Tax Court Judge Albert Lauber questioned an expert for Eaton on Monday about how he arrived at a lowered credit rating for the U.S. company in a report he prepared in January 2013, shortly after it acquired an Irish-based global electrical products manufacturer and inverted.

A reduced credit rating for Eaton Inc. allowed it to reap significant tax savings by requiring it to pay a higher interest rate to its newly formed Irish parent when it took on debt to finance the acquisition. (AP Photo/Mark Duncan) Judge Lauber asked William Chambers, a professor at Boston University, about notes from an interview with an Eaton official in 2012 that suggested Eaton itself had requested a rating several notches below one that Standard and Poor's had given it before the acquisition.

The reduced credit rating for Eaton Inc., the U.S. company, allowed it to reap significant tax savings by requiring it to pay a higher interest rate to its newly formed Irish parent, Eaton PLC, when it took on debt to finance the acquisition. According to Eaton, its lowered credit rating also justified the guarantee fees it paid to its parent on third-party debt also used to finance the transaction.

Chambers was asked about the expert report he prepared for the trial as well as a report he wrote in 2013 analyzing the creditworthiness of Eaton Inc. The 2013 report placed the U.S. company's rating into the speculative grade category, taking into account the $3 billion of new intercompany debt it had assumed to finance the acquisition of the Irish company, Cooper Industries.

Chambers, who had spent 22 years in the credit rating division of S&P, determined a rating of BB-/B+ for the new U.S. company, six or seven notches lower than the A- rating S&P had given it in May 2012, when Eaton announced plans to acquire Cooper.

Internal Revenue Service attorney Blake Corry and Judge Lauber asked Chambers about handwritten notes from a December 2012 telephone interview with Adam Lechman, Eaton's transfer pricing senior manager at the time, showing that Chambers had written "low B."

"Your understanding was that Eaton wanted you to provide an intercompany rating of low B?" Corry asked.

"That's not my understanding," Chambers responded.

Judge Lauber asked, "Where it says 'low B,' is that the credit rating you had already agreed to assign to it, the rating that they asked for?"

"They never asked for a rating," Chambers replied.

"Why did you write 'low B' down there?" the judge asked.

Chambers said he didn't know.

"You don't know?" Judge Lauber asked.

"I don't know," Chambers responded.

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, 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.