Summary
Xcel Energy Inc. is reporting a significant development regarding a tax dispute with the Internal Revenue Service (IRS) concerning corporate-owned life insurance (COLI) policy loans. The IRS National Office has issued an adverse technical advice memorandum, indicating an intent to disallow interest expense deductions for tax years 1993-1997, totaling approximately $175 million. Additionally, proposed disallowances for subsequent years (1998-2001) are estimated at $240 million. Despite the IRS's position, Xcel Energy maintains that its deductions are in full compliance with tax law and intends to vigorously challenge the IRS determination. The company believes the ultimate resolution will not materially impact its financial position, results of operations, or cash flows. However, if the IRS prevails, it could result in a reduction of earnings by an estimated $197 million, or $0.57 per share, through December 31, 2001, representing the total tax and interest payable. The company will continue to claim these deductions in subsequent years, with expected benefits of $31 million, or $0.09 per share, in 2002.
Key Highlights
- 1IRS proposes disallowing $175 million in COLI policy loan interest expense deductions for 1993-1997.
- 2An additional $240 million in COLI policy loan interest expense deductions for 1998-2001 are also subject to potential disallowance.
- 3Xcel Energy disputes the IRS determination and plans to challenge it, expecting the process to take several years.
- 4Management believes the dispute will not have a material adverse impact on the company's financial position, results of operations, or cash flows.
- 5If the IRS prevails, estimated financial impact is a $197 million reduction in earnings (or $0.57 per share) through December 31, 2001.
- 6Xcel Energy continues to claim these deductions and anticipates $31 million (or $0.09 per share) in tax benefits in 2002.