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Corporation Challenges Deficiency, Denial of Deductions

APR. 22, 2021

Computer Sciences Corp. v. Commissioner

DATED APR. 22, 2021
DOCUMENT ATTRIBUTES

Computer Sciences Corp. v. Commissioner

[Editor's Note:

The exhibits can be viewed in the PDF version of the document.

]

COMPUTER SCIENCES CORPORATION,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE
Respondent

UNITED STATES TAX COURT

PETITION

Computer Sciences Corporation ("CSC" or "Petitioner") hereby petitions for a redetermination of the deficiency in tax for the taxable period ended March 29, 2013 ("FY13"), set forth by the Commissioner of Internal Revenue ("Commissioner") in his Notice of Deficiency dated February 16, 2021 (Symbols: AP:EXM:AP:B:DMK:JM) (the "Notice of Deficiency" or the "Notice"). As a basis for this proceeding, Petitioner alleges as follows:

1. Taxpayer Information. Petitioner was a corporation organized under the laws of Nevada.1 Petitioner's principal place of business is at 1775 Tysons Boulevard Tysons, Virginia 22102. Petitioner timely filed a Form 1120, U.S. Corporation Income Tax Return, for FY13 with the Internal Revenue Service at Ogden, Utah.

2. Notice of Deficiency. The Notice of Deficiency upon which this Petition is based is dated February 16, 2021, and on information and belief, was placed in the mail on or about February 16, 2021. A copy of such Notice of Deficiency, including the statement and schedules accompanying the Notice, is attached hereto as "Exhibit A." Such Notice of Deficiency was issued by the Commissioner through the Internal Revenue Service, Independent Office of Appeals, 31 Hopkins Plaza, Suite 1310, Baltimore, Maryland 21201.

3. Amounts in Dispute. In the Notice of Deficiency, the Commissioner determined a deficiency in Petitioner's income tax for FY13 in the amount of $276,535,161 and a penalty or addition to tax for FY13 in the amount of $45,584,000, the entire amounts of which are in dispute. Petitioner also overpaid its income tax for FY13 by the amount of not less than $2,530,000, or by such other amount as the Court may determine, and is entitled to a credit or refund of such overpayment.

4. Assignments of Error. The Commissioner's determination of a deficiency in Petitioner's income tax and assertion of an addition to tax for FY13, as set forth in the Notice of Deficiency, and the Commissioner's failure to determine an overpayment in Petitioner's income tax for FY13, are based upon the following errors:

a. Adjustment to Ordinary and Necessary Business Expenses — UK. The Commissioner erred in increasing Petitioner's taxable income for FY13 by the amount of $90,480,000 by erroneously disallowing a deduction under section 1622 for ordinary and necessary business expenses relating to personnel in the UK incurred by CSC in connection with the restructuring of its business (referenced in the Notice of Deficiency as "Foreign Sub Severance Expense").

b. Adjustment to Ordinary and Necessary Business Expenses — Denmark, Sweden, and Norway (the "Nordics"). The Commissioner erred in increasing Petitioner's taxable income for FY13 by the amount of $35,460,000 by erroneously disallowing a deduction under section 162 for ordinary and necessary business expenses relating to personnel in Denmark incurred by CSC in connection with the restructuring of its business (referenced in the Notice of Deficiency as "Foreign Sub Severance Expense"). The Commissioner further erred in failing to reduce Petitioner's taxable income for FY13 by the amount of $7,230,000 by erroneously failing to allow a deduction under section 162 for ordinary and necessary business expenses relating to personnel in Sweden and Norway incurred by CSC in connection with the restructuring of its business.

c. Adjustment to Ordinary and Necessary Business Expenses — Australia. The Commissioner erred in increasing Petitioner's taxable income for FY13 by the amount of $12,960,000 by erroneously disallowing a deduction under section 162 for ordinary and necessary business expenses relating to personnel in Australia incurred by CSC in connection with its restructuring of its business (referenced in the Notice of Deficiency as "Foreign Sub Severance Expense").

d. Capital Loss on Sale of Stock. The Commissioner erred in increasing Petitioner's taxable income for FY13 by the amount of $651,200,000 by erroneously disallowing a capital loss in such amount arising under section 165 upon CSC's sale to an unrelated party of certain Participating Class A stock of CSC Consulting Corporation (the "Section 165 Loss") (referenced in the Notice of Deficiency as "Capital Loss — BTMU").

e. Addition to Tax or Penalty Under Section 6662. The Commissioner erred in determining an addition to tax or penalty in the amount of $45,584,000 with respect to an alleged underpayment of tax attributable to the Commissioner's determination to disallow the Section 165 Loss referenced in paragraph 4.d., supra.

f. Computational Matters. The Commissioner erred in determining the amount of any deficiency in Petitioner's income tax for FY13 by making various computational and related errors in calculating Petitioner's taxable income and other tax attributes. These computational matters can be addressed under Tax Court Rule 155 after the other errors identified in this paragraph 4 are resolved.

5. Facts Relied Upon. The facts upon which Petitioner relies as the basis for this proceeding are as follows:

a. Adjustment to Ordinary and Necessary Business Expenses — UK.

Historical Operations of CSC's Business and CSC's Business Challenges Relating to the UK.

(1) CSC was incorporated under the laws of Nevada on April 16, 1959.

(2) CSC and its worldwide affiliates (the "CSC Group") provided to their customers information-technology ("IT") and professional services, consulting, and solutions, including information-systems and business-process outsourcing, business transformation initiatives, technology strategy and deployments, consulting and systems-integration services, and other professional services.

(3) At all relevant times, CSC was engaged in a global business that was dependent not only on its operations in the United States, but also on its operations in various countries throughout the world. As such, CSC's business success, reputation, profitability, and stature in the market were dependent on the success, reputation, profitability, and stature of its operations throughout the world.

(4) Historically, the governments of the United States and various other countries were among CSC's largest customers.

(5) Prior to FY13, each of CSC's operations outside of the United States had its own management team, operated on a decentralized basis, and provided products and services to customers in its market.

(6) Specifically, CSC's operations in each country typically had a multiple-layered management team that identified and designed products and services to provide to customers in such country.

(7) The autonomy of CSC's non-U.S. operations contributed to challenges in contract and service delivery management, and in financial controls and systems.

(8) The allegations set forth in paragraphs 5.b.(1) through 5.b.(23), and 5.c.(1) through 5.c.(14), infra, are incorporated by reference in this paragraph 5.a.

(9) In FY13 and all relevant prior years, CSC's operations in the UK were conducted through CSC Computer Sciences International Limited, CSC Computer Sciences Limited, and other UK subsidiaries, each of which was an indirect wholly owned subsidiary of CSC organized under the laws of the United Kingdom. Collectively, CSC Computer Sciences International Limited and CSC Computer Sciences Limited are referred to as "CSC UK."

(10) In December 2003, CSC UK entered into a 10year contract with the UK government's National Health Service ("NHS") to deliver a patient record-management system covering UK residents (the "NHS Project").

