IRS Acts After IBM Saves $1.6 Billion

The Internal Revenue Service has moved to close a loophole that saved IBM $1.6 billion in income taxes.

The agency will issue regulations requiring companies to pay taxes on stock repurchases by international subsidiaries, the Wall Street Journal (sub. req.) reports. That will make the earnings subject to U.S. tax rates rather than usually lower international rates.

IBM structured a $12.5 billion stock repurchase to take advantage of the tax savings. It used a foreign subsidiary to buy back shares that were used to pay its U.S. corporate parent for goods and services, the New York Times explains.

Stewart Lipeles, a tax lawyer with Baker & McKenzie in Palo Alto, Calif., told the Journal that about a dozen clients expressed interest in such transactions after IBM announced its use of the device, known as a “Killer B” tax shelter after the relevant section of the tax code.

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