A U.S. Tax Court judge closely questioned Thursday an expert for Eaton who said potential investors would not have counted on financial support from the company's parent in the event it couldn't meet its obligations after acquiring an Irish entity and inverting in 2012.

The expert, Keith Harman, said the parent company's implicit support had no appreciable impact on Eaton's situation when it sought financing for its acquisition. Judge Albert Lauber, however, was skeptical that potential investors would ignore the possibility of support from a parent company, citing guidelines from Standard & Poor's that contemplate an uplift to the supported company's credit rating in such cases.

The current trial concerns the interest and guarantee fees that Eaton Inc. in the U.S. paid to its newly formed Irish parent, Eaton PLC, after it acquired global electrical products manufacturer Cooper Industries and inverted. The Internal Revenue Service argues the interest Eaton Inc. paid on loans from Eaton PLC was too high and the fees it paid to the parent for guarantees on third-party debt were unnecessary given that it already had the parent's implicit financial support.

Judge Lauber asked Harman, a managing director at Banc of America Securities between 2003 and 2021, about the conclusion of two other Eaton experts that no uplift in the U.S. company's credit rating was appropriate for its parent's implicit support.

"Did that conclusion strike you as strange?" the judge asked.

Harman said investors give no value to implicit support because doing so would put them at risk.

"When the bad thing happens — when the security is in a default situation or in a problematic situation — they have to depend on the parent companies doing the right thing," Harman said. "But parents do all sorts of things. Situations change; leadership changes."

In some cases, Harman added, a parent could simply walk away.

Judge Lauber asked Harman about published guidelines from S&P saying that it may be appropriate to give an uplift for parental support, even to the point of equalizing the credit rating of the supported company.

"Do you disagree that S&P takes that approach to credit?" he asked.

"I think they say that, yes," Harman responded.

"And so you think they don't believe that?" the judge asked.

The S&P statement, he added, is inconsistent with the notion that investors would place no value on implicit support.

"How can it be the case that S&P would go so far as to equalize the credit rating of the implicitly supported [entity] if investors would think it's worthless?" Judge Lauber asked. "How can investors be so completely out of sync with the credit rating agencies?"

The trial over the financing of the Cooper acquisition is expected to run through Dec. 12. The interest rates and guarantee fees represent just one part of Eaton's case against the government, in which it contests total deficiencies of more than $600 million and $76 million in penalties for 2012 and 2013. No penalties are at issue regarding the interest rates and guarantee fees, and the deficiency amount related to those items is roughly $291 million.

Eaton is represented by Rajiv Madan, Nathan Wacker, Royce L. Tidwell, Melinda H. Gammello, Juliana D. Hunter, Elizabeth J. Smith, Ryan K. Fackler, Dominic M. Reilly, Paige Levenberg, Tanushree Bansal and Rachel D. Harper of Skadden Arps Slate Meagher & Flom LLP.

The IRS is represented by Timothy L. Smith, Jeannine Zabrenski, Emily Snider, Elizabeth Turnbull, Steven Balahtsis, Shannon Bambery, Mark Frazer, Trevor Maddison, John Altman, Blake Corry, John Guarnieri and Ronald S. Collins Jr.

The cases are Eaton Corp. & Subsidiaries v. Commissioner of Internal Revenue, docket numbers 2607-23 and 2608-23, in the U.S. Tax Court.