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The Internal Revenue Service will have to recheck its math because of a federal court ruling that DHL Corp. is entitled to a refund of most of a $114 million tax payment. In essence, the 9th U.S. Circuit Court of Appeals held that the package delivery company made an honest mistake in undervaluing transactions with its international counterpart, DHL International, and wasn’t as far off the mark as the IRS alleged. The April 12 ruling in DHL Corp. v. Commissioner of Internal Revenue, No. 99-71580, hinges on regulations that are no longer in effect, but DHL’s lawyer said the decision has current implications. In 1992, a group of foreign investors bought a controlling interest in DHL International and invoked a 1990 agreement between DHL and DHL International giving the latter company the option to purchase the U.S. and foreign trademark rights to the “DHL” name for $20 million. Because both companies had been controlled by the same people when the option agreement was negotiated, the IRS suspected an effort to hide a transfer of assets. The U.S. Tax Court agreed that DHL had deliberately undervalued both U.S. and foreign trademark rights, which were really worth $50 million each. The court dismissed a “comfort letter” in which financial analysts Bain & Co. supported the $20 million valuation, suggesting that DHL had shopped around for a congenial expert. DHL was ordered to pay $59 million in tax deficiencies and penalties and another $55 million in interest. SOME DEFERENCE The 9th Circuit deferred to the Tax Court’s judgment that the U.S. trademark rights were worth $50 million. But it held that under regulations in effect in 1990 (but substantially revised in 1994), DHL should not have to pay taxes on the $50 million value of the foreign rights because DHL International, which spent millions in promoting the DHL name overseas, had done much more to give value to those rights, even though DHL retained legal title. DHL’s attorney, Edwin V. Woodsome Jr. of the Los Angeles office of Washington, D.C.-based Howrey Simon Arnold & White, said that DHL’s final bill has yet to be reckoned but that the company expects to get back most of its $114 million. He applauded the court’s finding that DHL committed no wrongdoing in relying on Bain’s evaluation, a holding that should restore some comfort to comfort letters. He would not speculate on how DHL might fare under regulations currently in effect. The Justice Department, which argued the case for the IRS, did not return calls asking for comment.

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