(11) The NHS Project experienced problems from the outset, with multiple missed deadlines, failures to deliver promised software, and failures to perform as promised.

(12) By January 2009, the UK government estimated that the NHS Project was four years behind schedule.

(13) In January 2010, negotiations with the UK government commenced regarding the terms of a memorandum of understanding ("MOU") to revise the scope and related contract value of the agreement relating to the NHS Project.

(14) In its Securities and Exchange Commission ("SEC") Form 10-Q filed on February 9, 2011 (the "2011 Form 10-Q"), CSC publicly announced that the NHS notified CSC that CSC failed to achieve a key milestone for the NHS Project.

(15) The UK government considered the failure to achieve the key milestone to constitute a breach of contract and considered possible termination of part or all of the contract for the NHS Project.

(16) From the close of the stock market on February 8, 2011, to the close on February 9, 2011, the price of CSC's publicly traded common stock declined from $56.54 per share to $48.43 per share, which amounted to a loss of approximately $1.2 billion in CSC's market capitalization.3

(17) On May 2, 2011, CSC announced that it was in the final stages of concluding the MOU with NHS to modify the contract relating to the NHS Project.

(18) On May 2, 2011, CSC disclosed that it was required to adjust the profit relating to the NHS contract for the fourth quarter of its financial year ended April 1, 2011 ("FY11"), and as a result, CSC announced that it anticipated a reduction in its previously projected earnings per share for FY11.

(19) CSC's stock price declined from $50.55 to $44.03 from the close of the stock market on May 2, 2011, to the close on May 3, 2011, which represented a decline in CSC's market capitalization of approximately $1 billion.

(20) The UK government announced on September 22, 2011, that it was dismantling the original $17 billion NHS Project.

(21) In its SEC Form 8-K, filed on December 27, 2011 (the "2011 Form 8-K"), CSC announced that it was recently informed by the UK government that neither the MOU nor an amendment to the contract would be approved. CSC further disclosed in the 2011 Form 8-K that it was required to recognize in the third quarter of its FY13 an impairment of up to $1.5 billion on its net investment in the NHS contract due to the uncertainty surrounding the future of the NHS Project and the potential of securing a revised contract with NHS.

(22) From the close of the stock market on December 23, 2011, to the close on December 27, 2011, the price of CSC's common stock declined from $26.48 to $24.10, which represented a reduction in CSC's market capitalization of approximately $400 million.

(23) In its SEC Form 10-K filed on May 29, 2012 (the "FY12 Form 10-K"), CSC announced that it booked and reported a write-down of its net investment in the NHS contract in the amount of $1,485 billion as of December 30, 2011.

(24) Not later than early 2012, the SEC initiated an investigation into CSC's prior disclosure and accounting determinations with respect to its contract with the NHS.

(25) On June 5, 2011, The Washington Post reported on the "[t]he potentially damaging investigation" of CSC's accounting errors by the SEC and the "protracted negotiations" on the reduced scope of contract with the UK government on the NHS Project. Marjorie Censer, With SEC Investigation Underway, CSC Reports Preliminary Earnings, The Washington Post, June 5, 2011 (internal quotations omitted).4

(26) On October 1, 2011, The Observer described CSC's performance on the NHS Project as a "dire performance of a £3bn contract to upgrade NHS computer systems" that led to a "possibility of litigation . . . from shareholders and the British taxpayer." Simon Bowers, Investors Sue CSC Over Losses on Disastrous NHS Contract: Shareholders Allege 'Fraudulent Concealment,' The Observer, Oct. 2, 2011, at 47.

(27) On December 8, 2011, The Times described CSC's performance on the NHS Project as among "the worst disasters of the NHS computerised records debacle." Dominic Kennedy & Alexandra Frean, $7m Payoff for Boss Behind IT "Nightmare," The Times, Dec. 8, 2011, at 8.

(28) On December 8, 2011, The Guardian referred to CSC as "one of the NHS's worst-performing IT contractors." Simon Bowers, NHS Software Provider CSC May Get Cash Lifeline, The Guardian, Sept. 26, 2011, at 24.

(29) On December 9, 2011, an official in the British government described CSC's software system as "vapour ware," which "suffered from 3,128 defects," and as "one of the most egregious mistakes of the NHS IT saga." Dominic Kennedy, Laura Pitel & Ingmar Hohmann, Dead Wrong, the Software that NHS Says It Just Can't Discuss, The Times, Dec. 9, 2011, at 18 (internal quotations omitted).

(30) CSC lost approximately 58 percent of its market capitalization as the price of its common stock declined from approximately $56.54 per share at the close of the stock market on February 8, 2011 (the day before CSC filed the 2011 Form 10-Q), to $23.70 per share at the close on December 30, 2011.

(31) CSC's common stock price declined by over 50 percent from early 2010 to late 2011, from a high of $57.93 per share in January 2010 to a low of $23.68 per share in December 2011 after the media published articles regarding the NHS Project.

(32) On November 15, 2011, The Wall Street Journal, citing conversations with several private equity firms, claimed that CSC had long been a rumored buyout target and that its shrinking revenue and steep drop in the stock price provided an opportunity for such buyout. Anupreeta Das, Kicking the Tires on CSC: Could a Buyout Happen This Time?, The Wall Street Journal, Nov. 15, 2011.5

(33) In the financial year ended March 30, 2012 ("FY12"), customers terminated approximately 30 to 40 of CSC's significant customer contracts prior to completion.

(34) In the FY12 Form 10-K, CSC disclosed that its free cash flow declined from $629 million in FY11 to $59 million in FY12, and explained that this reduction of approximately $570 million was driven primarily by the operating performance and net cash outflows associated with the NHS contract.

(35) In the FY12 Form 10-K, CSC disclosed that its operating income for FY11 was approximately $1,217 billion while its operating loss for FY12 was approximately $1,251 billion.

(36) On December 28, 2011, one day after CSC announced it would write off up to $1.5 billion of its investment relating to the NHS contract, Standard & Poor's reduced CSC's credit rating from A- to BBB+, citing, among other reasons, the material impairment in value of the NHS contract. Standard & Poor's subsequently downgraded CSC's credit rating to BBB on May 22, 2012.

(37) On May 17, 2012, Moody's reduced CSC's credit rating from Baal to Baa2 to reflect the uncertainty surrounding the NHS contract.

(38) On May 22, 2012, Fitch downgraded CSC's credit rating from BBB+ to BBB due to, among other reasons, unresolved contract negotiations with the NHS and the internal audit and SEC investigation into accounting adjustments and related disclosures.

(39) CSC's challenges with the NHS Project, among other reasons, were alleged as a basis for the two class action lawsuits initiated against CSC by certain of its shareholders on each of June 3, 2011, and September 26, 2011. See paragraphs 5.b.(10) and 5.b.(11), infra.

CSC's Turnaround Plan.

(40) On or about February 7, 2012, CSC's board of directors appointed a new President and Chief Executive Officer ("CEO"), Mike Lawrie. Lawrie had experience in revitalizing global companies. Lawrie also had experience in private equity, including mechanisms for funding business operations.

