https://www.law360.com/articles/902112/for-caterpillar-federal-raid-may-mean-more-than-tax-trouble

by Vidya Kauri

The IRS has challenged six years of tax returns filed by Caterpillar, but tax troubles may be the least of the construction equipment giant’s problems after a massive surprise raid by federal enforcement authorities signaled the possibility of more serious financial crimes.

The March 2 raid at three Caterpillar Inc. offices in Peoria and Morton, Illinois, was carried out by officials from the criminal investigation unit of the Internal Revenue Service, the Federal Deposit Insurance Corp.’s Office of Inspector General, and the U.S. Department of Commerce‘s Office of Export Enforcement.

Executed under a search-and-seizure warrant that Caterpillar said was “broadly drafted,” the raid has raised suspicions of tax fraud and shocked many in the business and legal community. A lack of specific information has led to multiple theories as to what exactly Caterpillar is being investigated for, and experts say the unique and severe circumstances of the case so far, such as the swift nature of the raids and the multiple federal agencies involved, suggest that the consequences could be quite catastrophic if Caterpillar is not able to adequately justify its accounting methods and financial activities.

“I don’t know why any company like Caterpillar, a Fortune 500 company, which has a large legal team and really highly paid, good legal counsel, would get raided unless the government felt they were possibly suppressing evidence or destroying evidence and they thought they had no choice,” Adam Fayne, a partner at Arnstein & Lehr LLP’s tax and white collar criminal practice groups, told Law360.

Experts say that such raids on large multinational corporations are extremely rare because these companies tend to have sophisticated legal and accounting teams, both in-house and externally hired, that can advise on how to stay within the law.

Also, the IRS is usually “very collaborative in trying to reach an understanding in terms of facts and finding a resolution,” according to Robert Rostan, an accountant and chief financial officer at Training The Street, a New York-based firm that trains finance professionals.

“A raid from the IRS is extremely unusual, but also, to see the IRS with other federal agencies involved is unusual as well. What they would be looking for is some sort of evidence contrary to their tax position,” Rostan said.

The federal investigation comes at an inauspicious time for Caterpillar as the company prepares to shift its headquarters from Peoria to Chicago and a new CEO takes the reins. Jim Umpleby, a 35-year veteran of the company, officially stepped into the CEO role on Jan. 1 after longtime CEO Doug Oberhelman announced his retirement.

Five days after the raids, Umpleby tried to quell concerns from clients, shareholders and other interested parties at Conexpo, a construction industry trade show, saying that the raids came as a surprise because the company had been cooperating with authorities and was continuing to do so.

“The unexpected events were difficult for our employees. But they are Caterpillar employees and they responded with integrity. They clearly demonstrated we are company built on values,” Umpleby said in a speech intended to promote Caterpillar’s technological advancements.

A statement from Caterpillar links the raids to years of criticism Caterpillar has faced for its relationship with its Swiss affiliate Caterpillar SARL. A congressional committee excoriated the company in 2014 for shifting $8 billion in profits to the European unit to avoid $2.4 billion in U.S. taxes, a move the committee called morally questionable. In early 2015, Caterpillar told shareholders that its cash movements overseas were being probed by a grand jury.

In addition, a new government-commissioned report by Leslie Robinson, an accounting professor at the Tuck School of Business at Dartmouth College, concludes that Caterpillar intentionally violated U.S. tax laws and financial reporting rules to maintain a higher share price. The report, which suggests that Caterpillar may have repatriated some offshore funds without paying U.S. taxes due on them, was the subject of a March 7 report in The New York Times, days before it was shared with Caterpillar at the company’s behest.

Robinson confirmed to Law360 that her conclusions were accurately represented in the Times, and that her report was delivered to a Jason LeBeau at the FDIC’s OIG last month.

The FDIC’s involvement is perhaps one of the more puzzling elements of the entire saga, in which no charges have yet been filed, according to Seth Cohen, a partner at Withers Worldwide who advises clients on civil and criminal tax and fraud investigations.

The FDIC typically gets involved when financial institutions are implicated, not when there are tax issues, and it’s hard to ascertain how that agency fits into the picture, he said. Moreover, Cohen said, he has difficulty fathoming how a large corporation such as Caterpillar, with its strong team of tax attorneys and consultants, some from accounting giant PricewaterhouseCoopers LLP, could possibly be in the hot water that it is in today.

“There’s always the outlier, but I can’t imagine a firm like Caterpillar has people that would enable it to not have a defense,” Cohen said. “I don’t believe there are people within their tax group who would allow them to enter into something, especially where we know the U.S. has been focused on these issues for some time now.”

With significant and sometimes duplicative reporting obligations imposed on multinational companies, any possibility of fraud would have to involve many people, making its likelihood even smaller, Cohen said.

Caterpillar may very well be able to legally defend its tax positions. Because tax matters are rarely black and white, and the IRS has been known to lose badly, especially in transfer pricing lawsuits, the company could land in a gray zone that seldom leads to criminal charges, experts said.

Taking aggressive stances on a tax return is not a crime on its own, and Fayne said that when it comes to the tax issues, the government may have to prove that Caterpillar intentionally filed a false tax return by either ignoring sound advice from its legal team or by adhering to potentially bad advice.

Regardless of whether the tax issues boil down to untaxed offshore income or transfer pricing disputes, they may ultimately pale in comparison to allegations that other agencies could level, such as selling products or services at unfairly low prices or charges under the Foreign Corrupt Practices Act, according to Rostan.

“This tax matter could be a lot of cash, but at the same time … it’s a little bit easier to overcome, and a black eye goes away more quickly,” Rostan said, adding that a federal investigation could bar Caterpillar from participating in federal contracts.

Other potential consequences for Caterpillar could include significant fines, back taxes, interest and maybe even jail time for executives, depending on what charges, if any, can be brought and proven, experts said.

Caterpillar spokeswoman Rachel Potts confirmed to Law360 that the IRS has challenged its taxes for the 2007 to 2012 years through an administrative process.

“We disagree with the IRS’ position, have cooperated for requests for information, and believe that we are compliant with tax laws and stand by our financial reporting,” Potts said.