Ingersoll-Rand Cleared for U.S. Contracts Despite Inversion

In August, President Barack Obama pledged to use the powers of his office to discourage the corporate tax-avoidance technique known as inversion, in which U.S. companies claim foreign tax addresses.

Four months earlier, according to a previously unreported legal document, his Department of Homeland Security did just the opposite. It decided that it was fine to do business with Ingersoll-Rand Plc even though a 2002 law bars the department from awarding contracts to inverted companies.

Ingersoll-Rand, a major manufacturer, helped inspire the ban by shifting its legal address from New Jersey to Bermuda in 2001. It took an Irish address in 2009. The offshore domiciles cut its effective tax rate by about half.

“I’m flabbergasted,” said Rebecca Wilkins, a senior counsel at Citizens for Tax Justice, a Washington-based group that supports limits on inversions. “I don’t know how they could possibly pretend not to be an inverted company.”

In an April letter to an Ingersoll-Rand (IR) executive, Joseph B. Maher, a Homeland Security lawyer, wrote that after reviewing a legal brief submitted by Ingersoll-Rand, he does “not have reason to disagree” with the company’s assertion that it’s eligible for contracts. Marsha Catron, a department spokeswoman, declined to elaborate.

Misty Zelent, an Ingersoll-Rand spokeswoman, also declined to discuss the company’s legal argument, citing “competitive reasons.” In September, Bloomberg News filed a public-records request for a copy of the brief, which is more than 25 pages long. Homeland Security hasn’t yet replied. The White House declined to comment on the Ingersoll-Rand decision.

High-Profile Inversions

Maher’s letter responded to a request for clarification from Ingersoll-Rand about whether or not it could bid for department projects. For several years, Ingersoll-Rand had avoided contracts subject to the ban, according to Zelent, although it continued to do some work for federal agencies based on old, grandfathered contracts. The company’s heating and cooling equipment is used in many government offices and military bases.

Maher wrote to Ingersoll-Rand just before a series of high-profile inversion proposals, including ones from Pfizer Inc. and Medtronic Inc., prompted concern in Washington about erosion of the U.S. tax base. In all, 46 companies have inverted since 1982, including 15 in the past three years.

In August, while calling on Congress to tighten tax laws, Obama pledged to take what unilateral action he could to “at least discourage some of the folks who may be trying to take advantage of this loophole.” The next month, his Treasury Department imposed new tax rules to make the deals less attractive.

Forgone Tax Revenue

Companies like Ingersoll-Rand that have already inverted will probably avoid at least $2 billion in taxes next year, according to calculations based on data compiled by Bloomberg. Congressional scorekeepers estimate that future inversions may cost the federal government another $3 billion a year in forgone revenue over the next decade.

The first contracting ban for inverted companies applied only to Homeland Security and was imposed when the department was created in 2002. In 2007, Congress temporarily expanded the prohibition across the federal government, and similar one-year rules were applied in five of the following seven years.

The measure defines inverted companies so narrowly that many expatriated companies are exempt; for instance, companies like Tyco International Plc that got their offshore addresses through a foreign merger aren’t affected. A Bloomberg News investigation in July found that more than a dozen corporate expatriates collect more than $1 billion a year from government work.

‘Like Swiss Cheese’

“The bans have so many loopholes, they’re like Swiss cheese,” said Charles Tiefer, a professor at University of Baltimore School of Law who has testified before Congress on the matter. “Companies unwilling to pay their fair share of U.S. taxes can nevertheless walk out of the Treasury with sacks of money in government contracting.”

It’s unclear, though, which exception Ingersoll-Rand might qualify for. According to Zelent, the spokeswoman, company executives weren’t initially sure if the contract ban applied to them, so for several years they avoided bidding on any work that was subject to it. Ingersoll-Rand also warned shareholders in securities filings that it might be affected by the prohibition, and sometimes told customers that it couldn’t accept federal funds during the years to which the ban applied. In a March letter requesting the ruling from Homeland Security, the company called it “a recurring issue.”

Navy Work

Ingersoll-Rand was able to continue to do some business with the government, Zelent said, either by winning new work under the authority of contracts signed years or decades earlier, by signing contracts when the rule had temporarily lapsed, or by doing work that wasn’t funded by the normal budget process.

In fact, the manufacturer even touts its work for the Army and Navy in sales brochures. It’s won assignments in recent years worth hundreds of millions of dollars, to maintain equipment at supermarkets on military bases, and to upgrade heating and cooling systems in government buildings.

At some point in the recent past, Ingersoll-Rand conducted an “exhaustive legal review” and decided that it wasn’t subject to the ban at all, Zelent said in an e-mail. She wouldn’t say when the review was conducted except to say that it was after a government rulemaking effort that concluded in May 2011.

Cleared to Bid

In July 2013, Ingersoll-Rand took steps to clarify the issue once and for all. It bid on a $23,500 project to install heating and cooling equipment at a U.S. Coast Guard command center in Detroit.

The work was eventually awarded to a different vendor, but in March the company asked to be told if the inversion issue had disqualified it. Maher, in his April letter, assured Ingersoll-Rand that the company is not subject to the ban and could bid on contracts.

The decision probably allows Ingersoll-Rand to seek new contracts across the federal bureaucracy, said Tiefer, the law professor. “When another agency wants a contractor, they will be glad to accept Homeland Security’s grant of immunity.”

Catron, the department spokeswoman, said Homeland Security “adheres to all relevant contracting statutes and regulations.” The department also said in a statement that the April letter doesn’t represent a change in policy and that it had awarded Ingersoll-Rand contracts prior to the letter.

The statement is at odds with Zelent’s account of Ingersoll-Rand’s contracting work. Catron declined to provide specific examples of such contracts.

“The letter from the Department of Homeland Security is evidence of the care and transparency with which Ingersoll-Rand has addressed this issue with its federal customers,” Zelent said.

Executive Authority

In August, six Congressional Democrats urged Obama to use his executive authority to deny contracts to a broader group of corporate expatriates than are affected by the current law. The White House declined to comment on whether it’s considering such a move.

Ingersoll-Rand traces its roots in the U.S. to 1871. It makes Thermo King refrigerated trucks, Trane air conditioners, and Club Car golf carts and reported $12 billion in revenue last year, a majority in the U.S. Despite the current legal address in tax-friendly Ireland, top executives work in a suburb of Charlotte, North Carolina.

The decisions by Ingersoll-Rand and a handful of other companies to invert to tax havens in the early 2000s sparked bipartisan outrage in Congress. Senator Charles Grassley, the Iowa Republican, was among those who cited Ingersoll-Rand by name as he called for an end to contracts for such companies.

“These corporations are skirting their own taxes, yet profiting from other people’s taxes,” Grassley said in a statement in 2002. “That’s wrong.”