IRS takes on Tyco in U.S. Tax Court debt-vs-equity dispute
A U.S. Tax Court fight between Tyco International Ltd and the Internal Revenue Service reflects a growing assertiveness by the agency over deductibility of interest in certain intercompany financing deals, tax lawyers said on Wednesday.
Tyco is challenging a $1 billion tax bill assessed by the IRS based on its view that cash transfers carried out within the multinational company were not debt payments, but taxable dividends, according to U.S. Tax Court documents.
Multinationals often structure intercompany capital transfers as debt so they can deduct the interest. The IRS is challenging such claims more frequently, tax lawyers said, despite two court losses it suffered last year.
"I have seen the IRS go after these structures very aggressively ... The IRS believes this is really low-hanging fruit," said Elan Keller, a tax lawyer with Caplin & Drysdale.
A maker of fire safety and home security products, Tyco did a series of corporate acquisitions involving intercompany transfers beginning in 1997, when it moved its headquarters to Switzerland from the United States.
The IRS alleges that Tyco and related companies owe $883.3 million in taxes and $154 million in penalties for tax years from 1997 to 2000, the company previously disclosed in U.S. Securities and Exchange Commission filings.
"The company strongly disagrees with the IRS position and intends to vigorously defend against the asserted adjustments in U.S. Tax Court," Tyco said in a statement to Reuters.
The IRS, which has not filed a court response to Tyco's challenge, declined to comment.
The Tyco decision could have a broad impact on other companies facing similar challenges from the IRS over debt-vs-equity questions in intercompany transfers, tax experts said.
The IRS is challenging Ingersoll-Rand Plc's intercompany debt issued in connection with a 2001 headquarters move to Bermuda, the company said in a July 24 securities filing.
Maker of Trane air conditioners and Schlage locks, Ingersoll-Rand said it could face a tax liability of $665 million plus penalties and interest related to debt payments in 2003 through 2006. It reincorporated in Ireland in 2009.
Tyco said its internal transfers had cash cushions, fixed maturities and interest payments - all characteristics of debt. Its "intercompany loans were bona fide indebtedness for federal income tax purposes," the company said in court documents.
An IRS court win would reverse a string of debt-vs-equity losses the agency suffered last year. In September, PepsiCo Inc won a $363 million debt-vs-equity decision in Tax Court. In June, the IRS lost a Tax Court decision to Scottish Power Ltd over $932 million in debt interest deductions.
A Tax Court loss for Tyco "could cause a lot of heartburn for other taxpayers," said a lawyer representing other companies facing a debt-vs-equity dispute with the IRS. "There are pretty high stakes here."
(Editing by Kevin Drawbaugh and Andrew Hay)