Monday, November 24, 2008

$900 Million Typo

Last week, I blogged about an error made by a government lawyer (later characterized by the government as a "typo") that nearly cost the government $200 million. But how would you like to be the lawyer responsible for a screw-up that cost your client $900 million?

It's an old case, but last week's incident reminds me of InverWorld v. Commissioner, a D.C. Circuit case from the 1990s. InverWorld, Ltd., a Cayman Islands corporation, didn't think it owed any U.S. taxes because it didn't think it conducted any trade or business in the U.S. The IRS, apparently believing that InverWorld had enough U.S. contact that it owed U.S. taxes, sent the company a notice that it owed $45 million in withholding taxes (i.e., FICA taxes on InverWorld employee income) and a separate notice that it had also owed several hundred million in corporate income tax.

Lawyers at InverWorld filed a timely petition to contest the assessment of withholding taxes, but said nothing about the notice that the company owed corporate income taxes. The IRS therefore proceeded to assess the company for the corporate income taxes. With interest and penalties thrown in, the amount owed was $900 million. The IRS sent InverWorld a bill.

At this point, the company woke up and said that it was also contesting its corporate income tax bill. But guess what? The time to contest that amount (measured from the original notice) had expired. And the court ruled that the petition contesting the assessment of withholding taxes was insufficient to contest the income taxes. So, the court said to InverWorld, no process for you -- kindly pony up the $900 million that you don't think you owe.

The case had a certain hypothetical quality about it, inasmuch as it seemed highly unlikely that InverWorld was actually going to pay the money in any event -- it was off in the Cayman Islands and I doubt the IRS would be able to get hold of any of the company's assets. So I'm guessing the company just vanished into the Caribbean mist and never actually paid the money.

Still, how would you like to be the lawyer who was responsible for a screw up that led to a $900 million judgment against your client? It pays to be careful.

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