
"Dow is disappointed by the trial court's decision ... we believe the opinion is not supported by the facts and applicable law. Dow is exploring all of its options, including appeal."
The case dates back to transactions Dow started in 1993 that involved patent transfers to company subsidiaries.
The IRS in 2005 denied Dow tax deductions based on the transactions, arguing the deals had no legitimate economic benefit to the company. Dow sued the government in 2005 to keep its tax deductions.
The transactions, created by Goldman Sachs and King & Spalding, involved forming a partnership that Dow operated from its European headquarters in Switzerland, according to the court's ruling.
Jackson wrote in his 74-page opinion that the government was correct to reject "the artificial tax benefits created by these schemes that were designed to exploit perceived weaknesses in the tax code and not designed for legitimate business reasons," according to the Justice Department.
Assistant U.S. Attorney General Kathryn Keneally of Justice's Tax Division said: "It is offensive to all taxpayers who pay their fair share when our largest corporations believe that they can claim hundreds of millions of dollars in tax deductions that are manufactured by abusive tax schemes."
Goldman Sachs and King Spalding both declined to comment.