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Hughes Fights $370-Million Bill From IRS : Taxes: The aerospace firm appeals charges dating to the 1980s. Again at issue is the timing of profit reports.

September 16, 1993|RALPH VARTABEDIAN | TIMES STAFF WRITER

WASHINGTON — The Internal Revenue Service has demanded that Hughes Aircraft pay $370 million in back taxes and penalties dating to the mid-1980s, the aerospace company disclosed in appeals it has filed in U.S. Tax Court.

The amount is one of the largest known tax deficiencies attributed to an aerospace contractor, although such disputes usually are not disclosed to the public because they are settled before reaching Tax Court, corporate tax experts said.

The Hughes case revolves around a number of corporate tax issues, but most of the tax in question involves the issue of when Hughes recorded past sales and profits on satellites, missiles and other electronic products.

"We don't think there is any foundation to (the IRS) position," said John Brown, Hughes vice president for taxes.

According to Brown, the IRS is trying to make the same arguments in the deficiency finding that it made several years ago in another Hughes dispute, which the agency lost.

The IRS refused to comment on the Hughes case.

Other experts said the aerospace industry has a tough time dealing with the IRS on the issue of when taxes are due on long-running defense contracts.

"The IRS is notorious for being aggressive in this area," said Mary Ann Sigler, a Los Angeles partner at accounting firm Ernst & Young. "One should conclude that this deficiency is overstated. I would be very surprised if the IRS could sustain this."

The aerospace industry has long been up in arms over government efforts to erode its tax advantages under a method of calculating taxes known as completed contract accounting.

Under that system, aerospace firms do not record the profits from a contract until the work has been completed, which can take years.

The IRS tried to erode the advantage throughout the early 1980s. Congress killed it outright in the tax reform law of 1986, Sigler said. But Hughes and a number of other major aerospace contractors are still haggling over the issue of taxes owed before that change.

The IRS in June sent Hughes and its subsidiaries deficiency notices asserting that the company had underpaid its taxes for the three years before General Motors Corp. acquired it in 1986.

Hughes is part of General Motors-Hughes Electronics Corp., which had more than $12 billion in sales last year.

The dispute came as no surprise to Hughes. The IRS has four auditors at Hughes to make sure the company pays all its taxes. Brown said the IRS had "stretched logic" to come up with its findings.

Hughes appealed the notice in an Aug. 30 filing with the Tax Court in Washington. Even though Hughes went to Tax Court, Brown said he expects the matter to be sent back to an internal IRS appeals process.

The reason for the Tax Court appeal was that both the IRS and the company missed a deadline for keeping it out of the court, Brown said.

In addition to the accounting issue, the Hughes appeal involves a dispute over the value of land Hughes purchased in the mid-1980s to build its corporate headquarters. It sold a portion of the land, a bluff overlooking the Pacific Ocean, to Loyola Marymount University and took a charity deduction on the sale. The IRS argued that the value of the bluff was overstated.

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