‘IRS Error in Your Favor’: Collect $23 Million
Berkshire Hathaway awarded $23 million in tax case
A federal judge in Lincoln, Neb., has ordered the Internal Revenue Service to pay billionaire Warren Buffett?s investment company more than $23 million in taxes and interest for disallowing certain deductions. The ruling ended three years of litigation between Berkshire Hathaway Inc. and the IRS, stemming from two lawsuits that alleged the IRS made an ?erroneous, wrongful and illegal? interpretation of the U.S. Tax Code when it denied the deductions. The original lawsuit, filed in 2002, said the IRS wrongly assessed more than $16 million in taxes and interest against Berkshire in 1989 and 1990. A second lawsuit said the IRS wrongly assessed it nearly $7 million in 1991.
The IRS first disallowed the deductions after tracing $750 million in borrowed money to Berkshire?s purchase of stocks in several companies, including Coca-Cola Co., Time-Warner Inc. and Wells Fargo & Co. — basing its denial on a tax law revision that reduced deductions if borrowed money is directly attributable to investments in stocks that pay dividends. Congress had passed the revision because of concern that some corporations were deliberately borrowing money for the purpose of buying dividend-paying stock, thereby converting pretax losses into after-tax gains.
Berkshire, based in Omaha, borrowed the money several times and put it into a principal bank account. But Berkshire said the money in that account came from several sources, was interchangeable and was used for thousands of transactions. The company said its goal was not to buy specific stocks but to maintain and enhance its financial strength. The lawsuits said Berkshire keeps large amounts of cash available to allow Buffett to make investments or acquisitions. Berkshire argued that is not enough to meet the standard that the borrowed money was directly attributable to the stock purchase.
In his ruling the judge said the ?current statutory and regulatory regime makes it virtually impossible for the (IRS) to trace debt proceeds and thus assess tax deficiencies under? the code ?against companies like Berkshire who engage in numerous investment transactions. ?However, any decision to loosen the ?direct? connection required between debt-proceeds and the purchase of dividend-paying stocks must be made by Congress or the service, not the courts,? the judge said.
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