MADISON, Wis. -- The Internal Revenue Service has targeted the state pension fund, saying that it owes the federal government millions in back income taxes from profits made years ago.

The move by the IRS officials, now technically nearly two years old, comes despite the fact that the State of Wisconsin Investment Board, or SWIB, is tax-exempt. The top lawyer for SWIB said she knows of no public pension fund that's been taken to tax court by the IRS, WISC-TV reported.

However, that's essentially what the IRS has done and SWIB officials continue to fight it, most recently by filing an appeal with the IRS Appeals Division.

At issue is the 2001 sale of the former private Wisconsin-based media group Shockley Communications Corp., which used to own WKOW-TV and was formed by Terry and Sandy Shockley. Their business partner was Terry Kelly, the man behind Madison's Rhythm and Booms fireworks display and who currently owns the business Weather Central.

According to documents and SWIB, the IRS filed a tax "notice" in late 2008 against the six largest former Shockley shareholders, including SWIB, which manages $70 billion in investments for state workers and retirees.

IRS officials the state board must pay it $28 million plus interest because they claim the Shockley stock sale was really an "asset" sale and, as such, former Shockley shareholders are liable for corporate income taxes from it.

On Monday, Terry Shockley, the former corporation's founder and shareholder, denied the company had any previous tax liability. He also said Shockley Communications Corp. simply sold its stock in a transaction "that was completely open."

"The IRS has challenged that" Shockley said. "And as a result ... transferred liability ... against certain entities," including himself.

IRS officials want to recover a total of $41.6 million in income taxes from the six largest Shockley Communications Corp. shareholders, according to SWIB counsel Jane Hamblen. The IRS also wants more than $20 million in total penalties and $23 million in interest.

Hamblen said the board is currently appealing the IRS notice for tax liability, which she said for the state pension fund could approach $40 million.

In an earlier statement though, the board has said whatever payment is made to the IRS, if any, there would be no negative impact on SWIB's investment assets or income in the future.

Hamblen said the IRS is going after the SWIB, the Shockleys, Terry Kelly and two other private equity funds as part of its notice for tax liability.