Judge Rules Against UPS In Tax Case

United Parcel Service, the nation’s largest motor carrier, could owe hundreds of millions of dollars in back taxes and penalties based on a ruling by a U.S. Tax Court judge Aug. 9.

Although it is likely to be appealed, the decision is a major setback for UPS 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 ruled that UPS had set up a Bermuda-based reinsurance company in 1984 and used inflated insurance rates to avoid paying taxes on $67 million of revenue.

UPS spokesman Norman Black said Overseas Partners Ltd. was set up and spun off as an independent company, not to avoid paying taxes, but because the Atlanta-based package carrier did not want to be in the insurance business.

"We didn’t want to face regulation as an insurance company," Black said. "That’s what we thought was coming because of what was going on with Avis and Hertz selling collision insurance at that time."

Black said UPS could owe between $200 million and $300 million in back taxes, penalties and interest for 1983 and 1984 tax years, but he acknowledged that the cost could go significantly higher if the judge’s ruling is applied to all subsequent years.

The IRS has issued similar claims covering 1985 through 1990.

UPS is analyzing the tax court opinion and is evaluating possible responses. "There are plenty of grounds for appeal," Black said.