President Obama’s cabinet picks are not the only ones facing tax problems these days. According to Cardinal Health’s (CAH-$38.10) recently filed second-quarter 2009 regulatory filing, the drug wholesaler and leading medical products supplier to acute care hospitals could be on the hook for more than $800 million in back taxes as the Internal Revenue Service audits questionable accounts receivable financing transactions and property transfers between foreign and domestic subsidiaries.
The sale of trade receivables is a cost-effective financing alternative to traditional bank sources as a means of raising cash. For example, Cardinal has commitments in place that permit it to received up to $850 million in cash through its own receivables sales facility program. Unfortunately, the Internal Revenue Service announced a tax probe of Cardinal in 2008 related to a deal with the Dutch bank Rabobank Group, alleging that the bank helped Cardinal avoid paying taxes. Updates on the details on this and other ongoing IRS audits involving the company can be found in the company’s recent 10-Q regulatory filing:
The Internal Revenue Service (“IRS”) currently has ongoing audits of fiscal years 2001 through 2005. During the three months ended March 31, 2008, the Company received Notices of Proposed Adjustments (“NPAs”) from the IRS related to fiscal years 2001 through 2005 challenging deductions arising from the sale of trade receivables to a special purpose accounts receivable and financing entity. The amount of additional tax, excluding penalties and interest, which may be significant, proposed by the IRS in these notices was $178.9 million. The Company disagrees with the proposed adjustments and intends to vigorously contest them. The Company anticipates that this transaction could be the subject of proposed adjustments by the IRS in tax audits of fiscal years 2006 to present. The Company, in normal course, terminated the transaction during the second quarter of fiscal 2009.
During the six months ended December 31, 2008, the Company received an IRS Revenue Agent Report for tax years 2003 through 2005 which included the NPAs discussed above and new NPAs related to transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among subsidiaries of an acquired entity prior to its acquisition by the Company. The amount of additional tax proposed by the IRS in these notices total $598.1 million, excluding penalties and interest which may be significant. The Company disagrees with these proposed adjustments and intends to vigorously contest them.
Although Cardinal has ample liquidity to pay the alleged taxes owed, with cash on hand of $773 million and $1.4 billion available in commercial credit, doing battle with the IRS at this time might not be prudent. The company is looking to spin-off its Clinical and Medical Products division. Before Cardinal can move forward with the planned transaction, it needs an IRS ruling on the tax status of the deal. The request was sent to the IRS in November. I can think of 800 million reasons why the IRS might be slow to respond to Cardinal’s petition.
Cardinal has refused to publicly comment on the IRS audits.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy. Cardinal
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