Today's Times includes an interesting piece by Floyd Norris about the problem of companies that are neither private nor public but have (or claim to have) few enough public investors that the SEC allows them to "go dark"--quit reporting their financial statements, or anything else for that matter, to the public at large or even their few public investors--even though at least some of their shares continue to be publicly traded. See Floyd Norris, Going Dark, and Putting Blindfolds on Investors, New York Times (July 13, 2013), at B1.
Norris is focused on the way that allows companies to take advantage of those (purportedly) few public investors by activities that "smell[] like insider trading." Id. He reports on Equity Inns, a hotel owner acquired by Goldman in 2007, which had (and has) publicly traded preferred shares outstanding, apparently amounting to about 1% of the assets. They'd been issued with par value of $25 and paid a dividend of 8.75% or 9%--now they are trading at less than $10 and Goldman has halted the dividend payments. Norris notes that Goldman was the purchaser and the lender on the deal, so "it could restructure the debt in ways that would essentially give the debt holders--Goldman, that is--the ability to get everything, leaving the preferred shareholdes with nothing." Id. The preferred share price declined, and then started to rise, and then Goldman announced that an affiliate had acquired 35% of the outstanding preferred. Preferred shareholders, perhaps feeling cheated, are trying to get the SEC to require public accounting, since the company has more than 300 shareholders of record. The company is trying to get the SEC to give it an exemption, with its lawyer claiming that "the issuer of the preferred shares ... was simply a real estate investment trust [REIT, in tax parlance] with a small economic interest in 130 hotels and no employees." The SEC asked for public comment. Norris adds that "public filings would make it easier to see what was going on, but Boldman would still have all the cards and might find ways to assure that the preferred holders received little or nothing from their investment." Norris also points out the oddity that the company's Web site seems to discuss its status as a REIT, but Goldman claims that it "gave up its REIT status years ago and disclosed that in financial statements that are not public."
So here's my thought. What reason can there be for not requiring publicly available information on federal income tax classification for all businesses that operate in this country?
I've never found the justifications offered for confidentiality of business tax returns convincing in the first place: they usually claim that "trade secrets" would be revealed, but one suspects that the secrets they don't want revealed and perused over by journalists, tax practitioners (especially academics) and just plain citizens are those showing just how much they are taking advantage of tax expenditures/subsidies to make huge profits for their owners/managers while starving their workers.
Those proffered rationales about trade secrets certainly don't support allowing any company to have one of the tax-privileged classifications such as partnership or S corporation or REIT or RIC status without having that status be public information. Certainly the investors in those preferred shares of the Goldman affiliate at least have a right to know its tax status. Beyond that, the public has a right to know just who is using what tax status (and how they are using it). How can people reasonably participate in public dialogues about tax policy if they are so ill-informed about major players in the system? As it is, in the case of the Goldman-purchased company, there is no way for any lay person to substantiate or disprove Goldman's claim about REIT status. And there are very large privately held companies, like Mars, Inc., that do not reveal their tax status--and won't even if you send them an inquiry asking them about it.
In this post-Citizens United period, when corporations can spend money to directly influence election campaigns under the Supreme Court's absurd "first amendment" holding that corporations are persons, too, there is even less justification for secrecy about tax status than there might have been before. This is one thing that could be easily legislated--a bill that creates a public registry of all businesses by federal income tax classification. It seems to me that sustaining democracy is much more important than sustaining tax-status secrecy.
There's been a good bit in the news lately about the way multinational enterprises like Apple, Google, and many others especially in Big Pharm and Big IP actively reduce their US taxes through offshoring that is offshoring-on-paper-only to a large extent. Apple does it by "selling" rights to its innovative IT developments to affiliated offshore entities (such as those in Ireland), and then claims that the profits from those US-based innovations are not US-income. In Apple's case, the main holding company in Ireland is run by directors in California (except for one woman who actually resides in Ireland but doesn't attend many meetings--and most of those by phone) and isn't even treated as a resident in Ireland for Irish tax purposes. See, e.g., How one Irish woman made $22bn for Apple in one year, The Guardian (May 29, 2013) [hat tip to Stevan].
That's a feat that shouldn't be achievable by any company but is a result of the lack of international harmonization in the way tax laws work and the failure of Congress to keep up with the innovations in tax law achieved by creative tax lawyers taking advantage of every discernible loophole or ambiguity. It may be legal (under our foolhardy current law that fails to treat corporations organized OR MANAGED in the US as US companies) or it may not be, depending on how willing a court would be to apply the "sham" corporation doctrine to the case. Either way, it doesn't sit very well that a company that benefited enormously from the way the US subsidizes the education (especially of the rich who pursue science careers) and research is so willing to show so little social responsibility. Congress should likely act on that, and soon, so that US MNEs do not continue to siphon out US profits to nowhere.
Even much of the ballyhoo about corporations that really "want" to repatriate their overseas profit but are "hindered" by the US taxes they would have to pay is ridiculous--they already keep most of those profits in the US in bank accounts and Treasuries, but don't claim them to be repatriated for their businesses.....
Victor Fleischer, a fellow tax prof, did a DealBook story on this last week that is worth noting. Fleischer, Calculating Apple's True Tax Rate, New York Times, DealBook (June 4, 2013).
As he says at the very beginning, it isn't easy to know what the actual tax amount paid (and hence tax rate) of big MNEs is: "it depends on what the meaning of 'pays' is."
