take a $1.44 billion hit on second-quarter earnings in a possible move to stop a huge disputed tax bill from ballooning.

United Parcel Service announced it would set the money aside on Monday, a week after a federal judge ruled the Atlanta-based shipping giant had illegally used Bermuda company Overseas Partners Ltd. to reduce its tax.

In 1983, UPS created a subsidiary in Bermuda that was later called Overseas Partners Ltd., which was subsequently spun off but remains owned by UPS employee-shareholders.

Its purpose was to provide reinsurance -- a way of spreading risk -- for UPS packages insured for over $100, according to court documents.

That arrangement was found to be an illegal offshore tax shelter by Tax Court Judge Robert P. Ruwe, who ruled on Aug. 9 that UPS was "motivated by the reduction of federal income tax'' in what the judge called a "sham transaction.'' If UPS pays off the bill now before further interest blows it out, it could still appeal to the 11th US Circuit Court of Appeals in Atlanta or negotiate a settlement, meaning possible refunds from the Internal Revenue Service.

If it doesn't pay the bill, the IRS could continue to charge interest.

Company spokesman Norman Black said no decision on payment of the taxes or possible appeals has been made.

"We are still reviewing this, but in the meantime, we have to recognise that there was an adverse court ruling in this case,'' Black said. "As a result, we have to set aside this money to prudently manage the interest of existing shareholders.'' The IRS issued a notice of tax deficiency in 1995 for the tax years 1983 and 1984, which totals $67 million in taxes plus penalties and interest. UPS has continued the practice, and could owe $259 million for 1985 through 1990 -- IRS is seeking taxes for those years as well -- and potentially millions more for years after that.

The charge was listed on a required quarterly filing to the Securities and Exchange Commission, and includes a tax assessment charge of $1.78 billion that includes $230 million in securities already set aside. Another $344 million was included as income from tax refunds from interest payments.

The restated earnings change the second-quarter net income of $588 million to a net loss of $854 million.

The charge will not affect the company's revenue of $6.56 billion and operating profit of $1 billion. It also won't affect a planned initial public offering later this year, UPS said.

UPS also said it will re-examine the way it provides extra insurance for packages. The company covers up to $100 in value, and customers must buy extra coverage for packages worth more.

Black said UPS is examining ways to create a new subsidiary or work with an existing one to handle the insurance and avoid tax discrepancies.

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