(41) During the CSC Investor Day meeting on September 11, 2012, Lawrie identified the loss of control of financial systems, the lack of discipline around contracting and delivery of services, CSC's highly fragmented corporate structure and the resulting uncompetitive cost structure, the existence of twelve layers of management, and a lack of transparency and accountability in the management system as root causes of the problems that eroded CSC's business reputation and caused CSC's underperformance. Lawrie also announced a company-wide, multi-year turnaround plan to fix these and other issues (the "Global Turnaround Plan").

(42) The goals of the Global Turnaround Plan included, among others: (i) moving CSC from a decentralized business model to a centralized business model, with CSC personnel in the United States establishing, managing, and controlling CSC's global business model and strategy; (ii) centralizing under CSC contract management across all sectors; (iii) establishing in CSC's operations in the United States direct management and control of CSC's overall risks, go-to-market strategy, and investments in tangible and intangible assets; (iv) streamlining CSC's operations throughout the world to tighten internal controls, reduce costs, and improve performance; and (v) diversifying sources of capital.

Restructuring Expenses.

(43) The Global Turnaround Plan that CSC began to implement in FY13 included multi-jurisdictional restructurings of its workforce and operations (collectively, the "Restructuring").

(44) Through the Restructuring and throughout CSC's global operations, CSC reduced management and organizational layers from thirteen to eight.

(45) Under the Restructuring, CSC (i) eliminated staff in the United States and in other countries who did not have the requisite skillsets for the next-generation IT solutions that CSC required to recapture market share; (ii) adopted a global approach to resourcing through shared service centers and centers of excellence; and (iii) relocated certain jobs to central service hubs in India, the Czech Republic, and the United States.

(46) CSC executed the Restructuring in FY13, inter alia, to repair the damage to CSC's business and reputation that arose from its operations in the UK, the Nordics, and Australia. The operations in the Nordics and Australia are discussed in paragraphs 5.b.(1) through 5.b.(23), and paragraphs 5.c.(1) through 5.c.(14), infra, respectively.

(47) CSC executed the Restructuring in FY13, inter alia, to prevent potential future harm arising from the mismanagement of its foreign operations and lack of internal controls.

(48) As part of the Restructuring in FY13, CSC's management in the United States identified for termination 858 company personnel in the UK.

(49) CSC decided which personnel to terminate in the UK as part of the Restructuring.

(50) CSC UK did not decide which personnel to terminate as part of the Restructuring.

(51) CSC was solely responsible for developing and directing the implementation of the Restructuring in the UK.

(52) CSC UK assisted in the execution of the Restructuring at CSC's direction.

(53) CSC paid for termination and related expenses incurred in connection with the implementation of the Restructuring ("Restructuring Expenses").

(54) CSC incurred Restructuring Expenses in FY13 in the amount of $90.48 million with respect to company personnel in the UK.

(55) At the close of the stock market on November 6, 2012, CSC's stock price of $36.80 increased by 17 percent (relative to its stock price of $31.46 at the close on November 5, 2012) after it reported its second quarter earnings for FY13 on its SEC Form 10-Q filed on November 6, 2012.

(56) At the close of the stock market on March 28, 2013 (the last day the stock market was open in FY13), CSC's stock price increased to $49.23, which reflected a 119-percent increase from the lowest price for FY13 of $22.5 at the close on July 24, 2012.

(57) After posting a loss of $4.2 billion for FY12, CSC reported net income of $979 million for FY13.

U.S. Federal Income Tax Treatment of the Restructuring Expenses

(58) CSC was entitled to deduct Restructuring Expenses under section 162 if those expenses constituted ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.

(59) Prior to and through FY13, CSC's U.S. business and reputation were significantly harmed as a result of the developments in the UK, the Nordics, and Australia.

(60) CSC's lack of internal controls and centralized management contributed to a loss of more than 50 percent of CSC's market capitalization, credit-rating downgrades, and a loss of customer confidence prior to FY13.

(61) The Restructuring helped CSC prevent further damage to its U.S. business and reputation.

(62) The Restructuring Expenses included (i) employee-severance payments, (ii) employee-pension-augmentation payments, (iii) payroll and similar employer taxes, and (iv) other related payments for employees that left with immediate effect once termination was agreed.

(63) Severance payments or "dismissal wages" are deductible expenses under Treasury Regulation section 1.162-10(a).

(64) CSC paid Restructuring Expenses to protect and restore its U.S. business.

(65) CSC paid Restructuring Expenses to protect its business reputation.

(66) CSC paid Restructuring Expenses to protect its sources of income.

(67) CSC paid Restructuring Expenses to protect its sources of supply.

(68) CSC paid Restructuring Expenses to protect its credit rating.

(69) Restructuring Expenses were ordinary and necessary business expenses under section 162.

(70) On its FY13 Form 1120 (U.S. Federal Income Tax Return) (the "FY13 Tax Return"), CSC reported a deduction in the amount of $90.48 million for Restructuring Expenses incurred in FY13 relating to personnel in the UK.

(71) In the tax forms that CSC UK filed in the UK, CSC UK did not report any deduction, credit, or loss regarding CSC's payment of Restructuring Expenses.

(72) CSC was entitled to a deduction under section 162 in the amount of $90.48 million for Restructuring Expenses that it incurred in FY13 relating to personnel in the UK.

(73) In the Notice of Deficiency, as part of his determination to disallow "Foreign Sub Severance Expense," the Commissioner disallowed Restructuring Expenses in the amount of $90.48 million relating to personnel in the UK.

(74) Accordingly, the Commissioner erroneously disallowed CSC's deduction for FY13 under section 162(a) of Restructuring Expenses in the amount of $90.48 million relating to personnel in the UK.

b. Adjustment to Ordinary and Necessary Business Expenses — Nordics.

(1) The allegations set forth in paragraphs 5.a.(1) through 5.a.(74), supra, and 5.c.(1) through 5.c.(14), infra, are incorporated by reference in this paragraph 5.b.

(2) In FY13, CSC indirectly wholly owned CSC Denmark A/S ("CSC Denmark"), which was a company organized under the laws of Denmark.

(3) In FY13, CSC indirectly wholly owned CSC Norge AS ("CSC Norway"), which was a company organized under the laws of Norway.

(4) In FY13, CSC indirectly wholly owned CSC Sverige AB ("CSC Sweden"), which was a company organized under the laws of Sweden.

(5) In early 2011, the SEC launched a fraud investigation into CSC Denmark's accounting practices.

(6) In FY11, CSC disclosed that it had uncovered accounting irregularities in the operations of its foreign affiliates in the Nordics.

(7) In its SEC Form 10-K filed on June 15, 2011 ("FY11 Form 10-K"), CSC disclosed that it recognized $91 million of out-of-period adjustment charges in FY11 related to the accounting irregularities in the Nordics.

