Baker Hughes sues IRS for ‘illegally’ not refunding $17.6M

By David Yates | Sep 16, 2015

Baker Hughes Inc. recently filed suit against the U.S., seeking to recover $17.6 million in federal income taxes the Internal Revenue Service refused to refund.

The action, filed Sept. 15 in the Southern District of Texas, alleges the taxes “erroneously and illegally assessed and collected by the IRS” stem from a disallowed deduction for a debt that became worthless.

On Aug. 30, 2009, Baker Hughes and BJ Services Company merged. Prior to the merger, in 2006, BJ Services guaranteed the performance of pressure pumping and other services by one of its foreign affiliates, BJ Russia, operating in Russia.

BJ Parent provided the guarantee at a time when financial calculations estimated that the profit margin earned by BJ Russia on the guaranteed contract would exceed 10 percent.

“Because of this estimated profit, and because BJ Parent routinely provided performance guarantees for its subsidiaries and had never had to perform under any of those performance guarantees, BJ Parent reasonably concluded it never would have to perform on the guarantee of the performance of pressure pumping and other services of BJ Russia,” the suit states.

“Unfortunately, the Russian oil and gas market soured after BJ Parent provided the guarantee. Prices for pressure pumping services dropped and labor and crude oil costs increased.”

The suit says BJ Russia sought to increase its prices to account for the economic pressures, but its primary customer refused to grant any price increase and instead demanded a steep pricing discount from BJ Russia.

“This unforeseen series of economic calamities forced BJ Parent to make the only rational decision it could: to exit the Russian oil and gas market,” the suit states.

“But such exit could not occur unless and until the legal obligations of BJ Russia and BJ Parent were satisfied under the guaranteed contract. BJ Parent estimated that it would have been liable for damages in excess of $160 million if BJ Russia failed to complete the guaranteed contract.”

Because of its legal obligations, BJ Parent made funding payments totaling $52 million to BJ Russia so that it could complete the contract.

“Russia was in dire financial straits and was not able to repay the $52 million. At the conclusion of the guaranteed contract, BJ Russia ceased operations and exited the Russian oil and gas market,” the suit states.

BJ Parent deducted the $52 million funding payments as a bad debt loss, but he IRS disallowed that deduction, giving rise to the lawsuit.

Baker Hughes seeks an award of $17,654,000 and is represented by Reagan Brown, attorney for the Houston law firm Norton Rose Fulbright.

Case No. 4:15-cv-02675

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