United Parcel Service will next week launch an appeal in the United States to overturn a decision which said that the shipping giants had illegally used a Bermuda reinsurance company to reduce its taxes.

A federal judge ordered UPS, the world's largest transportation company, to pay $1.8 billion in back taxes last August after ruling that the company had used Overseas Partners Ltd. to avoid paying taxes.

UPS lawyers are scheduled to submit written arguments on Monday in Atlanta's 11th US Circuit Court of Appeals spelling out their reasons the 1999 ruling against them should be reversed and the massive judgment overturned.

In 1983 UPS created a subsidiary in Bermuda which was later renamed Overseas Partners Ltd. It was subsequently spun off but remained owned by UPS employees.

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

But this arrangement was found to be an illegal tax offshore shelter by Tax Court Judge Robert P. Ruwe, who ruled on August 9, 1999 that UPS was "motivated by the reduction of federal income tax'' in what the judge called a "sham transaction''.

At the time Overseas Partners said that the decision had no impact on its financial strength or the willingness and ability to do business with its business partners.

The transaction which was at issue with the Internal Revenue Service in the United States involved UPS insuring its shippers' risk with National Union Fire Insurance, an AIG subsidiary, which then cedes risks to Overseas Partners. UPS paid all the damage claims itself, but passed on the risk for lost parcels to the insurer and reinsurer.

UPS strongly opposed the judgment, but took a charge of $1.8 billion to pay for the unpaid taxes and the interest they accrued as well as cancelling the shippers risk programme with Overseas Partners.

Overseas Partners at the time stressed it was not named in the case nor was it owned or controlled by UPS.

The appeal is likely to take many months, possibly years, to resolve.

Industry experts say UPS has compelling historical as well as financial reasons to fight to the end, according to the Atlanta Journal-Constitution.

Throughout its 97-year history, the company has sought to be known as a place where managers make moral decisions -- not just legal ones.

And UPS believes that Mr. Ruwe's stinging judgment last year assails that legacy.

"The people at UPS feel that they've been acting ethically and responsibly all along,'' said Rashad Bajarkly, transportation analyst at Williams Capital Group in New York. "They've already had to endure the financial pain of putting the money aside. Now they feel like they're obligated to fight to protect their good name.'' During Overseas' first full year of operation in 1984, UPS took in $99.7 million through EVCs and paid $22 million in claims, court records show. The new arrangement allowed UPS to shelter more than $78 million that formerly would have been treated as taxable income.

In his written ruling, Mr. Ruwe concluded the company's restructuring had `no economic substance or business purpose' and was a `sham transaction' designed to avoid U.S. income tax.

COURTS CTS