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 user 2010-02-22 at 11:01:28 am Views: 40
  • #23403


    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.

    H-P, a
    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
    to comment.

    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.

    Foreign tax
    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
    report noted