IRS Investigates Whether Oracle Improperly Claimed Millions In Tax Refunds

Even as it looks to complete a hostile buyout of BEA Systems, business software giant Oracle is facing a federal investigation into the way it accounted for nearly a quarter-of-a-billion dollars in previous corporate transactions and claimed millions of dollars in related tax refunds, InformationWeek has learned.

At the very least, Oracle could be forced to pay back to the government a $78 million tax refund it received in 2003. Some of the company's previous earnings reports could also be impacted by the results of the ongoing investigation, which is being conducted by a senior Internal Revenue Service agent.

The IRS is looking at whether Oracle improperly claimed losses related to the sale of stock in three subsidiaries in order to reduce its tax burden in 2003 and claim a refund worth more than $78 million, according to documents obtained Monday by InformationWeek.

The transactions that have fallen under IRS scrutiny are Oracle's purported sales of shares in Treasury Service, Concentra Software, and DataLogix International. Oracle acquired the latter company in 1996 for $94 million to bolster its presence in the market for software used in manufacturing.

On its 2003 federal tax form 1120, Oracle said the sale of the shares resulted in a capital loss of $223,651,021 -- the basis for the multimillion-dollar refund.

However, IRS investigators say Oracle may not have actually sold the shares in the companies, which had been previously folded into existing Oracle operations prior to 2003. The IRS agent eyeing the sales claims that what Oracle sold were merely "promissory notes" representing the value of the subsidiaries' assets that had been integrated into other parts of Oracle -- and that the deals were done simply so Oracle could claim a significant loss for tax purposes.

If the instruments sold were promissory notes, and not shares, "Oracle will not be entitled to the $223,651,021 capital loss it claimed on its 2003 Federal tax return," said Leslie Woo, an IRS appeals officer, in a document related to the investigation.

The instruments were sold in May 2003 at a 24% discount off face value to a subsidiary of a firm that provides Oracle with tax advisory services "to accommodate Oracle's desire to claim the purportedly resultant tax losses," Woo states in the document. The subsidiary was established by four owners of Atlanta-based Barnwell & Company LLC -- for the specific purpose of facilitating the transaction, according to Woo.

Beyond paying back the tax refund, it was not immediately clear what additional penalties Oracle or its executives might face if the IRS proves its case. An Oracle spokesman was not immediately available for comment.