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Compaq prevails against charge of unpaid taxes

A judge rejects the Internal Revenue Service's claim that the computer maker owed $75 million in unpaid taxes in an import case dating back to 1992.

Compaq has turned the tables on the Internal Revenue Service in a tax and import case dating back to 1992.

At issue were accounting practices for components manufactured by Compaq Asia and imported into the United States for assembly into computers.

Chief Judge Mary Ann Cohen with the U.S. Tax Court in Washington, D.C., rejected the IRS's contention that Compaq Computer owed $75 million in unpaid taxes from 1991 and 1992.

During that period, Compaq obtained about half the components used for making computer circuit boards from its Singapore operation and Asian subcontractors. The rest came from the United States.

Compaq's problems with the IRS stemmed from how it compensated suppliers for these components. In the United States, Compaq paid on a consignment basis, but in Asia it chose a different, industry-recognized approach. In the one method, Compaq consigned materials it owned to subcontractors, and in the other it compensated subcontractors for raw materials, labor, and other overhead.

Compaq used a formula to calculate prices semiannually, but the IRS disputed the accounting and faulted the company's "transfer pricing," a means of calculating overseas profits. By the government's accounting, Compaq made $232 million in profit for which it owed taxes.

The court faulted the government's initial argument, and the IRS changed tactics focusing on profits made by the Singapore facility.

A legal team from Baker & McKenzie used an existing case involving Bausch & Lomb to convince the court Compaq had acted appropriately.

In her July 2 judgment, Cohen ruled not only in favor of Compaq but determined the IRS owed Compaq about $21 million.

A Compaq spokesperson said the ruling would have little affect on accounting adjustments. "What will happen is Compaq is going to save the interest if the taxes were due earlier, and the company will retain use of the tax payment until the funds are repatriated to the U.S."