IRS Wins Tax Court Ruling Against Limited

WASHINGTON — A federal court ruled Tuesday that Limited Inc. owes taxes on $174.1 million from transactions between a foreign subsidiary and another entity created to handle the apparel retailer’s credit card business.

The U.S. Tax Court ruling marks a victory for the Internal Revenue Service, which issued notices of tax deficiency to Limited covering transactions in the 1992 and 1993 tax years.

The case involved a subsidiary called World Financial Network National Bank, organized by Columbus, Ohio-based Limited in 1989 to handle its credit card business, thus avoiding a patchwork of 50 state laws.

In 1993, the subsidiary sold eight certificates of deposit to another Limited unit, Netherlands Antilles-based MFE. The CDs were worth $174 million, money used to reduce a line of credit within yet another subsidiary of the parent company.

The IRS contended that the arrangement avoided income taxes on U.S.-controlled foreign subsidiaries because it in effect was a dividend paid from one part of the company to another. The Tax Court agreed.

Lawyers for Limited had argued that the tax did not apply because of an exemption that applies to banks, including World Financial Network, which it had organized to handle the store credit cards.

The Tax Court ruled, however, that the institution was too specialized to fit the law’s definition of a bank and is “not of much use to a foreign business customer except as the issuer of a private label credit card or as the recipient of large deposits of funds that are not needed immediately.”

A telephone call Tuesday seeking comment from Limited was not immediately returned.

News of the ruling came after the close of trading. Limited shares closed down 69 cents at $38.50 on the New York Stock Exchange.

Last month, the IRS won a Tax Court decision against United Parcel Service in a case involving a Bermuda company set up by UPS that the government said was created to avoid income taxes. UPS is considering an appeal of that ruling, which could cost it hundreds of millions of dollars in back taxes, penalties and interest.