U.S. IRS CRACKSDOWN ON HP FOR FOREIGN TAX DEALS
U.S. IRS CRACKSDOWN ON HP FOR FOREIGN TAX DEALS
2010-02-22 at 11:01:28 am #23403
U.S. IRS CRACKSDOWN ON HP FOR FOREIGN
SAN FRANCISCO –
Hewlett-Packard Co. has become an unlikely member of a group of
companies targeted by the U.S. Internal Revenue Service in a coordinated
legal assault on suspect international tax credits.
H-P is one
of roughly a half-dozen firms, nearly all in the banking and insurance
industries, now ensnared in the IRS’s “three-and-out” litigation
strategy targeting so-called foreign tax credit generators, experts say.
The IRS has pegged a handful of such cases as promising enough to
pursue, in hopes of winning at least three decisions in a row — and
thereby gaining a more solid legal footing on the issue.
the government does a good job of starting with cases that are very
weak for the taxpayer, and developing law,” said University of Southern
California Law Professor Edward Kleinbard.
Foreign tax credit
generators are investments by U.S. companies that earn income and result
in taxes overseas. Companies can then claim foreign tax credits, to
offset their tax payments in the U.S. However, the IRS alleges that many
are designed to unnecessarily load up on foreign tax credits, and
create an artificial financial benefit.
The IRS’s effort to curb
foreign tax credit generators is part of a broader push to keep pace
with overseas transactions. Uncollected taxes thanks to corporate
offshore deals can short government coffers hundreds of billions of
dollars annually, by some estimates. Clamping down has become a priority
amid the troubled economy, as tax revenue thins out.
technology giant best known for its personal computers and legendary
origins in a Silicon Valley garage, doesn’t generally fit the mold of a
company making extensive use of foreign tax credit generators.
firms now involved in related litigation with the IRS include insurance
giant American International Group Inc., Wells Fargo & Co. , Bank
of New York Mellon Corp. , Sovereign Bancorp Inc. and Principal
Financial Group Inc.”It’s typically always banks doing these
transactions,” said USC’s Kleinbard. “For them, earning financial income
is part of their core business.”
H-P is contesting $132 million
in disallowed tax credits resulting from an investment in a Dutch legal
entity called Foppingadreef, according to court filings. The IRS has
characterized the Foppingadreef deal as “a sham that lacked economic
substance and business purpose,” and the case is proceeding to trial in
U.S. Tax Court, according to filings.
An IRS spokesman declined
An H-P spokeswoman said in a statement that, “We
disagree with the IRS’s position and are optimistic that we will prevail
in court.” A. Duane Webber, an attorney with Baker & McKenzie
representing H-P, declined to comment.
In addition to its
petition filed in U.S. Tax Court, H-P has filed a related suit against
the IRS in federal court in California. The California proceeding has
been put on hold pending the U.S. Tax Court trial scheduled for
September, according to public filings.
‘The bad actor end of the
The IRS’s three-and-out strategy aims to pursue cases
in a variety of federal circuits. Losses could then be sent on to
different appeals courts, while a split at that level could later
theoretically be resolved by the Supreme Court, legal experts say.
IRS has followed a similar three-and-out litigation strategy, with some
success, in pursuing tax shelters.
Other foreign tax credit
generator cases currently underway include Principal Financial Group’s
case in Iowa, where Principal Life Insurance is a plaintiff, Wells
Fargo’s case in Minnesota, and Sovereign Bancorp.’s case in
Massachusetts. Bank of New York Mellon’s case is proceeding in U.S. Tax
Court. Representatives of Principal Financial Group, Wells Fargo,
Sovereign Bancorp and Bank of New York Mellon declined to comment.
New York-based foreign tax credit generator case has drawn the most
public attention, for pitting what is now a government-backed firm
against the government in an effort to recoup some $306 million in
taxes. The government bailed AIG out in 2008, during the darkest days of
the financial collapse, and wound up with a roughly 80% stake in the
An AIG spokesman said in a statement that, “AIG is
taking this action to insure that it is not required to pay more than
its fair share.”
H-P may seem an oddity among the insurance and
financial firms litigating over foreign tax credit generators, though in
one sense it blends in. The company’s financial services unit, which
specializes in leasing and financing hardware and software purchases,
pulled in nearly $2.7 billion in revenue in the company’s fiscal year
ended last October.
The IRS has been working for years to
restrict foreign tax credit generators. Its efforts are becoming more
visible now, as related court cases hit the public docket.
prepared remarks for a late 2008 speech, IRS Commissioner Douglas
Shulman criticized corporate structures aimed at sparing earnings from
U.S. taxation. “One of the most problematic of these structures are
foreign tax credit generators,” Shulman said, adding, “FTC generator
transactions are examples of situations where certain taxpayers may be
trending toward the bad actor end of the spectrum.”"It’s very popular,
it’s done all over the world and the focus on them is growing,” New York
University Law Professor H. David Rosenbloom said of foreign tax credit
generators. In many cases, “it’s quite obvious what’s going on,
[companies] are going out of their way to incur taxes” and stack up
credits, Rosenbloom said. One key benefit: The credits aren’t hit with a
35% U.S. tax rate that would apply to earnings.
credit generators are only one of a number of international tax
structures under close scrutiny by the IRS.According to a report
published by the Treasury Inspector General for Tax Administration last
year, the government can lose out on over $100 billion in revenue
annually that goes uncollected from international transactions. The
number of individual taxpayers in the U.S. filing for foreign tax
credits rose from 270,000 in 1981 to nearly 4.3 million by 2001, the