(8) In its FY11 Form 10-K, CSC attributed most of the $91 million of adjustments to accounting irregularities arising from suspected intentional misconduct by certain former personnel in Denmark.

(9) In its FY12 Form 10-K, CSC disclosed that it recognized an additional $13 million of out-of-period adjustment charges in FY12 related to the accounting irregularities in the Nordics.

(10) On June 3, 2011, certain shareholders of CSC initiated a class action lawsuit relating to CSC's actions in connection with the NHS Project and the accounting irregularities in the Nordics.

(11) On September 26, 2011, certain shareholders of CSC initiated another class action lawsuit relating to CSC's actions in connection with the NHS Project and the accounting irregularities in the Nordics.

(12) As part of the Restructuring in FY13, CSC's management in the United States identified for termination 434 company personnel in the Nordics.

(13) CSC decided which personnel to terminate in Denmark, Sweden, and Norway as part of the Restructuring.

(14) CSC Denmark, CSC Sweden, and CSC Norway did not decide which personnel to terminate as part of the Restructuring.

(15) CSC Denmark, CSC Sweden, and CSC Norway assisted in the execution of the Restructuring at CSC's direction.

(16) CSC incurred Restructuring Expenses in FY13 in the amount of $42.69 million with respect to company personnel in the Nordics.

(17) On its FY13 Tax Return, Petitioner reported a deduction in the amount of $42.69 million for Restructuring Expenses incurred in FY13 relating to personnel in the Nordics.

(18) In the tax forms that CSC Denmark filed in Denmark, CSC Denmark did not report any deduction, credit, or loss regarding CSC's payment of Restructuring Expenses.

(19) In the tax forms that CSC Sweden filed in Sweden, CSC Sweden did not report any deduction, credit, or loss regarding CSC's payment of Restructuring Expenses.

(20) In the tax forms that CSC Norway filed in Norway, CSC Norway did not report any deduction, credit, or loss regarding CSC's payment of Restructuring Expenses.

(21) CSC was entitled to a deduction under section 162 in the amount of $42.69 million for Restructuring Expenses that it incurred in FY13 relating to personnel in the Nordics.

(22) In the Notice of Deficiency, as part of his determination to disallow "Foreign Sub Severance Expense," the Commissioner disallowed Restructuring Expenses in the amount of $35.46 million relating to personnel in Denmark, and failed to determine an increase in the deduction for Restructuring Expenses in the amount of $7.23 million relating to personnel in Sweden and Norway.

(23) Accordingly, the Commissioner erroneously disallowed CSC's deduction for FY13 under section 162(a) of Restructuring Expenses incurred by CSC in the amount of $35.46 million relating to personnel in Denmark, and erroneously failed to allow a deduction for Restructuring Expenses incurred by CSC in the additional amount of $7.23 million relating to personnel in Sweden and Norway.

c. Adjustment to Ordinary and Necessary Business Expenses — Australia.

(1) The allegations set forth in paragraphs 5.a.(1) through 5.a.(74), and 5.b.(1) through 5.b.(23), supra, are incorporated by reference in this paragraph 5.c.

(2) In FY13, CSC indirectly wholly owned CSC Australia Pty Limited ("CSC Australia"), which was a company organized under the laws of Australia.

(3) The SEC investigation into CSC's Nordics-region accounting scandal expanded into an investigation of CSC's operations in Australia in late 2011.

(4) In the FY12 Form 10-K, CSC disclosed that it recognized $23 million of out-of-period adjustment charges for FY12 with respect to the Australian accounting errors. In the FY12 Form 10-K, CSC also disclosed that such adjustments arose from both intentional and unintentional accounting irregularities of CSC Australia.

(5) As part of the Restructuring in FY13, CSC's management in the United States identified for termination 157 company personnel in Australia.

(6) CSC decided which personnel to terminate in Australia as part of the Restructuring.

(7) CSC Australia did not decide which personnel to terminate as part of the Restructuring.

(8) CSC Australia assisted in the execution of the Restructuring at CSC's direction.

(9) CSC incurred Restructuring Expenses in FY13 in the amount of $12.96 million with respect to personnel in Australia.

(10) On its FY13 Tax Return, Petitioner reported a deduction in the amount of $12.96 million for Restructuring Expenses incurred in FY13 relating to personnel in Australia.

(11) In the tax forms that CSC Australia filed in Australia, CSC Australia did not report any deduction, credit, or loss regarding CSC's payment of Restructuring Expenses.

(12) CSC was entitled to a deduction under section 162 in the amount of $12.96 million for Restructuring Expenses that it incurred in FY13 relating to personnel in Australia.

(13) In the Notice of Deficiency, as part of his determination to disallow "Foreign Sub Severance Expense," the Commissioner disallowed Restructuring Expenses in the amount of $12.96 million relating to personnel in Australia.

(14) Accordingly, the Commissioner erroneously disallowed CSC's deduction for FY13 under section 162(a) of Restructuring Expenses in the amount of $12.96 million relating to personnel in Australia.

d. Capital Loss on Sale of Stock.

(1) The allegations set forth in paragraphs 5.a.(1) through 5.a.(74), 5.b.(1) through 5.b.(23), and 5.c.(1) through 5.c.(14), supra, are incorporated by reference in this paragraph 5.d.

CSC's Acquisition of Covansys and Covansys's Post-Acquisition Performance.

(2) On July 2, 2007, CSC acquired Covansys Corporation ("Covansys") for $1.3 billion in cash.

(3) In 2007, Covansys was an IT-consulting and services company that specialized in industry-specific solutions, strategic outsourcing, and integration services for the healthcare, financial services, retail and distribution, manufacturing, telecommunications, and high-tech industries. Covansys' primary service offering was staff augmentation, which involved lending staff to clients on a project or short-term basis.

(4) CSC expected the acquisition of Covansys to increase its delivery capabilities, extend its capabilities in strategic outsourcing and technology, and accelerate development of strategic offshore offerings.

(5) CSC allocated approximately $1.1 billion of the Covansys purchase price to goodwill, which was primarily attributed to the increased delivery capabilities and industry growth that was expected as a result of the acquisition of Covansys.

(6) In the late 2000s, Covansys lost business and encountered increased customer-credit risks.

(7) As of FY13, CSC had not realized the benefits that it expected when it acquired Covansys.

(8) In the second quarter of FY12, CSC recorded an impairment in goodwill of approximately $1,054 billion in connection to the reduction in its Covansys investment.

(9) As of March 12, 2013, the value of CSC's investment in Covansys was less than the amount that CSC paid for Covansys on July 2, 2007.

(10) As of March 12, 2013, CSC had incurred an economic loss in its investment in Covansys.

(11) The equity value of Covansys was approximately $473.8 million as of March 12, 2013.

(12) As of March 12, 2013, CSC had incurred an economic loss with respect to its investment in Covansys in the amount of $826.2 million.

The IT-Consulting Reorganization.

