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Court Disallows Compaq Tax Credit

September 21, 1999

WASHINGTON (AP) _ An $888 million stock transaction executed in an hour in 1992 by Compaq Computer Corp. was put together solely to avoid U.S. income taxes, the U.S. Tax Court ruled Tuesday.

As a result, the Tax Court said a $3.4 million tax credit claimed by Compaq will be disallowed, and the Houston-based computer maker will be assessed an unspecified accuracy-related penalty because of negligence.

The ruling by Chief Judge Mary Ann Cohen, which upheld the Internal Revenue Service’s position, concluded that the complex arrangement to buy 10 million shares of Royal Dutch Petroleum Co. stock was ``motivated by the expected tax benefits, ... and no other business purpose existed.″

Tax law generally prohibits transactions with no economic purpose other than the avoidance of taxes. The Clinton administration has been trying to crack down on corporate tax shelters, and Tuesday’s ruling follows two recent Tax Court decisions involving The Limited retail company and United Parcel Service that invalidated tax-avoidance schemes.

In the Compaq case, the Tax Court concluded that the company arranged for the purchase and immediate resale of the Royal Dutch shares in 23 transactions back-to-back on Sept. 16, 1992, to ``capture″ a foreign tax credit and help offset the tax sting of a capital gain caused by a previous stock transaction.

Compaq, Cohen said in her ruling, ``had no reasonable possibility of a profit ... without the anticipated federal tax consequences.″

Compaq spokesman Alan Hodel said the company was disappointed in the ruling and was considering an appeal. He said the court ruled in Compaq’s favor in July on another aspect of the three-part case, on the transfer of pricing, and that Tuesday’s ruling ``involved a relatively small issue.″

The decision says that Compaq will be forced to pay an accuracy-related negligence penalty equal to 20 percent of the underpayment of tax, but the amount was not disclosed.

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