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Unique profit center.

(This article is reprinted with permission from CSX Corporation's employee magazine, Connections, Number 3, 1992. L. Wayne Farrell of the Virginia Chapter served as TEI's 1984-1985 President.)

Nothing is certain but death and taxes. While there may be considerable truth to that adage Wayne Farrell would scoff at such a despairing approach to tax planning.

As CSX vice president-taxes, Farrell is responsible for all aspects of the tax affairs of CSX and its operating units. His ultimate responsibility is to make sure CSX pays as little in taxes as necessary, while complying with all local, state, federal and foreign laws.

While it's inevitable that a profitable company like CSX will pay plenty in taxes, how, when and where those taxes are paid can have a big impact on the company's overall performance. In the case of CSX, aggressive tax planning can save the company millions of dollars. Since tax savings flow directly to the bottom line, the tax department's staff can make a significant impact on the corporation's overall profitability.

In addition to tax planning, the department handles all CSX tax compliance, audits, appeals and litigation efforts. The staff also proposes and drafts tax legislation and helps advance CSX's position on tax proposals.

Viewed as Profit Center

The tax department boosts CSX's performance by helping the operating units improve their profitability through effective tax planning. "We truly look at our department as a profit center -- in terms of bringing money to the bottom line," Farrell said. "We work very closely with the units to help them improve their operating ratio and net income."

Maintaining a close working relationship with the operating units is critical to the success of the tax department's mission, said David Bowling, senior tax counsel-special projects. "The tax department relies on information from all levels of the company. The more we know about what's going on throughout CSX and the sooner we know it, the better we are able to do effective tax planning and ultimately minimize the tax impact to the company."

One important part of the department's tax-planning efforts involves working with CSX's state relations and federal affairs groups to support or fight legislation that could have a significant impact on the company, noted Jim Peter, senior tax counsel-corporate.

Leading the department's state legislative efforts is Courtney George Hyers, associate tax counsel and director-state tax legislation and litigation. She drafts proposed legislation, testifies before legislative committees, writes letters and lobbies on behalf of specific proposals.

A few years ago Hyers began compiling a notebook of possible tax legislation in the states in which CSX operates. "Now, it's four inches thick -- and growing," she said.

With many states hard-pressed to find new sources of revenue, much of CSX's tax legislative effort is aimed at defeating proposals for higher taxes. "But we also work with state legislatures to promote proposals favorable to CSX," Hyers said.

Small Richmond Staff

Only eight tax employees work at corporate headquarters in Richmond. The rest of the 70-member staff is in the respective headquarters city of the main transportation units -- 49 in Jacksonville, Fla.; 11 in Edison, N.J.; and two at Jeffersonville, Ind. Tax employees based at a business unit location work as members of that unit's team, offering advice on the tax aspects of all kinds of business decisions.

"Practically every significant business decision has a tax impact," Farrell said. "That's why it's so important that our group be involved in all aspects of the company's business."

Though many tax employees work almost exclusively on a specific business unit's tax affairs, all CSX tax functions are consolidated, unlike many companies that maintain separate tax departments for different business units.

Before Farrell took charge of the tax department in early 1987, CSX had separate tax staffs at each major business unit. By consolidating the staffs, the tax department was able to cut its overhead by a third.

More importantly, a consolidated department works more efficiently than do several independent staffs because it draws on the resources of a larger, cohesive team, allows a greater degree of individual specialization and avoids duplication of effort at each business unit, Farrell said.

International Tax Issues

For example, international tax issues for all CSX units are handled by the tax office located in Edison.

Since Sea-Land does business in some 70 countries, the tax people in Edison must be familiar with the laws, business procedures, language and culture in those countries, said Charles Gibbons, senior tax counsel and managing tax director for the Edison office. "It makes good sense for those same people to handle the international tax aspects of CSX's other business units."

The tax department's efforts to achieve fair and equitable tax treatment in foreign countries is complicated by the fact that each country has different tax structures and methods for accounting for revenue and expenses.

"Each country wants to get a piece of the pie, but they all define the pie differently," Gibbons said. "So it's our job to make sure that no one ends up with more than their fair slice."

Property, State Taxes

Gibbons "pie" analogy applies equally well to the work performed by the property tax and state tax groups.

The state tax group, led by Jim Hanford, senior director-state income and sales taxes, works closely with the property tax group, under Jack Borntraeger, senior director-property taxes, to make sure CSX pays only its fair share of state and local taxes. Last year, CSX and its business units paid $65 million in property taxes alone, $53 million of which was paid by CSXT. Various state income, sales and use taxes amounted to an additional $80 million.

