UPS Dealt Blow in Tax Court

A federal tax court ruling could cost United Parcel Service, the nation’s largest motor carrier, hundreds of millions of dollars in back taxes and penalties.

Although an appeal is likely, the Aug. 9 decision is a major setback for the Atlanta-based parcel carrier in a long-running dispute with the Internal Revenue Service over the legality of tax deductions taken to cover the cost of excess value insurance purchased by package shippers.

Judge Robert P. Ruwe, presiding in Washington, D.C, ruled that UPS is liable for tax on income of Overseas Partners Ltd., a Bermuda company set up by UPS to provide reinsurance for excess value coverage purchased by customers to cover loss or damage claims on packages valued at more than $100.

UPS charged customers 25 cents for every $100 of excess value, a rate the judge said was as much as three times the market rate. The program generated large profits for Overseas Partners Ltd., which has no income tax, and provided a hefty deduction that UPS used to minimize its U.S. tax liability.

Setting up an off-shore insurance company is usually not a problem for U.S.-based companies unless it is done solely to avoid paying taxes.

In his decision, Ruwe rejected the argument presented by UPS that it had valid business purposes for changing the way it handled excess value coverage in 1984.

For the full story, see the August 16 print edition of Transport Topics. Subscribe today.