UPS Revises Tax RulingThe United Parcel Service of America, Atlanta, said that it has revised its second-quarter earnings to reflect charges covering potential liability stemming from an Aug. 9 U.S Tax Court ruling.
The UPS stated it had a net loss of $854 million in the second quarter, which ended June 30th, instead of $588 million, which was reported last month.
The U.S. Tax Court ruling claimed the agency took inflated tax deductions during the 1983 and 1984 time period, and said the company must pay the IRS taxes, penalties, and interest on $67 million of revenue. In addition, it said it owes $250 million in back taxes for the years 1985 through 1990, pushing its total tax debt to more than $300 million plus penalties and interest.
The company announced on the 16th, however, that its total liability over the 14 years in which UPS took the disputed deductions is $1.786 billion, including $915 million in taxes and $871 million in accrued interest. With a $344 million tax credit, the charge equals $1.442 billion.
In a statement, the UPS said that it has "sufficient cash, cash equivalents and marketable securities on hand to satisfy it estimated payments for these tax matters."
Basically, the court held that UPS is liable for tax on income of Overseas Partners Ltd., a Bermuda company owned and controlled by UPS, which has reinsured excess value package insurance for products costing over $100 purchased by UPS customers beginning in 1984.
In his decision, Judge Robert P. Ruwe of the U. S. Tax Court ruled that UPS had illegally inflated its tax deductions by charging its customers three times the competitive market price for insuring these packages. UPS paid the money to National Union Fire Insurance of Pittsburgh and took a tax deduction. But the judge said that National Union was acting as a front because it funneled the money to OPL
On August 12, the UPS denied that it was guilty of tax evasion, and that there was nothing that amounted to a sham in this ruling. The company said it is considering an appeal of the ruling. The company has 90 days to do this.
UPS also said that it is changing the way it insures packages for its customers, to avoid any future run-ins with the IRS. Part of this includes termination of its relationship with National Union and the setting up of a UPS subsidiary to offer insurance to its customers.
It has no plans to reduce the current rate of 35 cents per $100 of extra value coverage, however.
"We already have the lowest cost in the business for extra value coverage insurance," said Black. "So, there is no issue of a refund."
In addition, Black said the decision will not affect UPS' plans, announced in July, to offer shares to the public for the first time in its 92-year history. The offering is expected to occur at the end of the year, though the company has not announced a date."
Analysts said the tax issue might not be such a big blow to the UPS.
"The company will obviously have to compensate [for the tax controversy]," said Doug Rockel, a transportation analyst with ING Baring, an investment house in NY. "And I know this is a huge amount of money-over $1 billion-but this is a pretty incredible company, with almost $30 billion in money, so they should be able to handle it."