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Federal Appeals Court Overturns UPS Tax Ruling

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NU Online News Service, June 22, 4:55 p.m. – A federal appeals court in Atlanta has overturned a 1999 decision stating that UPS, Atlanta, had illicitly tried to avoid federal income taxes through an offshore subsidiary when it restructured its program for providing extra package insurance to its customers.

Tax experts are describing the Atlanta ruling as a victory for companies trying to use aggressive but legal tax management strategies.

The case, known as UPS vs. Commissioner of Internal Revenue, focused on the manner in which UPS allegedly decided to funnel the excess value coverage business into a new, independent company known as Overseas Partners Ltd. in 1984.

Before 1984, UPS provided excess value coverage itself, the company says in a statement. After creating and spinning off OPL, UPS engaged another U.S. company, National Union Fire Insurance Comany, to provide the insurance purchased by UPS shippers.

The IRS alleged in 1997 that UPS had created OPL solely to avoid federal taxes and that UPS must pay federal taxes on OPL’s income. UPS, for its part, disputed the IRS’ allegations, saying it had followed all applicable laws and tax regulations in establishing OPL. The appeals court ruled that OPL is an independently taxable entity that is not under UPS’s control.

The logistic company estimated its potential liability at $1.8 billion for all subsequent years if the 1999 ruling were allowed to stand. The company then recorded a special tax assessment on its books of $1.8 billion, reducing its income for the second quarter of 1999 by a net $1.4 billion. Without conceding liability, UPS then paid $1.8 billion into a special account with the IRS, pending a decision by the 11th Circuit Court of Appeals. The balance will remain in place pending further proceedings on remand.