updated 8/11/2004 4:47:01 PM ET 2004-08-11T20:47:01

Motorola Inc. said Wednesday that the Internal Revenue Service claims the cell-phone maker may owe $500 million in additional tax liability for the years 1996 through 2000.

The IRS completed a field examination of the company's 1996 through 2000 tax returns in June, and notified Motorola of certain proposed adjustments, primarily related to transfer pricing, according to Motorola's second-quarter report filed with the Securities and Exchange Commission.

Transfer pricing refers to prices at which individual units within a company sell goods or services to one another.

Motorola, based in Schaumburg, Ill., said it disagrees with these proposed adjustments and intends to dispute the matter through applicable IRS and judicial procedures.

The transfer-pricing adjustments requested by the IRS would alter the way the company recorded profits and taxes on the sale of products worldwide, said company spokeswoman Jennifer Weyrauch.

"We pay taxes in different parts of the world," Weyrauch said. "The IRS believes we didn't allocate enough profits back to the U.S."

Weyrauch said Motorola doesn't believe resolving the tax issue with the IRS will have a material adverse effect on the company.

However, if the IRS were to ultimately prevail on all matters relating to transfer pricing for the period of the examination, Motorola said it could result in additional income for the years 1996 through 2000 of roughly $1.4 billion, resulting in additional income-tax liability for the company of $500 million.

Motorola said the IRS may make similar claims for years subsequent to 2000 in future audits. An unfavorable resolution could have a material adverse effect on the company's financial position, liquidity or operating results in the period in which the matter is resolved, Motorola said.

Also in the filing, Motorola said the Indian Supreme Court stayed in July a Bombay High Court order that restrained Motorola from removing any of its assets in India until $120 million has been deposited with the High Court, pending trial of a suit filed by Iridium India Telecom Ltd.

Iridium India filed a civil suit in September 2002 in the Bombay High Court against Motorola and Iridium LLC, a satellite-based telephone service financially backed by Motorola prior to its 1999 bankruptcy.

Iridium LLC's $5 billion in assets were eventually purchased by an unaffiliated investment group named Iridium Satellite LLC for $25 million.

Iridium India had purchased rights from Iridium LLC for the development of the Iridium system in South Asia.

The 2002 suit alleged fraud, intentional misrepresentation and negligent misrepresentation by Motorola and Iridium in inducing Iridium India to purchase equipment from Motorola, acquire Iridium stock and invest in developing a market for Iridium services in India.

Iridium India claimed in excess of $200 million in damages and interest. In April 2004, the appellate division of the Bombay High Court entered the order restraining Motorola from removing, transferring or encumbering its assets in India until the $120 million deposit had been made with the court.

Toward that end, according to Motorola, the order directed four Motorola customers in India to deposit with the court amounts owed to Motorola allegedly totaling $90 million, rather than paying them to Motorola. Motorola said it petitioned the Indian Supreme Court for discretionary review and a stay.

At the hearing in July, the Supreme Court stayed the Bombay High Court order pending further proceedings, subject to Motorola's bringing the total amount deposited with the High Court and a similar, previously established account to $44 million by no later than Aug. 23.

A further hearing is scheduled in October, Motorola said.

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