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. Last Updated: 07/27/2016

Judge Rules UPS Must Pay Tax Fine

A judge has ruled that United Parcel Service took inflated tax deductions in 1984 and must pay taxes, penalties and interest that the company said may total nearly $300 million for that year.

But its ultimate tax liability could be much larger because the Tax Court decision, issued Monday, covers only the first year of a business practice that has continued ever since.

The 114-page decision was a rare victory for the Internal Revenue Service in its efforts to prevent companies from taking tax deductions when they move money to subsidiaries overseas for the sole purpose of avoiding taxes.

Since 1990, UPS has claimed these deductions on the same theory that the Tax Court denied, Kenneth Sternad, the chief spokesman for the company, said. It expects the IRS to contest its tax payments for the subsequent years. Based on the company's estimates of tax liability, its total in taxes, interest and penalties could easily surpass $1 billion.

At issue in the civil tax case were deductions that UPS took for the costs of insuring against damaged or lost parcels worth more than $100.

The IRS claimed that UPS charged customers three times the actual cost of the insurance in a scheme to funnel money to a company it created in 1984 in Bermuda. UPS argued that its insurance fees were reasonable, but the judge held that the rates were more than what UPS would have paid had it bought the insurance in the open market.

In funneling business to the Bermuda insurer, the judge ruled, UPS was motivated only to reduce its income taxes in the United States. It is legal to organize business activities in ways that reduce taxes - but it is illegal to engage in transactions whose sole purpose is to avoid taxes, Judge Robert Ruwe noted.