Appeals Court Rules That UPS Doesn't Have To Pay $1.8 Billion Tax Bill

by Mike Godfrey, Tax-News.com, Washington

24 September 2001

In the latest instalment of the ongoing wrangle between the IRS and United Parcel Service Inc. over the latter's use of an offshore Bermuda-based captive insurance company, a federal appeals court has ruled that UPS is not obliged to pay $1.8 billion in back taxes.

The Internal Revenue Service alleged that UPS established the company, Overseas Partners Limited, in order to avoid federal income tax. UPS, however, claims that the company was set up to provide extra package insurance for its customers for packages worth more than $100.

UPS may have won this battle, but it is far from certain who will win the war, and the IRS has been nothing if not tenacious in this case. Although the 11th US Circuit Court of Appeals failed last week to overturn the previous appeals court verdict in June, which found in favour of UPS, the IRS has not ruled out the possibility of taking the case to the Supreme Court.

Whatever is the final outcome, the US Insurance Advisory Committee says that the circumstances surrounding the UPS case were very individual and could not be applied to the Bermuda market generally. This type of case was rare in the 1980s and is even less common now. US tax expert, KPMG senior manager Patrick Hackenberg, agreed that the case would have little impact in Bermuda. The judge who gave the original ruling against UPS had determined that the captive was set up for reasons other than business and economic ones; but everyone is aware these days that economic and business objectives need to be seen to come first.

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