updated 10/28/2005 1:20:45 PM ET 2005-10-28T17:20:45

A federal judge on Friday ordered the Internal Revenue Service to pay billionaire Warren Buffett’s investment company more than $23 million in taxes and interest for disallowing certain deductions.

The ruling by U.S. District Judge Lyle Strom ended some three years of legal wrangling between Berkshire Hathaway Inc. and the IRS.

The case stemmed from two lawsuits that alleged the IRS made an “erroneous, wrongful and illegal” interpretation of the U.S. Tax Code when it denied the deductions.

The original lawsuit, filed in 2002, said the IRS wrongly assessed more than $16 million in taxes and interest against Berkshire in 1989 and 1990. A second lawsuit said the IRS wrongly assessed it nearly $7 million in 1991.

The two lawsuits were combined for trial.

The IRS first disallowed the deductions after tracing $750 million in borrowed money to Berkshire’s purchase of stocks in several companies, including Coca-Cola Co., Time-Warner Inc. and Wells Fargo & Co., according to court records.

The IRS based the denial on a tax code passed by Congress that reduced deductions if borrowed money is directly attributable to investments in stocks that pay dividends.

Congress passed the code because of concern that some corporations were deliberately borrowing money for the purpose of buying dividend-paying stock, thereby converting pretax losses into after-tax gains.

Berkshire, based in Omaha, borrowed the money several times and put it into a principal bank account, according to court records.

But Berkshire said the money in that account came from several sources, was interchangeable and was used for thousands of transactions.

The company said its goal was not to buy specific stocks but to maintain and enhance its financial strength.

The lawsuits said Berkshire keeps large amounts of cash available to allow Buffett to make investments or acquisitions.

Berkshire argued that is not enough to meet the standard that the borrowed money was directly attributable to the stock purchase.

In his ruling Strom said the “current statutory and regulatory regime makes it virtually impossible for the (IRS) to trace debt proceeds and thus assess tax deficiencies under” the code “against companies like Berkshire who engage in numerous investment transactions.

“However, any decision to loosen the ’direct’ connection required between debt-proceeds and the purchase of dividend-paying stocks must be made by Congress or the service, not the courts,” Strom said.

Berkshire officials did not immediately return a call seeking comment.

Gerald Leedom, one of the lawyers for the IRS, did not immediately return a message seeking comment.

In the documents filed in the case, Berkshire lawyer Kelly Klaus quoted Buffett from Berkshire’s 1998 annual report.

“Writing checks to the IRS that include strings of zeros does not bother ... me,” he said. “Berkshire as a corporation, and we as individuals have prospered in America as we would have in no other country. Indeed, if we lived in some other part of the world and completely escaped taxes, I’m sure we would be worse off financially and in many other ways as well. Overall, we feel extraordinarily lucky to have been dealt a hand in life that enables us to write large checks to the government.”

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