Warren Buffett to testify in trial over Internal Revenue Service denial of tax deduction

Monday, September 26th 2005, 10:46 am

By: News On 6

LINCOLN, Nebraska (AP) _ Billionaire investor Warren Buffett is expected to testify in the trial of his investment firm's lawsuit accusing the Internal Revenue Service of denying it $16.3 million (euro13.5 million) in tax deductions.

The trial began Monday in U.S. District Court after some three years of legal wrangling between Berkshire Hathaway Inc. and the IRS.

The lawsuit alleges the IRS made an ``erroneous, wrongful and illegal'' interpretation of the U.S. Tax Code when it denied the deductions.

The IRS disallowed the deductions after tracing $750 million (euro623 million) in borrowed money to purchase stocks in several companies, including Coca-Cola Co., Time-Warner and Wells Fargo & Co., according to the lawsuit.

The IRS based the denial on a tax code passed by Congress that reduced deductions if borrowed money is directly attributable to the investment that pays the dividend.

Berkshire borrowed the money four times in 1988 and 1989, and put it into a principal bank account, according to court records.

But Berkshire said the money in that account came from several sources, was interchangeable and was used for thousands of transactions. Its goal was not to buy specific stocks but to maintain and enhance its financial strength, the company said.

The lawsuit said that Berkshire keeps large amounts of cash available to allow Buffett to make investments or acquisitions. Berkshire argues that is not enough to meet the standard that the borrowed money was directly attributable to the stock purchase.

``The government's assessment of taxes ... represents only a fraction of the federal taxes that Berkshire paid during the tax years at issue,'' said Berkshire lawyer Kelly Klaus in court documents. ``The amount at stake in Berkshire's complaint is less than $16 million out of a total of more than $400 million in federal income taxes that Berkshire paid from 1989 to 1991.

``The issue ... is about what the law does _ and does not _ require,'' Klaus said, adding that the IRS interpretation of the tax code ``is contrary to Congress's intent and should not be allowed to stand.''