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ATLANTA — McKesson Corp. wants Georgia to refund the taxes the company paid on phantom profits. The state says no, and the matter is now headed for resolution in Fulton County Superior Court. Last week, McKesson filed suit in Fulton County against the Georgia Department of Revenue, saying the government owes it $409,531 plus interest. According to a letter filed as an exhibit with the suit, representatives from the Department of Revenue said they were denying the claim because the three-year statute of limitations had run out. McKesson’s attorneys say the statute of limitations should not have started running until this past September when the Internal Revenue Service made its “final determination of the changed or corrected net income” and issued the company an $11.9 million refund. McKesson Information Solutions v. Graham, No. 2004CV82565 (Fult. Super. filed March 4, 2004). Officials with the Department of Revenue declined to be interviewed for this article. A lawyer representing McKesson, E. Kendrick Smith of Smith, Gambrell & Russell, also declined to comment. McKesson is not unique in seeking to reclaim taxes on nonexistent profits cited as fraud by the Securities and Exchange Commission. The idea of tax refunds for the likes of Enron, WorldCom and HealthSouth attracted the attention of Congress last year when Sen. Charles Grassley, R-Iowa, proposed, as part of a bill addressing tax cuts for manufacturers, a measure that would prevent companies from seeking refunds based on overstated earnings. “The con men pay a little tax to help hide their fraud, bump up the stock price and cash in their stock options,” Grassley said in a statement last year. “They basically have made the IRS an unwitting accomplice to their fraud.” The bill, which came out of the Senate Finance Committee, is pending before the Senate, according to an aide to Grassley. Enron has not received any tax money back, but the company is “currently in negotiations with the IRS,” said a spokeswoman. Similarly, a spokeswoman for HealthSouth said the Birmingham, Ala.-based health care services provider would attempt to recover taxes paid on overstated earnings. If HealthSouth succeeds in getting a refund, the company’s investors will be waiting for their share. In an amended complaint filed Jan. 8 in the Northern District of Alabama as part of a federal class action suit against HealthSouth, the investors asked the court to impose “a constructive trust on all income tax refunds payable to HealthSouth as a result of overpaying income taxes on fraudulent income reported.” In re HealthSouth Securities Litigation, No. CV-03-BE-1500-S (N.D. Ala. filed June 24, 2003). Sixteen people, including company founder and former Chief Executive Officer Richard Scrushy, have been charged with crimes in connection with the federal HealthSouth investigation. Federal investigators also have brought charges against several former officers of WorldCom. Most recently, Attorney General John Ashcroft flew to New York to announce the indictment of WorldCom President and CEO Bernard Ebbers and former Chief Financial Officer Scott Sullivan. A spokeswoman for WorldCom, which now does business under the trade name MCI, said the company is “in the process of restating earnings” and expects to announce the revised figures before emerging from Chapter 11 bankruptcy. She didn’t know if the company will ask for a tax refund. IRS REFUNDS VS. GEORGIA REFUNDS The IRS typically grants tax refunds in situations where individuals or corporations report nonexistent income and then say there’s been a mistake. “The IRS isn’t so much interested in why you reported it. They’re just interested in the appropriate tax that is owed, which rests on the actual income,” said Thomas Johnston, chairman of the tax department at Miller & Chevalier in Washington. The firm represented Enron and its officers in some non-tax-related matters, Johnston said. The attorney noted that, unlike the SEC, the federal tax authorities do not care if the overstatement of income was an honest mistake. “The IRS is kind of nonjudgmental in that respect. Their mission is to extract the appropriate tax on your actual income,” he said. However, getting money back from Georgia’s Department of Revenue is almost always more difficult than getting a tax break from the IRS, said Robert Greenberger, a certified public accountant and tax shareholder at Tauber & Balser, an accounting firm in Atlanta. “The current folks at Georgia are reluctant to give money back in general,” he said. “Especially with the commissioner they have now, “he added, referring to Bart Graham. A DISASTROUS DEAL At McKesson, the trouble began five years ago when the San Francisco-based company merged with an Alpharetta firm called HBO & Co. The two companies came together on Jan. 12, 1999, to form the world’s largest health care services business. The deal later turned disastrous for investors, executives and board members when accounting problems surfaced and, following a special audit, the company announced that more than $327 million in revenue previously reported by HBO & Co. was being eliminated. So far, six former executives have been charged with crimes ranging from securities fraud to insider trading. Four of them have pleaded guilty. Charges against HBO & Co.’s former general counsel, Jay Lapine, and HBO & Co.’s chief executive officer and chairman of the board of directors at the merged company, Charles McCall, are pending. Because HBO & Co. overstated its taxable income, the company applied for and received a federal tax refund based on the revised figures. On Sept. 10, the IRS issued a check to McKesson in the amount of $11.9 million. The amount included more than $2.7 million in interest from the government. In its suit, McKesson said the receipt of the check was “the first notification” the company received from the IRS that federal authorities had reached a decision on the corrected income figures. Accordingly, the company filed an amended state tax return with the Department of Revenue on Nov. 14 asking for a refund of $409,531. STATUTE OF LIMITATIONS AT ISSUE McKesson’s attorneys say state authorities relied upon the wrong statute in refusing the refund. The attorneys contend that O.C.G.A. § 48-7-82(e)(1) addresses their client’s situation — where a state income tax refund “becomes due as a result of a final determination of the changed or corrected net income of the taxpayer made by the federal tax authorities.” Robert Goolsby, the director of the Income Tax Division of the Georgia Department of Revenue, wrote to McKesson on Dec. 23. He told the company that the refund claim would be denied because it was not within the three-year statute of limitations. Regarding the code section cited by the company’s lawyers, Goolsby reiterated the department’s stance on the issue by quoting from an earlier letter to the company. “It has long been the Department’s interpretation that this [statute] means the IRS must make the change as part of an audit or examination and that the purpose of this statute is to provide a means to address IRS audit changes,” the letter said. The Department of Revenue was probably correct to deny the claim based on the statute of limitations, said Daniel Kolber, a securities attorney at Gambrell & Stolz who served as general counsel at the now defunct Air Atlanta. “Although the tax commissioners may have certain discretion in some cases, I doubt this is one where the state has any empathy for the taxpayer,” Kolber said. “McKesson always has the right to appeal, but, in this case, if they were my client, I think they would be well-advised to let sleeping dogs lie.” Steven H. Pollak is a reporter with Fulton County Daily Report , a Recorder affiliate based in Atlanta.

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