Berkshire Hathaway Wins Three-Year Tax Case

Warren Buffett’s Berkshire Hathaway will receive $23.1 million plus interest after a Federal District Court judge ordered the Internal Revenue Service (IRS) to pay the company ending three years of litigation. Reuters reports the case stems from the 1989, 1990, and 1991 purchases of dividend-paying stocks with the proceeds of portions of $750 million which the company said it borrowed to strengthen its finances.

The tax rule cited by the IRS in prosecuting the company governs the purchase of stock with borrowed money and any deductions resulting from the purchases. The Associated Press reports that the tax rule reduced deductions if borrowed money is directly attributable to investments in dividend-paying stocks. The Service contended that the company overstated its dividend-received tax deductions according to Reuters.


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Court records show that the purchased stocks included Coca-Cola Co., Time Warner Inc., and Wells Fargo & Co., although the purchases of no specific stocks were ever intended by Berkshire according to the Associated Press. Berkshire keeps large cash reserves to allow for investments and acquisitions.

Court records show the $750 million in borrowed funds came from several sources but went into a principal bank account. The Associated Press reports that Berkshire maintained in their lawsuits that these funds were interchangeable and used for thousands of transactions.

Judge Lyle Strom’s opinion read that the “current statutory and regulatory regime makes it virtually impossible for the (IRS) to trace debt proceeds and thus assess tax deficiencies under” the code “against companies like Berkshire who engage in numerous investment transactions,” according to the Associated Press.

Judge Strom’s decision continued, “However, any decision to loosen the ‘direct’ connection required between debt-proceeds and the purchase of dividend-paying stocks must be made by Congress or the Service, not the courts.”

The Associated Press reports the Berkshire lawsuits alleged that the IRS made an “erroneous, wrongful, and illegal” interpretation in denying the company’s tax deductions. The initial lawsuit was filed in 2002 concerning the 1989 and 1990 stock purchases seeking a refund of $16.3 million. The second lawsuit concerned the 1991 purchases sought a refund of $6.8 million. The two suits were combined for trial.

The judge ordered Berkshire and the IRS to agree on a total refund and return a proposed judgment by November 28.


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