(13) As a partial response to CSC's credit-rating downgrades, as described in paragraphs 5.a.(36) through 5.a.(38), supra, and drop in market capitalization, as described in paragraphs 5.a.(16), 5.a.(19), 5.a.(22), 5.a.(30), 5.a.(31), and 5.a.(60), supra, CSC sought to diversify its sources of cash for working capital required to carry on its day-to-day operations while implementing the Global Turnaround Plan.

(14) In March 2013, CSC reorganized part of its IT-consulting operations by contributing three previously separate IT-consulting businesses to a single entity in exchange for certain stock and a promissory note (the "IT-Consulting Reorganization"), some of which CSC sold to an unrelated third party for approximately $125 million in cash (the "Investment Transaction").

(15) Immediately before the IT-Consulting Reorganization, CSC wholly owned Covansys, First Consulting Group ("FCG"), Image Solutions, Inc. ("ISI"), and CSC Consulting, Inc. ("Consulting"), each of which was a U.S. domestic corporation that was part of the CSC Group.

(16) In FY13 and prior years, Consulting provided to its clients business-transformation initiatives, technology strategy and deployments, enterprise solutions, and systems integration.

(17) Consulting was an active IT services-and-solutions operating company with 1,962 and 1,694 employees as of March 30, 2012, and March 29, 2013, respectively, and approximately $672.9 million and $521.1 million of revenue in FY12 and FY13, respectively.

(18) CSC acquired FCG on or about January 11, 2008, for $275 million net of cash acquired. In FY13 and prior years, FCG provided IT-consulting services to the healthcare industry.

(19) CSC acquired ISI on January 12, 2011, for $42.5 million. In FY13 and prior years, ISI participated in regulatory-submission-management solutions and related implementation, and also provided outsourcing services to the global life-sciences industry.

(20) In March 2013, CSC combined the operations of Covansys, FCG, and ISI into Consulting (as set out below).

(21) On March 22, 2013, CSC contributed all of the outstanding stock of Covansys (the "Covansys Stock") to Consulting in exchange for Participating Class A Stock of Consulting (the "Participating Class A Stock"), Class B Stock of Consulting (the "Class B Stock"), and a note with a face value of £41,100,000 (equivalent to $62.6 million) (the "Note").

(22) On March 27, 2013, CSC merged FCG and ISI with Covansys in exchange for common stock of Consulting (the "Common Stock").

(23) On or about February 2013, in the ordinary course of business and prior to the IT-Consulting Reorganization, the CSC Finance group prepared projections (the "Management Projections") that estimated that Consulting's revenue would grow by 6.2 percent year-over-year beginning with CSC's financial year ending March 28, 2014 ("FY14"), through CSC's financial year ending April 1, 2022 ("FY22").

(24) The Management Projections reflected year-over-year revenue growth for Consulting.

(25) Houlihan Lokey Financial Advisors, Inc. ("Houlihan") prepared a report regarding the fair market value of 100 percent of the equity of Covansys, Consulting, and FCG as of March 12, 2013 (the "Entity Valuation Report").

(26) Houlihan considered the following factors (among others) in preparing the Entity Valuation Report: (i) the economic outlook in general and the condition and outlook of CSC's industry; (ii) the earnings capacity of Covansys, Consulting, and FCG; and (iii) the dividend-paying capacity of the Covansys, Consulting, and FCG.

(27) In the Entity Valuation Report, Houlihan determined that each of Covansys, Consulting, and FCG6 had the following equity fair market value:

Entity

Fair Market Value

Covansys

$473.8 million

FCG

$31.2 million

Consulting

$751.0 million

Total

$1,256 billion

(28) In the Entity Valuation Report, Houlihan projected the following annual revenues for each of Covansys, FCG, and Consulting for FY13 through FY22:

Value in USD millions

2013

2014

2015

2016

2017

Covansys

439.9

439.9

439.9

439.9

439.9

FCG

14.8

15.7

16.7

17.6

18.4

Consulting

500.0

531.0

563.9

598.9

636.0

Value in USD millions

2018

2019

2020

2021

2022

Covansys

444.3

453.2

462.3

473.3

484.7

FCG

19.4

20.3

21.3

22.4

23.5

Consulting

675.5

717.4

761.8

809.1

859.2

(29) Houlihan's revenue projections for FY13 through FY22 for Consulting were based on the revenue forecasts in the Management Projections.

(30) As a basis for its valuation of Consulting beginning in FY14, Houlihan used the compound annual growth rate ("CAGR") of 6.2 percent used in the Management Projections.

(31) Houlihan's revenue projections for FY13 through FY22 for each of Covansys, FCG, and Consulting were based on the following CAGRs:

Entity

CAGR

Covansys

1.1 percent

FCG

5.3 percent

Consulting

6.2 percent

(32) Houlihan's Entity Valuation Report reflected year-over-year revenue growth for Consulting beginning in FY14.

(33) Consulting continued to operate as an active company with 1,559 and 1,263 employees as of March 28, 2014, and April 3, 2015, respectively, and $935.3 million and $767.5 million of revenue in FY14 and the financial year ended April 3, 2015, respectively.

The Terms and Fair Market Value of the Equity Instruments and Note Issued by Consulting.

(34) The holders of the Participating Class A Stock were entitled to receive a dividend equal to 3.8 percent (the "Participation Percentage") of the amount of any dividends declared and paid on the Common Stock ("Participating Dividend").

(35) The holders of the Participating Class A Stock also were entitled to receive fixed quarterly dividends based on a rate per annum equal to 3.48 percent for the period from issuance through March 2018. In the event that a dividend was declared but not paid, the holders of the Participating Class A Stock were entitled to receive any such dividend based on a rate per annum equal to the sum of the London Inter-bank Offered Rate ("LIBOR") plus 250 basis points.

(36) Upon liquidation or redemption of the Participating Class A Stock, the holders of the Participating Class A Stock were entitled to a premium (in addition to any Participating Dividend) equal to 3.8 percent of the excess of (i) the fair market value of all of the Common Stock at the time of the liquidation or redemption over (ii) $782.2 million, the value of the Common Stock at the time of issuance of the Participating Class A Stock ("Participating Redemption Premium").

(37) Based on the Participating Redemption Premium in the Participating Class A Stock, if the fair market value of Consulting's common stock had appreciated by, for example, 10 percent (or $78.2 million) at the time of liquidation or redemption, the Participating Redemption Premium would be equal to approximately $3 million (i.e., 3.8 percent multiplied by $78.2 million).

(38) Upon liquidation or redemption of the Participating Class A Stock, the holders of the Participating Class A Stock were entitled to a sum equal to: (i) the stated value of the Participating Class A Stock; (ii) any accrued dividends; and (iii) the Participating Redemption Premium (collectively, the "Liquidation Preference").

(39) The holders of a majority of the Participating Class A Stock had the right to elect one of the six directors of the board of directors of Consulting. If the majority holders of the Participating Class A Stock did not elect to designate one of the six directors of Consulting, then the holders of the Participating Class A Stock could vote with the holders of the Common Stock and the Class B Stock in the election of the remaining directors, exercising a percentage of the total aggregate vote equal to the Participation Percentage, but in no event more than 4.9 percent of the total aggregate vote.

