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Today, Grupo TMM S.A. and Kansas City Southern announced TFM S.A. de C.V. received notification from the Mexican Fiscal Administration Service (SAT) that it completed an audit of TFM’s 1997 tax returns.

Because TFM didn’t supply documentation complying with the requirements of the Mexican fiscal code, the railroad wasn’t entitled to deduct depreciation of equipment and other assets at the time it was privatized in 1997, the SAT determined. The agency is considering whether to assess penalties or additional taxes.

TMM and KCS officials believe the determination is without merit because the Mexican government failed to produce and provide to TFM the necessary documents, according to a prepared statement.

A Mexican appellate court recently ruled TFM is entitled to receive a value-added tax (VAT) refund certificate — including inflation and interest adjustments from 1997 until the date the certificate is delivered to TFM — from the Mexican government. As part of its determination, the SAT confirmed provisional attachment of the original VAT refund certificate, which the government delivered to TFM in January 2004.

TFM will legally contest the SAT’s tax audit conclusions and any subsequent penalties or taxes, TMM and KCS officials said, adding that they will continue trying to resolve their VAT disputes with the Mexican government. In the meantime, KCS has filed with the Securities and Exchange Commission and sent shareholders a definitive proxy seeking approvals to issue additional stock and use proceeds to purchase TFM’s controlling interest.