Tax Man Cometh to Synopsis
Synopsis, a developer of chip set design software, provided details on its recent dust-up with the IRS in its third-quarter 2008 filing on Tuesday. During the third-quarter ended July 31, the IRS completed a field examination of Syopsys' federal income tax returns for the years 2002 through 2004, and now wants to adjust Syopsys' tax return by $236.2 million.
That proposed figure may seem like a bit of a bargain since the IRS had asked for $476.8 million three years ago when it audited Synopsys' returns for the years 2000 and 2001. At issue was transfer pricing transactions between Synopsys and a foreign subsidiary. In that round, Synopsis attorneys pushed back with an appeal, and the assessment was eliminated. The company ended up simply adjusting balance sheet items for tax deferred assets and liabilities, leading to a net tax benefit of $17.3 million that was recorded in the July 2008 quarter.
Now the IRS is out of joint over tax deductions Synopsys claimed for payments related to litigation between Avant! Corp. and Cadence Design Systems. Avant!, a developer of electronic design automation systems, was acquired in June 2002. Additionally, Synopsys apparently did not get its numbers straight for its foreign operations, for the IRS is again proposing adjustments to the company's transfer pricing adjustments. Of course, Synopsys is appealing the July 2008 IRS report and has already filed a protest.
As with the 2000/2001 round, the most recent IRS findings of tax deficiency largely impact non-cash tax loss and credits. That makes it easier to downplay the significance of the matter. Indeed, the third quarter 2008 income statement simply shows a $4.8 million net tax benefit for the quarter. However, the start of a second audit in just two years leads me to ask whether Synopsys needs new tax advisors or needs to shape up its own accounting practices. It certainly calls into question the wisdom of congratulatory headlines -- doubling of net income year-on-year for 3Q:08 due to tax benefits -- on artificial achievements at the bottom line.
Reporting by contributor Debra Fiakas, who does not hold a financial interest in any stocks mentioned in this article. The 10-Q Detective has a Full Disclosure Policy.