IRS v. ITT

ITT's acquisition of Hartford Fire Insurance Co. nearly four years ago has long been a financial and political cause celebre. It was the biggest merger in American corporate history, and has been the subject of furious controversy concerning the circumstances under which the Justice Department settled an antitrust suit that had sought to break up the combination. Last week, after the dispute had finally faded, the Internal Revenue Service suddenly revived it.The IRS had paved the way for the merger in the first place by ruling that the insurance company's owners did not have to pay capital gains tax on any profit they made by exchanging their Hartford stock for ITT shares. Now the agency has reversed itself and ruled that taxes are due on the exchange after all.

The ruling will not undo the merger. But if it is upheld by the federal courts to which an appeal will almost certainly be taken, it could cost ITT $35 million --one estimate of unpaid taxes owed on the deal. Although those taxes are due from the former shareholders of Hartford, ITT has pledged to reimburse them for any money they have to cough up.

The IRS did not say what had changed its mind, but the reversal appears to be due to some facts unearthed by lawsuits filed by former Hartford shareholders, who now oppose the merger. Initial IRS approval was based on ITT's selling to a disinterested third party a block of Hartford stock that the company had bought before the merger agreement. ITT sold them to an Italian organization, Mediobanca, under an agreement approved by the IRS. It has since developed that a then-secret agreement between ITT's investment bank, Lazard Freres and Co., and Mediobanca modified the terms of the contract. A former Securities and Exchange official has testified that in his opinion, no legitimate sale ever took place.

In order to collect any actual back taxes, the IRS must move speedily. Before April 15 it will have to obtain waivers from, formally notify of tax deficiency, or bring suit against every one of the 17,000 former owners of Hartford who exchanged their stock for ITT shares. After that date, the three-year statute of limitations on most tax cases runs out. Preparing itself for that job, the IRS five months ago obtained a list of ITT stockholders who were former Hartford shareholders. But many of the former Hartford shareholders have sold or otherwise disposed of their ITT shares, which the IRS now says are taxable. How much tax the IRS will ever be able to collect very much remains to be seen.

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