(40) If Consulting's board of directors failed to declare all fixed dividends for any two consecutive dividend-declaration dates, or if Consulting failed to pay all fixed dividends that were declared on any two consecutive dividend payment dates, the holders of a majority of the Participating Class A Stock had the right to elect a majority of the directors in a special election. These directors could then declare and pay any accrued but unpaid dividends before resigning from the Board.

(41) Upon the occurrence of certain specified material events, Consulting was required to redeem all of the Participating Class A Stock at a price per share that equaled the Liquidation Preference. In order to pay the Liquidation Preference to the holders of the Participating Class A Stock, Consulting's board of directors had the right to cause Consulting to liquidate certain qualified assets that Consulting was required to hold under its Restated and Amended Articles of Organization.

(42) The Participating Class A Stock was subject to a mandatory redemption date of March 22, 2023.

(43) Consulting also had the option to redeem the Participating Class A Stock as of March 22, 2018.

(44) The holders of the Class B Stock were entitled to receive fixed quarterly dividends based on a rate per annum equal to 8.5 percent for the period from issuance through March 2018.

(45) The Class B Stock was subject to a mandatory redemption date of March 22, 2025.

(46) The principal of the Note was £41.1 million (equivalent to $62.6 million on the date of issuance).

(47) Interest on the Note accrued annually at a rate equal to LIBOR plus 3.5 percent.

(48) The Note had a March 22, 2018 maturity date.

(49) Upon default on the Note, the holder of the Note could declare immediately due and payable the Note, all interest thereon, and all other amounts payable under the Note.

(50) The Participating Class A Stock was senior to the Common Stock, the Class B Stock, and any other capital stock of Consulting with respect to dividend rights and rights on liquidation.

(51) The Participating Class A Stock was junior to the Note and all other outstanding indebtedness of Consulting and its subsidiaries with respect to the rights on liquidation.

(52) Houlihan prepared a report regarding the fair market value of the Participating Class A Stock, the Class B Stock, and the Note as of March 15, 2013 (the "Instrument Valuation Report").

(53) In the Instrument Valuation Report, Houlihan determined that the Participating Class A Stock, the Class B Stock, and the Note had the following fair market values as of March 15, 2013:

Instruments

Fair Market Value

Participating Class A Stock

$59.4 million

Class B Stock

$356.2 - 369.5 million

Note

$62.6 million

(54) In the Instrument Valuation Report, Houlihan determined that the implied internal rates of return of the Participating Class A Stock using 5-year and 10-year cash-flow analyses were 5.7 percent and 6.2 percent, respectively, with a weighted average of 6 percent.

(55) In the Instrument Valuation Report, Houlihan valued the Participating Redemption Premium using 5-year and 10-year discounted-cash-flow analyses and determined that this right was worth $5.4 and $9 million, respectively.

Sale of the Participating Class A Stock and Note.

(56) In FY13, CSC searched for external sources of financing to raise cash for use in its business operations and to diversify its sources of capital.

(57) CSC consulted with multiple financial institutions to gauge interest in the Participating Class A Stock and the Note.

(58) CSC consulted with banks that were unrelated to CSC, including BTMU, to gauge interest in the Participating Class A Stock and the Note.

(59) CSC and BTMU negotiated the terms of the Investment Transaction over a period of several weeks.

(60) BTMU conducted its own independent assessment of the financial instruments involved in the Investment Transaction (i.e., the Participating Class A Stock and the Note).

(61) Multiple departments of BTMU, including BTMU's credit planning and policy department, market risk department, and capital department, evaluated the Participating Class A Stock before BTMU decided to purchase such stock.

(62) BTMU independently determined that the Participating Class A Stock that it ultimately purchased provided a "very real" potential for participating in the corporate growth of Consulting.

(63) BTMU anticipated that it would receive a return on the Participating Class A Stock approximately equal to LIBOR plus 500 basis points, including a return approximately equal to 150 basis points as the yield from the participation features of the Participating Class A Stock.

(64) BTMU expected the Participating Class A Stock to participate in the corporate earnings and growth of Consulting.

(65) Multiple BTMU departments, including its credit approval, accounting, compliance, portfolio management, and tax departments, evaluated the Note before BTMU decided to acquire the Note.

 

(66) BTMU independently determined that the Note constituted creditworthy debt.

(67) BTMU was not related to CSC and its affiliates.

(68) Before BTMU agreed to purchase the Participating Class A Stock and the Note, BTMU and CSC negotiated the terms of each of such instrument and the terms of the transaction for a period of several weeks.

(69) BTMU and CSC did not engage in any other transactions or agreements that were collateral to, or in any way related to, BTMU's purchase of the Participating Class A Stock and the Note from CSC.

(70) BTMU and CSC bargained at arm's-length over the terms of the Participating Class A Stock and Note.

(71) BTMU and CSC bargained at arm's-length over the terms of the purchase of the Participating Class A Stock and the Note.

(72) On March 26, 2013, CSC sold to BTMU the Participating Class A Stock (for $62.5 million) and the Note (for £41.4 million, equal to approximately $62.6 million) for a total of approximately $125 million in cash.

(73) The fair market value of the Participating Class A Stock was $62.5 million as of March 26, 2013.

(74) The fair market value of the Class B Stock was $348.7 million as of March 26, 2013.

(75) The fair market value of the Note was $62.6 million as of March 26, 2013.

(76) Through the Investment Transaction, CSC raised more than $125 million that it was free to use for its day-to-day business operations and thus diversified its sources of capital.

(77) Immediately after the Investment Transaction: (i) CSC owned 100 percent of the Common Stock and the Class B Stock; (ii) BTMU owned 100 percent of the Participating Class A Stock and the Note; and (iii) Consulting owned 100 percent of the Covansys Stock.

The Participating Class A Stock's Participation in the Corporate Growth of Consulting.

(78) At the time of the issuance of the Participating Class A Stock, the Participating Class A Stock had a value of $62.5 million and the Common Stock had a value of $782.2 million. The total value of the participating stock of Consulting was thus $844.7 million.

(79) The $62.5 million value of the Participating Class A Stock was equal to 7.4 percent of the value of Consulting's participating stock at the time it issued the Participating Class A Stock (i.e., $62.5 million of Participating Class A Stock divided by $844.7 million of Consulting's participating stock).

(80) The 3.8-percent Participation Percentage under the terms of the Participating Class A Stock granted to the holders of the $62.5 million of the Participating Class A Stock the right to participate in all dividends paid on the Common Stock at approximately 50 percent of the level of an equivalent amount invested by the holders of the $782.2 million of Common Stock (i.e., the 3.8-percent Participation Percentage divided by the 7.4-percent amount of participating equity attributable to the Participating Class A Stock).

(81) The holders of the Participating Class A Stock were entitled to share in dividends (through Participating Dividends) equal to approximately 50 percent of any dividends paid on an equivalent value of the Common Stock.

