Textron Inc., an aerospace and defense contractor, is in an uphill legal battle with the Internal Revenue Service that could win U.S. corporations a significant new weapon in tax disputes. The conglomerate is resisting demands by the IRS for internal documents about its use of allegedly abusive tax shelters. Tax collectors have become more aggressive in recent years in demanding such records, and most companies comply. Textron is the first company that the federal government has taken to court over the issue, the IRS says. Legal experts say the IRS has the upper hand in the fight, but tax lawyers are watching to see if the case alters the balance of power in corporate tax disputes....
In 2001, Textron bought several telephone networks and a railroad system overseas and then leased them back to their owners, according to a Justice Department court filing. Such arrangements can produce big tax benefits because depreciation can be claimed on the assets to reduce taxable income.
Some leasing transactions that reduce taxes are legitimate, but the IRS has tried to crack down on aggressive ones it calls "sale in, lease out" deals. In 2004, Congress outlawed future so-called SILOs, and the IRS in 2005 said it would begin presuming that past SILO transactions violated tax laws. The IRS is currently trying to prove that assertion in cases involving Consolidated Edison Co. of New York Inc., BB&T Corp. and Fifth Third Bancorp, which in suits against the government contend their deductions were proper.
The IRS says Textron entered into several deals that were SILOs, or "substantially similar" to SILOs. Toward that end, last year it demanded copies of the company's "tax-accrual work papers" for 2001. Such documents generally include detailed analysis of tax-beneficial transactions that could be challenged by the IRS. If Textron thought there was a chance that the IRS would disallow a deduction, it would set aside -- or "accrue" -- a portion of the expected savings. The papers also could include analysis by lawyers of the transaction's legal weaknesses. Joseph Bankman, a Stanford University law professor who writes about tax shelters, calls such papers "the blueprint" for complicated tax transactions.