BREAKING NEWS / LAW: Caterpillar subject to law enforcement search

March 2, 2017

The company’s tax strategy has been called into question, an investigation has begun

Federal officials seized documents and electronic records from three Caterpillar Inc. facilities, including the company’s global headquarters in downtown Peoria, on Thursday morning as an apparent part of a criminal investigation into the company's tax strategy.

Agents from several federal agencies lined up outside the main administration building, a data center in East Peoria and the logistics center in Morton. Neither federal nor company officials would confirm the substance of the investigation.

“Caterpillar is cooperating,” a brief statement from the company read.

The investigation appears to stem from revelations about the company's tax strategy as outlined in a 2009 federal wrongful termination lawsuit brought by Daniel Schlicksup. The lawsuit alleged the company shifted profits overseas and to offshore shell companies to avoid paying more than $2 billion in U.S. taxes. Schlicksup settled the suit in 2012.

Caterpillar, in its annual tax filing with the U.S. Securities and Exchange Commission last month, acknowledged a criminal investigation into the tax strategy.

The company included the following statement on legal proceedings in the filing: “On Jan. 8, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries).”

The statement continued: “The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL and related structures. The Company is cooperating with this investigation.”

In his complaint against Caterpillar, Schlicksup alleged the company sold and shipped spare parts globally from its warehouse in Morton while attributing at least $5.6 billion of profits from those sales to a unit in Geneva, Switzerland. This scheme, which operated from 2000 to 2009, was known as the “Swiss structure.” Caterpillar SARL is based in Geneva.

A different strategy, the “Bermuda structure,” allegedly involved shell companies that had no business operations returning profits to the United States without paying taxes on them.

The company has denied the allegations.

The accusations nonetheless prompted an inquiry by an investigative panel of the U.S. Senate. The probe found Caterpillar saved about $2.4 billion in taxes through the “Swiss structure” over the course of 13 years. The Internal Revenue Service eventually proposed a $1 billion tax increase and penalties for years 2007-2009.

IRS agents were among the officials executing the search warrants on Thursday.

Since news of the search warrants broke, Caterpillar stock fell more than $4.50 from an opening-bell price of $98.36 per share and have continued to trend lower throughout the day.

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