ANALOG DEVICES, INC. 
By In separate cases, BMC Software Inc (>> BMC Software, Inc.) and Analog Devices Inc (>> Analog Devices, Inc.) are challenging IRS demands that the companies pay more tax, arguing the agency's claim breaches the controversial tax holiday law Congress enacted nine years ago.
The two cases are believed to be the first U.S. Tax Court tests of the tax holiday - an idea some businesses in 2011 pushed the government to try again, but without success.
BMC, a Houston, Texas, systems company and the IRS went to trial in May 2012, with a decision due any day. Massachusetts-based Analog, a circuit-maker, is set for a trial in November.
Both companies and the IRS declined to comment. BMC has agreed to be bought by a private-equity group led by Bain Capital and Golden Gate Capital. Bain declined to comment.
The cases are seen by lawyers as tests of the scope of the 2004 tax break - made law during the administration of President George W. Bush - that let multinational businesses bring profits earned abroad into the United States at a reduced tax rate.
Under law, U.S. corporations that make profits overseas can put off paying tax on them as long as they are not brought into the United States. This is known as offshore corporate income tax deferral. Companies often take advantage of this law to reduce their tax bills by leaving foreign profits overseas.
Nearly a decade ago, with U.S. corporations' offshore profit piles rising fast and the economy sluggish, Bush and Congress enacted a 'holiday' that let those profits come into the country at a reduced tax rate - 5.25 percent, instead of 35 percent.
The measure was billed as a stimulus, but studies later showed it had little impact on boosting jobs and capital investment. In any case, more than 800 companies brought home $362 billion in overseas income. In 2005, Analog repatriated $1 billion; BMC, $717.2 million.
At around the same time, both companies were fighting with the IRS over transfer pricing practices. This is an area of frequent dispute involving companies' tax transactions for capital and assets among their subsidiaries in different countries.
Both BMC and Analog settled their disputes with the IRS. Those settlements boosted both companies' domestic profits subject to the full corporate income tax, while reducing the amount of profits they could repatriate at the holiday tax rate.
BMC got a $12.9 million tax bill in 2011, while Analog got a $26 million bill in 2012, according to court filings. Both companies promptly sued the IRS in Tax Court, arguing that the settlements had no connection to the repatriations.
Given the language of IRS rules for repatriation and transfer pricing, Analog does not "have much grounds for being surprised," by the IRS's tax bill, said David Rosenbloom, a tax lawyer at Caplin & Drysdale who has reviewed the documents.
Cym Lowell, a lawyer with McDermott Will & Emery, said the IRS's tax bill to Analog was overly aggressive. "The taxpayer should win the case," he said.
The cases are docket No. 017380-12 Analog Devices Inc & Subsidiaries v Commissioner of Internal Revenue; No. 015675-11 BMC Software Inc. v Commissioner of Internal Revenue.
(Editing by Kevin Drawbaugh and Doina Chiacu)
By Patrick Temple-West
