| WASHINGTON, June 9
WASHINGTON, June 9 The U.S. Internal Revenue
Service and manufacturer Illinois Tool Works Inc are
battling in U.S. Tax Court over a $356.8 million dispute that
highlights a type of cross-border tax avoidance strategy facing
increased scrutiny worldwide.
As governments crack down on tax-driven profit-shifting,
the IRS is asserting that a loan used by Illinois Tool to bring
foreign cash from a Bermuda-based subsidiary into the United
States was not a tax-free transaction.
Instead, the IRS argues that the transaction was a
repatriation of foreign profits equivalent to a taxable
A victory for the IRS in the case would jeopardize similar
transactions undertaken on a tax-free basis, tax lawyers say.
"This is foreign tax planning 101 ... Every Fortune 500
company in America that is multinational does this," said Jasper
Cummings, a tax lawyer for Alston & Bird LLP, who reviewed the
case for Reuters.
"If the IRS wins this, it will be a hell of a win," he said.
The Glenview, Illinois-based diversified manufacturer, which
makes everything from vehicle parts to food service equipment to
arc welding tools, filed its Tax Court petition last month,
challenging the tax agency's position.
Illinois Tool said it could owe $70 million if it loses the
case, according to a May regulatory filing. No trial date has
Both the company and the IRS declined to comment on Friday.
In 2006, Illinois Tool needed cash in the United States to
retire outstanding commercial paper and fund acquisitions,
according to the company's court filing.
The filing said Illinois Tool decided to repatriate cash
from its roughly $6.4 billion of earnings held overseas.
The company structured the transaction as a loan, with a
maturity date and a fixed interest rate. But in 2010 the IRS
recharacterized the loan as a taxable dividend, the filing said.
The case comes amid growing scrutiny of international
corporate tax issues. An anti-tax avoidance project is under way
at the Organization for Economic Co-operation and Development.
Known as the Base Erosion and Profit Shifting (BEPS) project,
the effort calls for revising tax treaties, tightening rules and
increasing government tax information sharing.
The OECD is expected to make BEPS recommendations to the
Group of 20 economies by the end of next year.
"Repatriation is becoming an increasingly significant
issue," said Miriam Fisher, co-chair of the tax controversy
practice at law firm Latham & Watkins LLP.
"It will be the subject of coming litigation and this case
certainly brings the issue to the forefront," she said.
The case is Illinois Tool Works Inc & Subsidiaries v.
Commissioner of Internal Revenue; Docket No. 010418-14.
(Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh
and Dan Grebler)