The U.S. Internal Revenue Service will prevent companies fromentering into transactions that allow them to tap their offshorecash stockpiles without paying taxes, the government said.

“The IRS and the Treasury Department believe that thesetransactions raise significant policy concerns,” the agencies saidin a notice Friday.

The government plans to write regulations to enforce the change,and those rules will take effect Friday.

“This is what they do when they want to close down a transactionthey find objectionable and they don't know exactly how they wantto do it,” said Robert Willens, a corporate tax consultant in NewYork.

Companies owe U.S. taxes on income they earn around the worldafter receiving credits for foreign taxes paid. Under U.S. tax law,they must pay those taxes only when they repatriate the income.

That system has led companies including Google Inc., MicrosoftCorp. and Pfizer Inc. to keep foreign profits outside the U.S. Datacompiled by Bloomberg in March showed that 70 companies have $1.2trillion in untaxed profits around the world, up 18.4 percent froma year earlier.

Those companies and others lobbied Congress unsuccessfully in2011 for a temporary tax holiday on repatriated profits.Republicans including presidential candidate Mitt Romney favorchanging the tax system permanently to allow companies to bringmost overseas profits into this country without facing the residualU.S. tax.

Two Transactions

The IRS notice describes two types of transactions it is tryingto prevent and says the agency is “aware” that taxpayers areengaging in them. One involves selling a patent from a U.S. companyto a foreign subsidiary without triggering an immediate U.S.tax.

In the other type of transaction, a company uses its offshoremoney to purchase a U.S. company and quickly reorganizes to movethe purchased company outside the U.S.

Willens said the second transaction is likely the way that NewBrunswick, New Jersey-based Johnson & Johnson used one of itsforeign subsidiaries to purchase Synthes Inc., based in WestChester, Pennsylvania.

In a June 12 filing with the Securities and Exchange Commission,Johnson & Johnson said it believed the Synthes transactionswould be tax-efficient.

“It is possible that the Internal Revenue Service could assertone or more contrary positions to challenge the transactions from atax perspective,” the company wrote. “If challenged, an amount upto the total purchase price for the Synthes shares could be treatedas subject to applicable U.S. tax at approximately the statutoryrate to Johnson & Johnson, plus interest.”

The IRS announcement, Willens said, makes it impossible forother companies to follow.

“The hope was that this would be a viable strategy for a year ortwo,” he said.

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