(82) The Participating Class A Stock owned by BTMU, with a value of $62.5 million, was entitled to receive Participating Dividends equal to 50 percent of the amount of any dividends paid to a holder of the Common Stock with a value of $62.5 million.

(83) The holders of the Participating Class A Stock were entitled to share in the appreciation in the fair market value of Consulting's net worth (through the Participating Redemption Premium) at a rate equal to approximately 50 percent of the appreciation of the fair market value of Consulting's net worth.

(84) CSC reasonably expected the holders of the Participating Class A Stock to participate in the corporate earnings and growth of Consulting.

(85) As of March 2014, Consulting accrued $1,155,200 as the estimated Participating Redemption Premium on the Participating Class A Stock.

(86) On March 13, 2014, Consulting paid participating dividends to the owner of its Common Stock and to the owner of its Participating Class A Stock (BTMU). The amount of the participating dividend on the Participating Class A Stock was $112,100.

(87) On October 30, 2014, Consulting paid participating dividends to the owner of its Common Stock and to the owner of its Participating Class A Stock (BTMU). The amount of the participating dividend on the Participating Class A Stock was $206,302.

(88) On January 30, 2017, Consulting paid participating dividends to the owner of its Common Stock and to the owner of its Participating Class A Stock (BTMU). The amount of the participating dividend on the Participating Class A Stock was $76,000.

(89) The holders of the Participating Class A Stock actually participated in the corporate earnings and growth of Consulting.

U.S. Federal Income Tax Treatment of the IT-Consulting Reorganization and the Investment Transaction.

(90) Section 1001 generally requires a taxpayer to recognize any gain or loss realized on the sale or exchange of property unless another provision of the Code provides otherwise. One such "non-recognition" provision is section 351, which generally provides that no gain or loss is recognized upon the transfer of property to a corporation solely in exchange for the corporation's stock if the transferor controls the corporation immediately after the exchange. If, however, the transferor receives money or "other property" in return, then section 351(b) requires a transferor to recognize any gain in property transferred to a corporation in a section 351 exchange to the extent of the amount of money and the fair market value of "other property" received in return. Section 351(b) does not require recognition of loss when "other property" is received in addition to "stock."

(91) When CSC transferred the Covansys stock to Consulting, CSC received in exchange, together with other property, all shares of the Participating Class A Stock.

(92) CSC owned 100 percent of the shares of all classes of stock in Consulting after the contribution of the Covansys stock to Consulting.

(93) The Participating Class A Stock was "stock" for purposes of sections 351(a) and (b).

(94) When CSC transferred the Covansys stock to Consulting, CSC received in exchange the Class B Stock and the Note in addition to the Participating Class A Stock.

(95) The Class B Stock and the Note were "other property" within the meaning of section 351(b).

(96) Under sections 351(a) and (b), CSC did not recognize any gain or loss with respect to the Participating Class A Stock when it transferred its Covansys stock to Consulting in exchange for the Participating Class A Stock, the Class B Stock, and the Note.

(97) "Nonqualified preferred stock" is not treated as "stock" pursuant to section 351(g). Under section 351(g)(3)(A), stock is "preferred stock" only if the stock is limited and preferred as to dividends and does not participate in corporate growth to any significant extent.

(98) The Participating Class A Stock was not "nonqualified preferred stock" because it was not limited and preferred as to dividends and because it participated in the corporate growth of Consulting to a significant extent.

(99) The Participating Dividend payable on each dollar of Participating Class A Stock was approximately 50 percent of the dividend payable on each dollar of Common Stock.

(100) There was no structural or operational impediment to the likelihood that the holders of the Participating Class A Stock would receive dividends beyond the preference dividends.

(101) The Participating Dividend feature of the Class A Stock required that the holders of the Participating Class A Stock receive common dividends whenever Consulting paid dividends on its Common Stock.

(102) At the time of issuance of the Participating Class A Stock, CSC's management projected that Consulting would be profitable and thus would be capable of paying dividends beyond any limitation or preference.

(103) At the time of issuance of the Participating Class A Stock, Houlihan projected that Consulting would be profitable and thus would be capable of paying dividends beyond any limitation or preference.

(104) At the time of issuance of the Participating Class A Stock, BTMU projected that Consulting would be profitable and thus would be capable of paying dividends beyond any limitation or preference.

(105) Based on the terms of the Participating Class A Stock, if Consulting paid a dividend to the shareholders of the Common Stock received a dividend, then Consulting also was obliged to pay a Participating Dividend to the holders of the Participating Class A Stock.

(106) At the time of issuance of the Participating Class A Stock, there was a real and meaningful likelihood that dividends beyond any limitation or preference would be paid on the Participating Class A Stock.

(107) Consulting paid dividends on the Common Stock to the shareholders of the Common Stock and commensurate Participating Dividends to BTMU on the Participating Class A Stock (beyond the fixed dividends) in three of the first four fiscal years after the Participating Class A Stock was issued.

(108) The Participating Class A Stock actually received dividends beyond any limitation or preference.

(109) The Participating Class A Stock was not limited and preferred as to dividends.

(110) The Participating Class A Stock was entitled to receive Participating Dividends, which represented approximately 50 percent of the return on each dollar of the Common Stock, when dividends were paid on the Common Stock.

(111) The Participating Class A Stock was entitled to a Participating Redemption Premium, which represented approximately 50 percent of the return on each dollar of the Common Stock, based upon the growth in Consulting's equity value.

(112) There was no structural or operational impediment to the likelihood that the holders of the Participating Class A Stock would participate in the earnings and growth of Consulting.

(113) The contemporaneous valuation analyses prepared by Houlihan, an independent third party, showed that Consulting likely would achieve corporate growth in which the holders of the Participating Class A Stock could share.

(114) CSC's Management Projections showed that it was likely that Consulting would achieve corporate growth in which the holders of the Participating Class A Stock could share.

(115) The Participating Class A Stock had a real and meaningful likelihood of participating in corporate earnings and growth through the Participating Dividends.

(116) The holders of the Participating Class A Stock had a real and meaningful likelihood of participating in corporate growth through the Participating Redemption Premium.

(117) Houlihan concluded that the average weighted yield on the Participating Class A Stock was 6 percent.

(118) BTMU expected that its total return on the Participating Class A Stock would be LIBOR plus 500 basis points, and attributed 150 basis points of that expected return to the participation features of the Participating Class A Stock.

(119) The price paid by BTMU for the Participating Class A Stock reflected an expected return to the holders based on the participation rights built into that stock.

(120) The holders of the Participating Class A Stock had a real and meaningful likelihood of participating in Consulting's corporate earnings to a significant extent.

(121) The holders of the Participating Class A Stock had a real and meaningful likelihood of participating in Consulting's corporate growth to a significant extent.

(122) The Participating Class A Stock was not "preferred stock" within the meaning of section 351(g)(3)(A).

(123) The Participating Class A Stock was not "nonqualified preferred stock" within the meaning of section 351(g)(2).

