After years of procedural delays, the trial between investment company Berkshire Hathway Inc. and the Internal Revenue Service has begun over the legality of tax deductions taken by the company in the late 1980s.
Investor mogul Warren Buffett is expected to take the stand for his company, which filed a lawsuit three years ago against the IRS, saying the agency wrongfully denied it $16.3 million in tax deductions.
According to court filings, the IRS disallowed the deductions after tracing $750 million in borrowed money that Berkshire used to purchase stock in several companies, including Coca-Cola Co., Time-Warner and Wells Fargo & Co. The IRS based its denial on a tax code passed by Congress that reduced deductions if borrowed money is directly attributable to the investment that pays a dividend.
According to the IRS, Berkshire allegedly borrowed the money four times in 1988 and 1989, and put it into a principal bank account. But Berkshire has argued the money in that account came from several sources, was interchangeable and was used for thousands of transactions. The company said that its business model was not to buy specific stocks but to enhance its financial strength, and accordingly, it keeps large amounts of cash available to allow Buffett the freedom to make key investments or acquisitions.
The trial is being held in U.S. District Court in Nebraska. Berkshire and its subsidiaries engage in a number of business activities, chief among them the property and casualty insurance business, whose re-insurance dealings have been under recent investigation by the Securities and Exchange Commission.
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