Caterpillar Probe Adds New Chapter to Old Tax Case, Explained

Senate Democrats are demanding new details from the Department of Justice in a long-running political interference probe, in which they allege Trump-era officials interceded to protect Caterpillar from a whopping $2.3 billion tax-and-penalty bill.

Senate Finance Committee Chair Ron Wyden (D-Ore.) and member Sen. Sheldon Whitehouse (D-R.I.) say former Attorney General William Barr was among high-level Justice Department officials who engaged in “egregious political interference” to protect Barr’s former client, the industrial equipment manufacturer Caterpillar Inc.

A recent letter to current Attorney General Merrick Garland contends Barr’s alleged interference could have prevented the investigation into a massive tax scheme case—an example of a well-connected corporation avoiding prosecution, undermining trust in American institutions.

Barr could not be reached for comment and Caterpillar has defended its tax strategies as legal.

The requests are new, but allegations of criminal wrongdoing by Caterpillar date back more than a decade.

Here’s what you need to know:

What’s the tax strategy at issue?

Lawmakers allege Justice Department leadership took steps toward “squashing the investigation” of Caterpillar and permitting the company to pay a fraction of the unpaid taxes and penalties alleged by the IRS. The letter points to Barr, who was hired to help defend Caterpillar amid the IRS tax inquiry before then-President Donald Trump appointed him attorney general.

“Trump appointees undermined prosecutors by interfering with a legally-authorized witness interview and preventing the review of evidence collected through a court-authorized warrant,” the letter sent to Garland on March 14 said. “Evidence we have reviewed corroborates recent reporting on the matter.”

The letter also points to former DOJ tax unit head Richard Zuckerman, asserting he stymied investigators from getting critical evidence.

At issue is a strategy employed starting in 1999 by the global machinery giant to channel profits from its highly profitable US-based replacement parts business to a new Switzerland-based affiliate, according to a report by Senate investigators. While nothing changed operationally for the replacement parts business, the Swiss strategy shifted $8 billion in profits overseas and saved $2.4 billion in US taxes between 2000 and 2012.

The tax structure caught the attention of law enforcement after Daniel Schlicksup, a former senior tax executive at Caterpillar, accused his employer of tax fraud in a complaint filed in 2009 with the IRS Whistleblower Office.

Schlicksup provided information to the Senate Permanent Subcommittee on Investigations, led at the time by Sen. Carl Levin (D-Mich.), that culminated in a day-long hearing on Caterpillar’s conduct in 2014. Levin argued the subsidiary was developed only for tax avoidance, while a company vice president argued that it doesn’t invent artificial business structures. Caterpillar officials could not be reached for fresh comment.

Caterpillar facilities in Peoria, Ill., were raided by 60 federal agents armed with search warrants three years later. Soon after, the company announced it had retained Barr, then affiliated with Kirkland & Ellis LLP.

What do Wyden and Whitehouse want now?

The Senate Finance lawmakers opened a probe in 2021 on the role of the Justice Department and the IRS in the Caterpillar case, and last week they sought new details on whether Barr was involved in ordering agents to stop action on the case.

Earlier this month, a lengthy New York Times story cited a federal agent working on the probe suggesting there was such interference.

The senators are demanding Garland turn over details that IRS Criminal Investigation shared with Justice about the Caterpillar case, and are also asking for letters or memoranda describing the DOJ’s decision against bringing criminal charges against Caterpillar.

Wyden and Whitehouse asked whether there’s an ongoing probe by the DOJ inspector general, and if the department prevented agents or prosecutors from reviewing information obtained through a court-authorized warrant.

They also requested lists of meetings that Caterpillar and its outside counsel took with then-DOJ officials including Zuckerman and Rod Rosenstein.

Why is it important whether IRS made a criminal referral?

The thrust of the raid and Barr’s work on behalf of Caterpillar have been shrouded in mystery, but the company in January 2018 acknowledged in various filings with the Securities and Exchange Commission the IRS was seeking $2.3 billion in unpaid taxes and penalties linked to the Swiss strategy. The tax dispute was later settled for $740 million.

Wyden and Whitehouse’s letter zeroes in on whether DOJ received a referral to open a tax-crime probe into Caterpillar from IRS investigators, and questioned how the agency acted on it.

If the IRS did make the referral, it would indicate that agents believed there was enough evidence to open an investigation for potential criminal tax violations.

The lawmakers said it would be deeply concerning if the IRS was blocked from pursuing the matter because of political interference from Trump administration officials, and asked for any documentation related to whether there was a referral or if DOJ pushed back.

The Justice Department acknowledged receipt of the letter, but declined to comment.

What comes next?

Wyden and Whitehouse asked the Justice Department to comply with their request for additional information no later than April 15, said Senate Finance Committee spokesman Ryan Carey.

While no demands have been placed on Caterpillar, the company hasn’t commented on the allegations of political interference.

The conduct described in Wyden’s letter cries out for an independent examination, perhaps by the justice department’s Office of Inspector General, said Reuven S. Avi-Yonah, a professor of tax law at the University of Michigan School of Law who gave Senate testimony in 2014 about Caterpillar’s tax strategies.

“It’s the kind of thing Merrick Garland may be interested in. It makes them look bad, that’s for sure,” Avi-Yonah said in an interview.

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