IRS losing its battle against corporate tax shelters

  • Thursday, January 3, 2002 9:00pm
  • Business

Associated Press

WASHINGTON — The Internal Revenue Service suffered a string of setbacks recently in federal appeals courts on its aggressive campaign to crack down on corporate tax shelters.

The 5th U.S. Circuit Court of Appeals in New Orleans last week became the latest to reverse a lower court decision when it sided with Compaq Computer Corp. against the IRS. Earlier last year, appeals courts in St. Louis and Atlanta issued similar reversals, the latter in a big case involving United Parcel Service.

Although the facts differ, each case ultimately turned on whether the companies set up transactions solely to avoid taxes or for a legitimate business reason. The lower courts agreed with the IRS position that these were sham deals made for tax advantages.

"The government, feeling they have a legitimate concern about deals that have gone too far, may have overplayed its hand a little bit," said Timothy McCormally, executive director of the Tax Executives Institute, which represents corporate tax officers. "These decisions will restore a better sense of balance."

The IRS has been attempting in recent years to curb corporate tax shelters, citing billions of dollars in annual tax losses. In December, the agency said investors and corporations could avoid stiff penalties over a four-month period if they disclose their deals to the government.

IRS officials said Thursday the reversals will not slow down the agency’s efforts. They noted that the same Atlanta appeals court that ruled against the agency in the UPS decision upheld the IRS, on the same day, in a case involving the Winn-Dixie grocery chain.

"We really don’t bring litigation unless we believe we are correct," said David Harris, manager of the IRS tax shelter office. "This does send a message that courts are going to look at these transactions on an individual basis, based on the facts and circumstances."

In the Compaq case, the company in 1992 made a rapid series of moves involving Royal Dutch Petroleum Co. securities, buying them for $887 million and immediately reselling them for $868 million — still qualifying for a net dividend of $19.2 million after the Netherlands tax was paid.

The deal generated a $3.4 million U.S. foreign tax credit and $20.7 million in capital losses, which were used to offset capital gains Compaq realized in other deals, thus lowering its tax bill.

The IRS called this a blatant attempt to avoid taxation, and the U.S. Tax Court agreed, saying Compaq’s moves had no economic substance and no nontax purpose.

But the appeals court disagreed, pointing out that Compaq made a profit on the deal and that it took place in the very public New York Stock Exchange, where prices are often volatile.

The transaction, according to the court’s opinion, "had both a reasonable possibility of profit attended by a real risk of loss … the transaction was not a mere formality or artifice but occurred in a real market subject to real risks."

Ben Wells, vice president and corporate treasurer at Houston-based Compaq, said Thursday the Tax Court ruling considered the company’s rapid-fire purchases and sales of Royal Dutch securities innately suspicious — but disregarded many other aspects of the deal.

"We were not doing this for the sake of tax savings," Wells said. "We were hoping to make a reasonable return, just as we would with any investment."

Copyright ©2002 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

The Westwood Rainier is one of the seven ships in the Westwood line. The ships serve ports in the Pacific Northwest and Northeast Asia. (Photo provided by Swire Shipping)
Westwood Shipping Lines, an Everett mainstay, has new name

The four green-hulled Westwood vessels will keep their names, but the ships will display the Swire Shipping flag.

Lead climbers head up their respective routes at Vertical World North on Monday, Nov. 20, 2023, in Lynnwood, Washington. (Ryan Berry / The Herald)
Beginner’s ascent: A newcomer’s guide to indoor climbing

Indoor climbing gyms in and around Snohomish County offer thrills without winter chills.

Alexis Burroughs holds a bigleaf maple leaf while guiding her participants through sensory observation during a forest bathing session Sunday, Nov. 19, 2023, at Lord Hill Regional Park near Snohomish, Washington. (Ryan Berry / The Herald)
To restore human bond with nature, locals lead forest bathing sessions

A yoga instructor in Bothell and Adopt a Stream in Everett say the meditative practice evokes emotion, health benefits.

Instructor Gael Gebow checks her stopwatch while tracking her group’s exercises during her Boot Camp fitness class Monday, Nov. 13, 2023, at the YMCA in Everett, Washington. (Ryan Berry / The Herald)
YMCA fitness instructor challenges, empowers Everett residents

Gael Gebow has made inclusivity and healthy living her focus in 23 years at the YMCA.

A view of the Broadway construction site of Compass Health’s new mental health facility on Wednesday, Nov. 29, 2023 in Everett, Washington. (Olivia Vanni / The Herald)
Compass Health dedicates Everett block to housing and behavioral health services

The “state-of-the-art” project is set to total over $90M. The nonprofit has asked for public support.

More than 150 people attend a ribbon cutting event on Nov. 16, 2023 celebrating the completion of Innovation Hall at the University of Washington Bothell and Cascadia College campus. The building, which highlights STEM instruction and research, opens to students in January. Credit: Tara Brown Photography/UW Bothell
New science, math facility opens in January at UW Bothell

Innovation Hall is the first new building to be constructed at the Bothell university campus in 10 years.

Everett
Rairdon Auto Group acquires Pignataro VW in Everett

Everett VW dealership is the 12th for the Rairdon Group, which marks 30 years in business this year.

A Keyport ship docked at Lake Union in Seattle in June 2018. The ship spends most of the year in Alaska harvesting Golden King crab in the Bering Sea. During the summer it ties up for maintenance and repairs at Lake Union. (Keyport LLC)
In crabbers’ turbulent moment, Edmonds seafood processor ‘saved our season’

When a processing plant in Alaska closed, Edmonds-based business Keyport stepped up to solve a “no-win situation.”

Angela Harris, Executive Director of the Port of Edmonds, stands at the port’s marina on Wednesday, Jan. 24, 2024, in Edmonds, Washington. (Ryan Berry / The Herald)
Leadership, love for the Port of Edmonds got exec the job

Shoring up an aging seawall is the first order of business for Angela Harris, the first woman to lead the Edmonds port.

The Cascade Warbirds fly over Naval Station Everett. (Sue Misao / The Herald file)
Bothell High School senior awarded $2,500 to keep on flying

Cascade Warbirds scholarship helps students 16-21 continue flight training and earn a private pilot’s certificate.

Rachel Gardner, the owner of Musicology Co., a new music boutique record store on Thursday, Jan. 18, 2024 in Edmonds, Washington. Musicology Co. will open in February, selling used and new vinyl, CDs and other music-related merchandise. (Olivia Vanni / The Herald)
New Edmonds record shop intends to be a ‘destination for every musician’

Rachel Gardner opened Musicology Co. this month, filling a record store gap in Edmonds.

MyMyToyStore.com owner Tom Harrison at his brick and mortar storefront on Tuesday, Sept. 6, 2022 in Everett, Washington. (Olivia Vanni / The Herald)
Burst pipe permanently closes downtown Everett toy store

After a pipe flooded the store, MyMyToystore in downtown Everett closed. Owner Tom Harrison is already on to his next venture.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.