Bloomberg News

BMC Software Loses Repatriation Case in U.S. Tax Court

September 19, 2013

BMC Software Inc. faces a $12.9 million tax bill after the U.S. Tax Court upheld a finding by the Internal Revenue Service that some earnings repatriated in the mid-2000s were ineligible for a temporarily lower tax rate.

BMC, based in Houston, contended that accounts receivable on its books shouldn’t be counted as debt that would reduce the amount of money it could bring to the U.S. from foreign affiliates at the reduced tax rate.

Judge Diane Kroupa disagreed, ruling that the IRS’s “treatment of the accounts receivable are consistent with the dictionary definition” and “may constitute indebtedness” for purposes of calculating how much in earnings could be taxed at the lower rate in effect at the time.

Ann Duhon, a spokeswoman for BMC, said she hadn’t seen the ruling and had no immediate comment. Christine Vaughn, of Vinson & Elkins LLP, an attorney on the case for BMC, didn’t immediately reply to a phone message requesting comment.

The 2004 repatriation program permitted U.S. corporations to bring home income held outside the U.S. at an effective rate of 5.25 percent instead of the top 35 percent corporate income tax rate.

BMC claimed $709 million in earnings qualified for the tax holiday. The IRS ruled that $43 million was ineligible for taxation at the lower rate because it represented a foreign unit’s debt to BMC created by accounts receivable, according to court filings.

Tax Holiday

The question of how much debt a company had at the time of the tax holiday is relevant because Congress wanted new money brought into the U.S. and sought to prevent companies from loaning money to offshore affiliates in order to bring it back at a lower tax rate, said David Rosenbloom, a tax attorney Caplin & Drysdale Chartered.

“That’s just running money in a big circle,” Rosenbloom said.

BMC’s accounts receivables were set up to deal with an accounting issue involving royalty payments to a foreign subsidiary, BMC Software European Holdings, according to the ruling. Kroupa didn’t find them to be part of an abusive transaction, Philip West, a tax attorney with Steptoe & Johnson LLP, said.

“They weren’t being abusive, but according to Judge Kroupa, the rules compel this result,” West said.

The case is BMC Software Inc. v. IRS, 15675-11, U.S. Tax Court (Washington).

To contact the reporter on this story: {Andrew Zajac} in Washington at

To contact the editor responsible for this story: Michael Hytha at

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