How IBM saved $1.6 billion on taxes

International Business Machines Corp. (NYSE: IBM) came up with such a clever way to save $1.6 billion on its taxes that the IRS plans to shut down the loophole.

As the Wall Street Journal [subscription] explains, IBM used some creative but legal maneuvering in structuring a $12.5 billion stock repurchase. First, Big Blue formed a new subsidiary in the Netherlands. Then it spent $1 billion in cash and $11.5 billion in borrowed funds to buy 111.8 million shares. By doing so, IBM avoided having the money subject to higher U.S. corporate tax rates.

Experts are divided on whether the IRS will fight IBM but Fortune 500 companies run in packs. If one company came up with a clever way to reduce taxes, others will copy it.

As the presidential election kicks into high gear, candidates from both political parties are going to make noise about ending corporate welfare and making the tax system more equitable. Companies such as Tyco International Ltd. (NYSE: TYC) that are based overseas for tax purposes are going to get special scrutiny.

There's no escaping death and taxes even for members of the Fortune 500.