CSXT alone operates in 780 counties in 20 states in the East, Midwest and South, each of which has taxing authority. The state and property tax groups work to keep state and local tax assessments reasonable by contesting those that appear out of line.

"If we didn't have a tax department and just paid whatever tax bills came in, the assessments would just keep going up and up," Borntraeger said. "By contesting those that appear unreasonable, we put states on notice that we will challenge unfair assessments.

"CSX wants to pay its fair share of taxes," Borntraeger said. "But |fair' has to be defined. We want to minimize our share of the tax burden and not pay a dollar more than we have to."

Federal Tax Return

Minimizing CSX's federal tax bill is another of the tax department's major responsibilities -- and probably the most difficult.

Anyone who's filed a federal tax return has experienced at least a small amount of the complexity of the U.S. Internal Revenue Code. Imagine the headaches involved in computing the tax obligations of a corporation the size of CSX, which measures its annual federal tax liability in the hundreds of millions of dollars.

The tax department spends almost a year preparing CSX's federal return, working closely with the accounting department at each business unit, as well as the payroll, engineering, purchasing and law departments. CSX's most recent federal return, for 1991, weighed in at 1,438 pages and covered 144 separate legal entities.

The IRS routinely audits the returns of major corporations like CSX. More than 50 IRS employees participate in the audit of CSX's returns. That compares to the 20 CSX tax employees who prepare and consolidate the federal return, respond to IRS inquiries and handle all payroll tax work.

Tax Planning Efforts

In addition to preparing CSX's tax return, the federal tax compliance staff devotes considerable effort to providing tax advice to the units.

"Unlike a lot of companies that view taxes as a necessary evil, CSX has the foresight to utilize tax planning," said Dorothy Winston, senior director-federal tax compliance. "Knowing that the taxation of a transaction can be a significant factor, we take the necessary steps ahead of time to minimize those costs."

The complexity of CSX makes the tax department's work that much more interesting, said David Freedman, assistant vice president and managing director of federal tax compliance. "I love the complexity of CSX. There are so many things going on all the time, I don't ever get bored."

The impact individual tax employees have on the company's bottom line makes their work very satisfying, Freedman said. "It's easy to see the results of your efforts," he said.

A $5 Million Success Story

A clear example of the department's financial contribution to CSX involved the filing of the 1990 tax return.

That year, CSX had a loss for federal tax purposes and was expecting a large tax refund. Normally, CSX would have filed its federal return close to the Sept. 15 deadline, but the tax department realized CSX was losing money every day its refund was not earning interest. By filing early and getting the refund more quickly, the tax department could save CSX millions of dollars.

The tax compliance group asked the accounting departments at all the business units to provide their data by January instead of the customary April deadline. "It took a lot of effort, but everybody came through," Winston said.

Once the tax compliance group had assembled all the information it needed to consolidate the CSX federal return, staff members worked seven days a week for eight weeks straight to file the return in mid-March -- more than five months ahead of schedule. As a result, CSX earned $5 million in interest it would not have made if the return had been filed at the Sept. 15 deadline.

"That's just one example of how the tax department, working with the business units, enhances the company's overall performance," Freedman said. "It's really exciting to be a part of something like that."

Effectiveness Well-Established

The effectiveness of the CSX Tax Department is well-established, inside and outside the company.

Within CSX, business units recognize the positive impact the tax department brings to their operating ratio and net income by reducing the tax impact of their operations. Externally, the department has earned a reputation unsurpassed among its peers in either the rail or shipping business and among the best in any industry.

"There is no doubt that the work of the CSX Tax Department is and will continue to be extremely important to CSX, both strategically and economically," said John Snow, CSX chairman and chief executive officer. "The department's outstanding reputation is well-deserved."

Farrell credits the success of the tax department to the caliber of its employees. "Our staff consists of some extremely bright individuals with the right blend of business savvy and technical expertise," he said. "We also have the advantage of solid support from senior management -- both at the unit and corporate levels. We have immediate access to senior management -- and they listen to us."

Part of the reason managers at the various CSX business units are receptive to tax advice is that the tax department understands the units' goals and priorities and speaks the same language.

"We view ourselves as business people, not a bunch of technocrats," Farrell said. "Our goal is to help the business units do the transactions they want to do -- but to do it in the most tax-effective manner. We may tinker with a plan or tweak it here and there, but we always strive to preserve the unit's intent."

The tax department seeks to tear down obstacles, not erect them, Farrell noted. "I ask our people never to tell someone there's a tax problem in doing something a particular way without offering a possible solution."
COPYRIGHT 1992 Tax Executives Institute, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:from 'Connections,' number 3, 1992; CSX Tax Department
Publication:Tax Executive
Date:Nov 1, 1992
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