Berkshire Hathaway Victorious In Tax Dispute With IRS

by Glen Shapiro, LawAndTax-News.com, New York

01 November 2005

Ruling on Friday in a long-running dispute between Berkshire Hathaway and the US Internal Revenue Service, Judge Lyle Strom of the US District Court of Nebraska found in favour of the investment firm.

The firm's major shareholder, billionaire investment guru Warren Buffett in September testified in the suit, which was brought by Berkshire over the tax authority's decision to disallow $16.3 million in tax deductions.

The legal wrangle between the two parties began in 2002, and involved the taxes paid by the organisation in 1989, 1990 and 1991.

Berkshire Hathaway alleged that the IRS made an "erroneous, wrongful and illegal" interpretation of the US tax code. The tax body's decision was based on the discovery that Berkshire Hathaway had borrowed $750 million to buy dividend-paying stock.

It was interpreting a piece of legislation passed by Congress to address concerns that organisations were employing such tactics to convert pretax losses into after-tax gains, which therefore stipulated that deductions be reduced if borrowed money is directly attributable to the investment that pays the dividend.

However, the holding company argued that the money in the account which received IRS scrutiny came from several sources, and was used for thousands of transactions. It further stated that the purpose of buying stocks was to enhance the company's overall financial strength, rather than to purchase the stocks in question because they paid dividends.

According to reports in the national media, in his 38 page decision, Judge Strom ordered the IRS to pay Berkshire Hathaway $23.1 million plus interest.