| WASHINGTON, July 2
WASHINGTON, July 2 The Internal Revenue Service
and two technology firms are fighting in court over tax bills
from a 2004 corporate tax holiday, with other multinationals
watching closely for a result that could come any day, said tax
In separate cases, BMC Software Inc and Analog
Devices Inc are challenging IRS demands that the
companies pay more tax, arguing the agency's claim breaches the
controversial tax holiday law Congress enacted nine years ago.
The two cases are believed to be the first U.S. Tax Court
tests of the tax holiday - an idea some businesses in 2011
pushed the government to try again, but without success.
BMC, a Houston, Texas, systems company and the IRS went to
trial in May 2012, with a decision due any day.
Massachusetts-based Analog, a circuit-maker, is set for a trial
Both companies and the IRS declined to comment. BMC has
agreed to be bought by a private-equity group led by Bain
Capital and Golden Gate Capital. Bain declined to comment.
The cases are seen by lawyers as tests of the scope of the
2004 tax break - made law during the administration of President
George W. Bush - that let multinational businesses bring profits
earned abroad into the United States at a reduced tax rate.
Under law, U.S. corporations that make profits overseas can
put off paying tax on them as long as they are not brought into
the United States. This is known as offshore corporate income
tax deferral. Companies often take advantage of this law to
reduce their tax bills by leaving foreign profits overseas.
Nearly a decade ago, with U.S. corporations' offshore profit
piles rising fast and the economy sluggish, Bush and Congress
enacted a 'holiday' that let those profits come into the country
at a reduced tax rate - 5.25 percent, instead of 35 percent.
The measure was billed as a stimulus, but studies later
showed it had little impact on boosting jobs and capital
investment. In any case, more than 800 companies brought home
$362 billion in overseas income. In 2005, Analog repatriated $1
billion; BMC, $717.2 million.
At around the same time, both companies were fighting with
the IRS over transfer pricing practices. This is an area of
frequent dispute involving companies' tax transactions for
capital and assets among their subsidiaries in different
Both BMC and Analog settled their disputes with the IRS.
Those settlements boosted both companies' domestic profits
subject to the full corporate income tax, while reducing the
amount of profits they could repatriate at the holiday tax rate.
BMC got a $12.9 million tax bill in 2011, while Analog got a
$26 million bill in 2012, according to court filings. Both
companies promptly sued the IRS in Tax Court, arguing that the
settlements had no connection to the repatriations.
Given the language of IRS rules for repatriation and
transfer pricing, Analog does not "have much grounds for being
surprised," by the IRS's tax bill, said David Rosenbloom, a tax
lawyer at Caplin & Drysdale who has reviewed the documents.
Cym Lowell, a lawyer with McDermott Will & Emery, said the
IRS's tax bill to Analog was overly aggressive. "The taxpayer
should win the case," he said.
The cases are docket No. 017380-12 Analog Devices Inc &
Subsidiaries v Commissioner of Internal Revenue; No. 015675-11
BMC Software Inc. v Commissioner of Internal Revenue.