(124) Section 351(g)(3)(A) did not change the non-recognition treatment with respect to the Participating Class A Stock because the Participating Class A Stock was not "nonqualified preferred stock."

(125) Section 358(a) provides rules for determining the basis of property received without recognition of gain or loss.

(126) Under section 358(a), the basis in the Participating Class A Stock that CSC received from Consulting was equal to the amount of CSC's former basis in the Covansys stock immediately prior to the exchange less the fair market value of the Class B Stock and the Note that CSC also received from Consulting.

(127) CSC's initial basis in the Covansys stock was $1,445,673,442.

(128) After making adjustments under the unified loss rules of Treasury Regulation section 1.1502-36, CSC's basis in the Covansys stock as of March 22, 2013, was $1,124,665,772.

(129) CSC's basis in the Participating Class A Stock was equal to $1,125 billion less the $348.7 million of Class B Stock and the £41.4 million (equivalent to approximately $62.6 million) Note that CSC also received from Consulting.

(130) After CSC's contribution of the Covansys stock to Consulting, CSC had basis in the Participating Class A Stock in the amount of $713.7 million.

(131) When CSC sold the Participating Class A Stock to BTMU for $62.5 million, CSC recognized a capital loss under section 1001 in the amount of $651.2 million.

(132) CSC's capital loss arising from the Investment Transaction was calculated as follows:

Sale Proceeds

$62.5 million

Basis in the Participating Class A Stock

$713.7 million

Capital Loss

$651.2 million

(133) The Participating Class A Stock constituted equity and not debt for U.S. federal income tax purposes.

(134) In the Notice of Deficiency, the Commissioner determined to disallow the capital loss under section 1001 in the amount of $651.2 million relating to CSC's sale of the Participating Class A stock to BTMU.

(135) Accordingly, the Commissioner erroneously disallowed the capital loss under section 1001 in the amount of $651.2 million relating to CSC's sale of the Participating Class A stock to BTMU.

e. Addition to Tax or Penalty Under Section 6662.

(1) The allegations set forth in paragraphs 5.d.(1) through 5.d.(135), supra, are incorporated by reference in this paragraph 5.e.

(2) CSC is not liable for any penalty under section 6662.

(3) CSC did not have a deficiency or underpayment of income tax for FY13.

(4) Any deficiency in CSC's income tax for FY13 was not attributable to negligence or disregard of rules or regulations, a substantial understatement of income tax, or a substantial valuation misstatement.

(5) In the Notice of Deficiency, the Commissioner determined an accuracy-related penalty under section 6662 in the amount of $45,584,000 relating to the Commissioner's disallowance of the capital loss on CSC's sale of the Participating Class A Stock to BTMU.

(6) The Notice of Deficiency did not identify any basis for the Commissioner's determination that part or all of the asserted deficiency in tax for FY13 was attributable to negligence or disregard of rules or regulations, a substantial understatement of income tax, or a substantial valuation misstatement.

(7) There was substantial authority for CSC's treatment of the IT-Consulting Reorganization and the Investment Transaction on its FY13 Tax Return.

(8) There is substantial authority for CSC's treatment of the IT-Consulting Reorganization and the Investment Transaction on its FY13 Tax Return.

(9) CSC disclosed the IT-Consulting Reorganization and the Investment Transaction on its FY13 Tax Return by filing a Form 8886, Reportable Transaction Disclosure Statement (the "Form 8886").

(10) On the Form 8886, CSC identified the transaction as a "Sec. 165 Capital Loss."

(11) CSC adequately disclosed the relevant facts affecting its treatment of the IT-Consulting Reorganization and the Investment Transaction on its FY13 Tax Return within the meaning of section 6662(d)(2)(B)(ii)(I).

(12) There was an objective reasonable basis for CSC's treatment of the IT-Consulting Reorganization and the Investment Transaction on its FY13 Tax Return.

(13) With respect to the section 6662(b)(1) penalty for negligence or disregard of rules or regulations, CSC was not negligent in its treatment of the IT-Consulting Reorganization and the Investment Transaction on its FY13 Tax Return.

(14) With respect to the section 6662(b)(1) penalty for negligence or disregard of rules or regulations, CSC did not disregard any rules or regulations in its treatment of the IT-Consulting Reorganization and the Investment Transaction on its FY13 Tax Return.

(15) Accordingly, the Commissioner erroneously determined an addition to tax or penalty for FY13 in the amount of $45,584,000 relating to the Commissioner's disallowance of the capital loss on the sale of the Participating Class A Stock to BTMU.

f. Computational Errors.

(1) The allegations set forth in paragraphs 5.a.(1) through 5.e.(15), supra, are incorporated by reference in this paragraph 5.f.

(2) The Commissioner made various computational errors in the calculations reflected in the Notice of Deficiency, and therefore determined an erroneous deficiency for FY13.

(3) The computational errors should be addressed pursuant to Tax Court Rule 155 after the substantive issues identified in paragraphs 4.a. through 4.e. are resolved.

WHEREFORE, Petitioner prays that this Court hear this proceeding and determine that the deficiency in tax determined by the Commissioner for FY13 is erroneous, that there is no deficiency in Petitioner's income tax for FY13, that there is an overpayment of Petitioner's income tax for FY13 by the amount of not less than $2,530,000, or by such other amount as the Court may determine, and that this Court grant such other further relief to Petitioner as this Court may deem just and proper.

Respectfully submitted,

A. DUANE WEBBER
T.C. Bar No. WA0351

JOSEPH B. JUDKINS
T.C. Bar No. JJ0454

MEERAH KIM
T.C. Bar No. KM0625

COURTLAND ROBERTS
T.C. Bar No. RC0459

BAKER & MCKENZIE LLP
815 Connecticut Ave., N.W.
Washington, D.C. 20006
(202) 452-7000
email: duane.webber@bakermckenzie.com

Attorneys for Petitioner

Dated: April 22, 2021

FOOTNOTES

1In April 2017, CSC combined with the Enterprise Services business of Hewlett Packard Enterprise Company and began to go to market as DXC Technology Company ("DXC"). CSC continued to exist as a wholly owned subsidiary of DXC and remains in existence as of the date of this Petition.

2Unless otherwise indicated, all references to "section" or "Code" are references to the Internal Revenue Code of 1986, as amended and in effect for the tax year at issue. All references to the "Treasury Regulations" are references to the Treasury Regulations promulgated under the Code that were in effect during the tax year at issue.

3For purposes of the Petition, the share price of CSC's publicly traded common stock is based on the price at the closing of the trading day obtained from Standard & Poor's Capital IQ database at http://www.spcapitaliq.com.

4Available at https://www.washingtonpost.com/business/capitalbusiness/with-sec-investigation-underway-csc-reports-preliminary-earnings/2011/05/31/AGusXfJH_story.html.

6Houlihan assumed that the fair market value of ISI's international subsidiaries was equal to the $1.6-million book value of those subsidiaries. Given the relative size of these entities, Houlihan did not separately value them.

END FOOTNOTES

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