Chemical Giant Settles with IRS for $30 million
Hercules Inc. agrees to a settlement offer that finds a previous tax
shelter illegal, saddling the chemical company with a $30 million tax
bill, plus penalties
By Stanley H. Block
The Internal Revenue
Service’s continued battle against tax shelters isn’t limited to
individual Americans using Bahamian bank accounts.
The government is ready and
willing to take on some of America’s largest and most powerful companies,
forcing them into court, if necessary, to dispute their use of illegal tax
shelters.
In December, the federal
government entered into a settlement agreement with Hercules Inc., a
chemical giant based in Wilmington, Del. The IRS alleged that a tax
shelter the company employed — known as a contingent liability transaction
— was illegal.
The contingent liability
transaction was designed to shelter capital gains, according to the IRS.
In a typical contingent liability transaction, a taxpayer that has or
anticipates a substantial capital gain transfers company notes to a
subsidiary in exchange for stock and the subsidiary’s assumption of a
contingent liability. The taxpayer claims that the basis in the stock
received is equal to the value of the notes without reduction for the
liability transferred. When the stock is sold, often to an accommodating
party, the taxpayer claims a substantial loss that offsets unrelated
capital gains. The taxpayer also claims deductions in later years when the
liabilities are paid or incurred.
Under the settlement terms
with Hercules, the company agreed to concede 100 percent of the capital
loss claimed from the stock sale, resulting in a tax liability of
approximately $30 million, and to pay a 20 percent accuracy-related
penalty of about $6 million. In exchange, the government agreed not to
pursue its claim for a 40 percent penalty.
“We are pleased that this
taxpayer has chosen to put this shelter controversy behind it,” said IRS
Chief Counsel Don Korb. “The decision to accept Hercules’ settlement offer
reflects our commitment to resolving controversies involving listed
transactions without litigation — provided the ultimate goal of
enforcement is not compromised.”
The headline-grabbing
settlement with such a giant of the American corporate community is part
of the government’s continued assault on tax shelters.
Over the past 18 months, the
IRS brokered deals with credit card companies that revealed the identities
of U.S. taxpayers who used offshore bank accounts to evade tax collection.
As a result, hundreds of taxpayers came forward voluntarily, while still
others were indicted.
Additionally, despite losing
lower-court cases against Black & Decker and Coltec, the IRS continues to
pursue tax shelters with vehemence. That much is illustrated in the
settlement with Hercules.
“Taxpayers should recognize
that recent taxpayer victories at the trial court level have not deterred
the IRS from taking a tough stance on listed transactions, both inside and
outside of the courthouse,” commented Korb.
Stanley H. Block is a Maryland State Tax
Attorney and a member of the American Society of IRS Problem Solvers. You
can contact him at 410-727-6006 to obtain a free subscription to his newsletter
titled The IRS Times & Inquirer.
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