Tax Day for Motorola

While Tax Day is officially April 15 for most of us, yesterday was the official day of reckoning for Motorola (NYSE: MOT  ) . The No. 2 maker of mobile phones revealed in a regulatory filing that it might owe $500 million in back taxes. Investors have hammered the stock on the news, sending shares lower by more than 5% yesterday and as much as 2% more this morning.

It's easy to understand why, of course. The Internal Revenue Service thinks Motorola should have reported $1.4 billion more in income from 1996 to 2000. That sounds downright insidious, as though an earnings restatement were around the corner. But is the news really that bad? Unlikely.

First, the IRS hasn't accused Motorola of wrongdoing. Instead, the Feds conducted what was a routine examination of the company's old tax returns in June, a common practice. It was during that process that the IRS concluded Motorola went a little light in paying its obligations.

But the IRS's conclusions may be in error, or so says Motorola. According to a BusinessWeek report, the issue at hand is how the firm accounted for transfer pricing. For tax purposes, transfer pricing refers to profits reported by regional tax subsidiaries. Multinational corporations usually have a tax entity for every country in which they do business. That's sometimes more than a dozen for big firms. Motorola, however, sells products in 67 countries. The IRS says that Motorola assigned too much of its profits overseas from 1996 to 2000. The company disagrees and is appealing the decision.

Whether or not Motorola will owe $500 million is anything but clear, and it doesn't matter, really. The company has more than $1.8 billion in net cash and generates roughly $2 billion in free cash flow annually, more than enough to pay its dividend and the IRS.

The more important question for investors is whether Motorola under Ed Zander, former chief lieutenant to Scott McNealy at Sun Microsystems (Nasdaq: SUNW  ) , can continue to present a meaningful challenge to strugglingNokia (NYSE: NOK  ) and surgingEricsson (Nasdaq: ERICY  ) . A sizable tax bill, real or imagined, won't be the deciding factor.

What do you think of Motorola's prospects? Can it take advantage of downtrodden Nokia? How big of a threat is Ericsson? Will its deal with Apple to put music in your cell phone pay off? Debate all this and more at the Motorola discussion board. Only at Fool.com.

Fool contributor Tim Beyers is rooting for Motorola, but he has a Samsung cell phone. He owns no stake in any of the companies mentioned, and you can view his Fool profile here.


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