BMC Software lost a key case in tax court Wednesday and will pay $13 million to the IRS in a ruling that will be closely watched my multinational companies with profits abroad.
The court decision comes after the company's Sept. 10 announcement that it would go private after it was sold to Bain Capital and Golden Gate Capital, along with a few others, for around $6.9 billion.
The case revolved around a 2004 corporate income tax repatriation holiday that allowed multinational companies a tax break on profits returned to the U.S., reducing the rate temporarily from 35 percent to 5.25 percent. Between June 29, 2005, and March 31, 2006, BMC repatriated $721 million from its European counterpart, according to the court decision.
BMC declined to comment on the case, saying that it typically doesn't comment on legal proceedings.
The corporate income tax repatriation holiday was highly criticized at the time for its favoritism of larger, global corporations. A similar holiday was proposed again in 2011, but it did not make it through Congress despite lobbying efforts by global tech giants such as Microsoft, Google and Apple.
The conflict arose between the corporate income tax break and issues over transfer pricing that questioned the amount of profits BMC held domestically. Transfer prices are the prices that occur when a company moves funds between secondary locations offshore, often used to leverage the benefits of lower-tax countries. The transfer put BMC's profits higher, meaning it owed more taxes.
BMC challenged the difference, but a tax court ruled Wednesday that it must pay $13 million in missed taxes and penalties.
"The Commissioner and the taxpayer were bound to treat the payment as a return of principal for all Federal income tax purposes and the repayment was no longer a dividend. In short, we did not permit inconsistent characterizations for Federal income tax purposes," Judge Diane L. Kroupa's opinion read.
BMC isn't the only company embroiled with the IRS on this issue. Next up is a case for Massachusetts-based Analog Devices on Nov. 4 for a $26 million settlement. Analog Devices declined to comment on the case, saying that it doesn't comment on legal cases.
PUBLISHED SEPT. 19, 2013