IRS audit clears FedEx Ground again

The government still could audit contractor-related issues for 2007 and 2008 tax years, but FedEx officials said Tuesday they're confident the company will prevail. The IRS reached the same conclusion Oct. 30 on the 2002 tax year.

The finding represented a major, albeit expected, victory for , which has fought to preserve FedEx Ground's contractor-based driver model on two fronts: IRS investigations of tax issues and state and federal lawsuits that challenge classification of drivers as contractors, rather than employees.

The IRS action confirmed what FedEx officials have said all along, and what some analysts had asserted, that the challenge to FedEx Ground on federal tax issues was without merit.

"They expected it, but still it's good to have it over with," said analyst Donald Broughton of Avondale Partners LLC.

Tax and court challenges have been frequently cited as risk factors potentially affecting the company's performance and a source of uncertainty for investors. The lawsuits, seeking reclassification of drivers from contractors to employees, include a pending class-action case in federal court in Indiana.

FedEx spokesman Maury Lane said, "FedEx Ground's independent contractor model has been tremendously successful for our customers, the hardworking independent contractors and FedEx Ground for more than 20 years. It is clear that the IRS decision today further validates this business model, and we look forward to continue growing the model for many decades to come."

From the IRS' point of view, the latest findings stood in stark contrast to a $319 million assessment that the government proposed in late 2007 for back taxes and penalties for 2002 alone. The disclosure prompted some analysts to speculate that similar results for 2004-2006 audits could push FedEx's exposure on the contractor issue to $1 billion to $2.5 billion.

Last October, however, the IRS retreated, withdrawing the tentative assessment for 2002.

Broughton said it has been clear since last fall that FedEx Ground's contractor arrangements would withstand IRS scrutiny.

"I have been recommending the stock and didn't expect this to be an issue all along," Broughton said. "It doesn't really change my outlook. I expected it to be a nonissue all along."

Helane Becker, analyst with Jesup & Lamont Securities, said the IRS news was perhaps one factor that sent FedEx stock soaring in recent trading.

"It is a very big positive, and probably a major reason the shares have been up more than 5 percent in the past day," she said. "It does remove a major overhang on the stock, and given that other companies have recently indicated that overall air freight volumes are picking up in the Asia Pacific region, we think this is a real positive."

FedEx stock was up 1.12 percent Tuesday, closing at $82.13, after jumping 5.32 percent Monday.

-- Wayne Risher: 529-2874

FedEx Ground and IRS

Latest ruling: IRS audit team clears FedEx Ground of additional tax liability related to independent contractors for 2004, 2005 and 2006 tax years.

Earlier ruling: Audit of 2002 tax year reached the same conclusion Oct. 30.

Reaction: FedEx officials say decisions reaffirm business model based on independent contractors and pickup and delivery force.

To see more of The Commercial Appeal or to subscribe to the newspaper, go to
http://www.commercialappeal.com. Copyright (c) 2009, The Commercial Appeal,
Memphis, Tenn. Distributed by McClatchy-Tribune Information Services. For
reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or
847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group
Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

For full details on Fedex Corp (FDX) FDX. Fedex Corp (FDX) has Short Term PowerRatings at TradingMarkets. Details on Fedex Corp (FDX) Short Term PowerRatings is available at This Link.