A Minneapolis energy company may face a $254 million bill for back taxes if it loses a legal dispute with the Internal Revenue Service.
Xcel Energy Inc. believes that the IRS mistakenly disallowed interest deductions on corporate-owned life insurance, which pays benefits to the company when an employee dies but not to survivors, according to a lawsuit filed in U.S. District Court earlier this month.
The $254 million at stake is equal to 40 percent of Xcel’s total profits in 2003, the Minneapolis Star-Tribune reported.
Xcel has been deducting the premiums for these policies since 1993 — and continues to do so — but in 2001, the IRS disallowed the deductions for the years 1993 to 1997.
The two sides failed to reach an agreement after two years of negotiating. The dispute centers on corporate-owned life insurance policies, known as COLI plans, which are issued by a Denver subsidiary of Xcel called the Public Service Co. of Colorado. Xcel started taking life insurance out for some of its employees in 1993. Xcel took out loans to pay for the policies and then deducted the interest it paid on the loans, saving millions of dollars every year.
However, the IRS considered the COLI plans "gimmicks," said Paul Gutterman, a specialist in tax accounting at the University of Minnesota's Carlson School of Management. "The IRS has taken the position that there is no economic substance to many of these [COLI] plans."
Members of Congress and some tax experts also see the interest deduction on COLI plans as a tax avoidance scheme since the life insurance doesn’t seem to serve any purpose except to lower the company’s tax bill.
Xcel, however, says the money generated from the policies was used to fund employee benefits. Xcel executives said in an SEC filling that they believe "the resolution of the matter will not have a material adverse impact on Xcel Energy's financial position." If it loses its case, though, the IRS wants $254 million.
"This is a large enough number that, were the IRS to prevail, it would have a significant impact on Xcel's earnings and possibly its stock price," said Daniele Seitz, an energy analyst at Maxcor Financial Inc., a New York brokerage firm. "It's a big uncertainty, and the market hates uncertainties."