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McKesson Corp. wants Georgia to refund the taxes the company paid onphantomprofits. The state says no, and the matter is now headed for resolutioninFulton Superior Court. Last week, McKesson filed suit in Fulton County against the GeorgiaDepartment of Revenue, saying the government owes it $409,531 plusinterest. According to a letter filed as an exhibit with the suit, representativesfrom the Department of Revenue said they were denying the claim becausethethree-year statute of limitations had run out. McKesson’s attorneys say the statute of limitations should not havestartedrunning until this past September when the Internal Revenue Service madeits”final determination of the changed or corrected net income” and issuedthecompany 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 forthisarticle. 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 nonexistentprofitscited as fraud by the Securities and Exchange Commission. The idea of tax refunds for the likes of Enron, WorldCom and HealthSouthattracted the attention of Congress last year when Sen. CharlesGrassley,R-Iowa, proposed, as part of a bill addressing tax cuts formanufacturers, ameasure that would prevent companies from seeking refunds based onoverstated earnings. “The con men pay a little tax to help hide their fraud, bump up thestockprice and cash in their stock options,” Grassley said in a statementlastyear. “They basically have made the IRS an unwitting accomplice to theirfraud.” The bill, which came out of the Senate Finance Committee, is pendingbeforethe Senate, according to an aide to Grassley. Enron has not received any tax money back, but the company is “currentlyinnegotiations with the IRS,” said a spokeswoman. Similarly, a spokeswoman for HealthSouth said the Birmingham, Ala.-basedhealth care services provider would attempt to recover taxes paid onoverstated earnings. If HealthSouth succeeds in getting a refund, the company’s investorswill bewaiting for their share. In an amended complaint filed Jan. 8 in theNorthern District of Alabama as part of a federal class action suitagainstHealthSouth, the investors asked the court to impose “a constructivetruston all income tax refunds payable to HealthSouth as a result ofoverpayingincome taxes on fraudulent income reported.” In re HealthSouthSecuritiesLitigation, No. CV-03-BE-1500-S (N.D. Ala. filed June 24, 2003). Sixteen people, including company founder and former Chief ExecutiveOfficerRichard M. Scrushy, have been charged with crimes in connection with thefederal HealthSouth investigation. Federal investigators also have brought charges against several formerofficers of WorldCom. Most recently, Attorney General John D. Ashcroftflewto New York to announce the indictment of WorldCom President and CEOBernardJ. Ebbers and former Chief Financial Officer Scott D. Sullivan. A spokeswoman for WorldCom, which now does business under the trade nameMCI, said the company is “in the process of restating earnings” andexpectsto announce the revised figures before emerging from Chapter 11bankruptcy.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 orcorporations report nonexistent income and then say there’s been amistake. “The IRS isn’t so much interested in why you reported it. They’re justinterested in the appropriate tax that is owed, which rests on theactualincome,” said Thomas D. Johnston, chairman of the tax department atMiller &Chevalier in Washington. The firm represented Enron and its officers insomenon-tax-related matters, Johnston said. The attorney noted that, unlike the SEC, the federal tax authorities donotcare if the overstatement of income was an honest mistake. “The IRS iskindof nonjudgmental in that respect. Their mission is to extract theappropriate tax on your actual income,” he said. However, getting money back from Georgia’s Department of Revenue isalmostalways more difficult than getting a tax break from the IRS, said RobertN.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 ingeneral,”he said. “Especially with the commissioner they have now, “he added,referring to Bart L. Graham. A DISASTROUS DEAL At McKesson, the trouble began five years ago when the SanFrancisco-basedcompany merged with an Alpharetta firm called HBO & Co. The twocompaniescame together on Jan. 12, 1999, to form the world’s largest health careservices business. The deal later turned disastrous for investors, executives and boardmemberswhen accounting problems surfaced and, following a special audit, thecompany announced that more than $327 million in revenue previouslyreportedby HBO & Co. was being eliminated. So far, six former executives have been charged with crimes ranging fromsecurities fraud to insider trading. Four of them have pleaded guilty.Charges against HBO & Co.’s former general counsel, Jay M. Lapine, andHBO &Co.’s chief executive officer and chairman of the board of directors atthemerged company, Charles W. McCall, are pending. Because HBO & Co. overstated its taxable income, the company applied forandreceived a federal tax refund based on the revised figures. On Sept. 10,theIRS issued a check to McKesson in the amount of $11.9 million. Theamountincluded more than $2.7 million in interest from the government. In its suit, McKesson said the receipt of the check was “the firstnotification” the company received from the IRS that federal authoritieshadreached a decision on the corrected income figures. Accordingly, the company filed an amended state tax return with theDepartment 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 statuteinrefusing 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”becomesdue as a result of a final determination of the changed or corrected netincome of the taxpayer made by the federal tax authorities.” Robert M. Goolsby, the director of the Income Tax Division of theGeorgiaDepartment of Revenue, wrote to McKesson on Dec. 23. He told the companythat the refund claim would be denied because it was not within thethree-year statute of limitations. Regarding the code section cited by the company’s lawyers, Goolsbyreiterated the department’s stance on the issue by quoting from anearlierletter to the company. “It has long been the Department’s interpretation that this [statute]meansthe IRS must make the change as part of an audit or examination and thatthepurpose of this statute is to provide a means to address IRS auditchanges,”the letter said. The Department of Revenue was probably correct to deny the claim basedonthe statute of limitations, said Daniel H. Kolber, a securities attorneyatGambrell & Stolz who served as general counsel at the now defunct AirAtlanta. “Although the tax commissioners may have certain discretion in somecases, Idoubt this is one where the state has any empathy for the taxpayer,”Kolbersaid. “McKesson always has the right to appeal, but, in this case, iftheywere my client, I think they would be well-advised to let sleeping dogslie.”

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