What's the Deal with Dell's Tax Dodge?
The Litigation Daily
Summary Judgment is American Lawyer senior writer Susan Beck's regular opinion column for the Litigation Daily.
I like tax lawyers. In my experience, they are some of the smartest, nicest, most interesting lawyers you'll find at a big law firm. When I briefly practiced law a couple of decades ago, I was a corporate tax associate--and that was by choice! It's hard to explain what's so fun about a corporate tax practice, but the job involved a lot of creative problem solving, plus there's hardly any yelling and screaming.
At the same time, I hate our insanely complex tax system. And I don't like the fact that corporations hire these brilliant, creative tax lawyers to find ways to avoid billions and billions of dollars in taxes. As The New York Times recently documented, Apple Inc. has cleverly parked billions in profits in overseas havens to avoid paying U.S. taxes.
So I'm curious to see what "creative" strategy Dell Inc. CEO Michael Dell and Silver Lake Partners plan to use in their $24 billion proposed buyout of the computer maker. According to The Wall Street Journal, the parties' advisers are trying to craft a deal that would let Dell tap billions in cash stashed overseas without paying any U.S. taxes. Normally, offshore corporate profits are taxed when they're repatriated to the U.S. In Dell's case, the dealmakers are hoping to avoid more than $2 billion in taxes.
But Dell and the buyout parties have not, so far, disclosed any of this in filings to shareholders.
Tax lawyer Eric Brown of Aronberg Goldghen in Chicago said he doesn't know what Dell's tax strategy will be, but it's likely to be risky. "There is substantial risk because the transaction would have to be fairly complicated to get this cash back. The IRS will be looking at it very closely," he said. Brown pointed out that Johnson & Johnson attempted to avoid U.S. taxes when it funneled offshore funds through a foreign entity to purchase Synthes Inc. last year. The Internal Revenue Service responded with a ruling that it wouldn't allow the tactic.
There are some awfully clever lawyers working on this deal, including at Simpson, Thacher & Bartlett, which is advising Silver Lake, and Wachtell, Lipton, Rosen & Katz, which is advising Michael Dell. Debevoise & Plimpton is representing a special committee of Dell's board, which is tasked with evaluating the fairness of the deal for all shareholders. I contacted tax lawyers at Simpson Thacher and Wachtell and didn't hear back. Debevoise declined to comment. Dell (the company) also didn't respond to a request for comment.
A $2 billion tax gamble seems like a material information. If the buyout group is banking on a daring tax strategy, then they should disclose that fact, along with an explanation of the strategy. Would such a disclosure tip off the IRS? Sure. But the IRS has every right to scrutinize this deal. If you believe you have legitimate grounds to avoid billions in taxes, then come forward and explain.
This article originally appeared in The Am Law Litigation Daily.