Oil Shipper and Its Former CFO Fined for Understating Tax

Overseas Shipholding Group and its ex-CFO allegedly failed to recognize $512 million in tax liabilities over a 12-year period.
Matthew HellerJanuary 24, 2017
Oil Shipper and Its Former CFO Fined for Understating Tax

Overseas Shipholding Group has agreed to pay $5 million to settle charges that the oil shipper and its former CFO failed to account for more than $500 million in tax liabilities arising from a foreign subsidiary’s guarantees of credit agreements.

According to the U.S. Securities and Exchange Commission, OSG’s credit agreements had tax consequences under Internal Revenue Code Section 956 but OSG failed to report the liabilities in its financial statements from 2000 to the second quarter of 2012.

“Had OSG recorded the [liabilities] in that period, its net loss would have increased by approximately 265%, from $193 million to $705 million,” the SEC noted in an administrative order.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Itkin, who served as OSG’s finance chief from June 1995 to April 2013, allegedly ignored “significant red flags” indicating tax consequences from the credit agreements and misled OSG’s auditor. He agreed to pay a $75,000 penalty.

“Where public companies derive economic benefits from their offshore earnings, it is critical that those responsible for the company’s accounting and financial reporting understand the federal income tax consequences triggered from these benefits,” Gerald Hodgkins, associate director of the SEC’s Enforcement Division, said in a news release.

Section 956 provides that when a “controlled foreign corporation” guarantees the debt of its U.S. parent company, the amounts borrowed by the parent are, in effect, “deemed dividends” and taxable to the parent.

In OSG’s case, the SEC said, its credit agreements made its Overseas International Group (OIN) subsidiary “jointly and severally” liable for OSG’s debt, triggering a tax liability.

But over the 12-year period, OSG allegedly failed to report any Section 956 liabilities in its financial statements, resulting in an understatement of about $512 million in tax liabilities, or 17% of its total liabilities.

In a May 2011 memo, the firm’s outside counsel noted that if the credit agreements made OIN a co-borrower, it “would create a significant risk that a substantial portion of OIN’s deferred earnings would be taxable to OSG.” But the SEC said Itkin did not disclose the memo to the board.

After the board finally became aware of the accounting issue in September 2012, OSG filed bankruptcy.

4 Powerful Communication Strategies for Your Next Board Meeting