FedEx shares dip 2 percent on IRS back tax of $319 million

CHICAGO (Reuters) - FedEx Corp (FDX.N: Quote, Profile, Research, Stock Buzz) shares dipped more than 2 percent on Monday following news late Friday that U.S. tax authorities had found the company owed more than $319 million in taxes and penalties for 2002 related to its independent contractor model at FedEx Ground.

Estimates vary for how much FedEx may eventually asked to pay the U.S. Internal Revenue Service -- which is now reviewing FedEx's results for calendar years 2004 to 2006 -- but Credit Suisse analyst Jason Seidl wrote in a research note to clients entitled "FedEx Gets Coal in its Stocking" that the company "could potentially owe nearly $1.5 billion in taxes and expenses when all audits are completed."

The Memphis-based company reported the IRS's finding in a regulatory filing Friday, saying that the federal tax authority had "tentatively concluded" that the 15,000 independent contractors FedEx Ground uses as drivers should be reclassified as employees.

FedEx said in the filing it aims to "vigorously defend" its position.

The use of independent contractors allows FedEx to save money and compete with its main rival, Atlanta-based United Parcel Service Inc (UPS.N: Quote, Profile, Research, Stock Buzz), whose drivers are unionized.

But that cost-saving model has come under attack from a number of different directions.

In a research note, Bear Stearns analyst Edward Wolfe wrote, "In recent months FedEx has been stung by a series of decisions, filings and directives which claim that FedEx exercises too much control over its Ground Drivers for them to be classified as contractors."

FedEx's use of contractors is also the focus of lawsuits in 36 U.S. states, brought by some current and former FedEx Ground drivers, alleging the level of control the company exercised over their work qualified them as employees and the benefits that go with that status.

In late November California's Supreme Court refused to hear an appeal from FedEx seeking to overturn a state court ruling that said FedEx Ground drivers should be reclassified as employees.