Adaptec Fights $93.4-Million IRS Tax Bill

Adaptec Inc., a maker of electronic devices that speed computer connections, is fighting a $93.4-million tax bill for 1997 in U.S. Tax Court.

The Milpitas, Calif.-based company, which reported $170.8 million in earnings last year, says the Internal Revenue Service wrongly denied it credits for research and taxes paid to foreign governments.

The IRS also improperly calculated transfer pricing arrangements with its subsidiary, Adaptec Manufacturing Ltd., and improperly valued royalties paid by Adaptec Manufacturing to Adaptec Inc. for intangible computer software, the company said in a petition filed in March. Tax Court petitions are released on a delayed basis.

According to its 1997 annual report, the company said it paid $64.2 million on $171.8 million in pretax income. According to the court petition, the IRS said the company underreported its income to the government by $224.9 million. As a result, the IRS slapped the company with $66.1 million in back taxes in December, along with $27.3 million in penalties, according to the petition.

Calls to company spokesman and Chief Financial Officer David A. Young were not immediately returned. William Colgin, an attorney with Fenwick & West, which is representing the company, declined to comment.

By law, the IRS does not comment on individual cases.

In its petition, the company says it overpaid its taxes by $911,859 in 1997 by not taking the full benefit of a research credit.

Last month, Adaptec reduced its fourth-quarter revenue and earnings forecast for a second time this year, saying its sales have been hurt because customers are spending less. Young called the situation a “dramatic” slowdown. The company’s 2000 earnings are due later this month.

Tax Court cases are decided one issue at a time by judges. After the judge rules, the amount of tax owed is renegotiated by the IRS and the taxpayer.

The case is Adaptec Inc. and Subsidiaries vs. Commissioner of Internal Revenue, Tax Court Docket No. 3480-01.

Adaptec shares rose 86 cents on Tuesday to close at $9.01 on Nasdaq.