An accounting expert and a former Eaton Corp. official both advised the U.S. Tax Court on Thursday about the data used to establish the financial position of the U.S. company after its acquisition of Irish-based Cooper Industries in 2012.

Eaton hired Jonathan Rush of Ankura Consulting Group LLC to assess the creditworthiness of what it refers to as New Eaton U.S. — all entities that were intended to be majority-owned by Eaton in the United States after the Cooper acquisition and inversion. During the second week of trial in the Tax Court, Rush and Mary Kim Elkins, Eaton's current senior vice president for tax, spoke about the financial data from Eaton and Cooper underlying Rush's analysis.

According to the company, New Eaton U.S.'s standalone creditworthiness is relevant to pricing the loans and guarantee fees paid to the newly formed parent company, Eaton PLC. The Internal Revenue Service argues that the interest rates were too high and the guarantee fees unnecessary because the U.S. company could have counted on the "implicit support" of its parent.

For his expert report, Rush separated the U.S. and non-U.S. entities into two groups using historical financial statements from the pre-acquisition Cooper and Eaton groups. Group A included all entities that were wholly owned by New Eaton U.S. — except for those that, at the time of the Cooper acquisition, the company planned to restructure to make foreign-owned. Group B was made up of all Eaton and Cooper entities not included in Group A.

Jeannine Zabrenski of the IRS said that according to Rush's analysis, operating margins for Group A were lower than the margins for Group B, whereas Eaton's former chief financial officer Rick Fearon testified earlier in the trial that earnings margins in the U.S. were higher.

Rush responded that he would have to better understand which margins Fearon had referred to and whether he was considering intercompany transactions.

Elkins, who was Eaton's vice president of international tax strategy at the time of the Cooper acquisition, was asked about the decision to restructure the ownership of a subsidiary valued at $14 million that was originally part of Eaton. The subsidiary, Eaton Holding V Sarl, known as Lux V, was moved from under the U.S. limited liability company Eaton Worldwide through a capital contribution in which a foreign entity, Eaton Technologies Sarl, claimed a controlling interest.

Before Lux V was "decontrolled" in the U.S., it was used as a platform for foreign acquisitions, Elkins said. The company "had major foreign holdings, and we wanted foreign cash to be available on the foreign side to service public dividends and share buybacks."

The trial over the financing of the Cooper acquisition is just one part of Eaton's larger 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, 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.