Now, what you have to understand is that this comes in the context of Apple CEO Cook's testimony at congressional hearing as to that very piece of information. “The way I look at this is that Apple pays 30.5 percent of its profits in taxes in the United States.” Id. (emphasis added). One has to wonder about that qualifier--"the way I look at this is", instead of a plain statement about Apple's payments of taxes to the United States Treasury. For example, one wonders "which profits" Apple is using. It all depends, doesn't it, on whether Cook is counting as US income everything that should be counted as US income? In the case of many discussions of MNE tax liabilities, there is also a question of whether they are talking about taxes that the company has booked (as "deferred tax liabilities" that are someday, maybe, due and payable), though the Fleischer story says that was not the case with Cook's statement. Often you have to also ask whether the tax rate calculated as "paid" to the United States is based on tax liabilities that are offset by foreign tax credits (and thus not actually paid to the United States)--which would ordinarily be the case with most MNEs.
As Bloomberg News highlighted recently, Mr. Cook’s calculation is based on a badly distorted measure of United States income. ... Apple shifts substantial amounts of its economic profits from the United States to Ireland, where they are taxed at a rate close to zero. Those profits are then sheltered in Ireland and untaxed unless Apple decides to bring the cash back to the United States.
We can't easily figure out how much an MNE actually pays, because of a rather silly view that corporations merit having their tax returns kept fully confidential. Looking through publicly disclosed information, including financial statements, sometimes is revealing, but only after hard work and not often with certainty about the conclusions, as Fleisher notes. Felix Salmon of Reuters has suggested public companies should file their tax returns with their other information filed with the SEC. Id. Instead, they currently file all kinds of statements prepared assiduously by lawyers to hide their tax avoidance strategies from the IRS and to hide their actual tax situation from everybody. Obviously, they don't want to disclose their tax returns, but it is hard to see why that would be a bad thing to require. We require open disclosure of Form 990 for 501(c)(3) organizations to justify their tax breaks, and MNEs get tax breaks of a much greater magnitude than most 501(c)(3)s.
Fleisher has a more modest proposal--require all public companies to disclose their "true US tax rate", defined as cash payments made to the U.S. Treasury divided by worldwide pre-tax income. If you calculate that rate over three years for Apple, it's a heck of a lot less than Cook says is "the way [he] look[s] at this"--only 8.2% ($5.3 billion paid to the U.S. Treasury from 2009-2011 OVER $65 billion worldwide pre-tax profits). Id.
The point of the disclosure is to allow voters and policy makers an easy way to understand how well the tax system is working and what each corporation contributes to the public coffers. Id.
As the House hearings have continued into the "much ado about nothing" "scandal" of the IRS Cincinnati office using terms like Tea Party and Patriot to filter 501(c)(4) status appications for groups that were likely to be politicking and thus merit extra scrutiny before granting the status, there continue to be statements that lambast the government generally and the Obama White House in particular, accusing it of intervening in IRS affairs and implying that the Obama White House is using the agency to get at its political enemies.
Darryl Issa, the Republican chair of the House Oversight Committee, one of the various politicians avidly pursuing the issue, spoke with CNN's Candy Crowley and claimed that IRS agents were being "directly ordered from Washington". See Joan Walsh, Elijah Cummings Outplays Darryl Issa, Salon.com (June 9, 2013). Issa hinted that interviews with IRS staff had turned up plenty of proof of such shenanigans, but Cummings, the Democratic vice-chair of the Committee, called his bluff, saying that a senior Republican staffer who described himself as a "conservative Republican" had made quite clear that wasn't so and challenging Issa to release the transcripts of interviews. (Cummings ultimately released the transcripts himself.) Cummings suggested that it was time to close the book on this case. id. If only.
The Wall Street Journal reported Saturday on an IRS effort to police the misuse of REITs. See A.D. Pruitt & Amos Sharma, IRS Puts Brakes on Corporate Push to Capture Real-Estate Tax Break, Wall St. J. (June 7-8, 2013), at B1.
A REIT is a "real estate investment trust", a special-status entity created by Congress in sections 856 -859 of the Internal Revenue Code to provide a way for ordinary retail investors to share in a big investment in real estate that would be impossible for them to do individually. REITS avoid the corporate tax so long as they distribute most of their income as dividends to shareholders.
The Journal story notes that private prison operator Corrections Corp of America has already completed conversion to REIT status. Now a flock of corporations operating various businesses that one wouldn't ordinarily think were intended to be covered by the REIT exception to corporate taxation are applying for REIT status--including Iron Mountain Inc. (document storage operator), Lamar Advertising Co. (outdoor billboards), Equinix Inc. (data-center operator), and Penn National Gaming Inc. (casino operator). CBS submitted a letter ruling request for its outdoor advertising division's bid for REIT status and an IPO, a move that would save it $145 million in 2014 taxes (and more in later years), according to Davenport Research, as reported in the Journal.
In addition to the distribution requirement, REITs avoid corporate taxation only if they satisfy a complex set of eligibility requirements, including the following gross income and asset requirements.
The first gross income requirement mandates that at least 95% of a REIT's gross income must come from dividends; interest; real property rents; gains from property sales; income or gain from foreclosure property; abatements and refunds of real property taxes; amounts received as consideration for entering into agreements to make loans secured by mortgages on real property or to purchase or lease real property;gain from disposition of a real estate asset (other than prohibited transactions).
The second gross income requirement mandates that at least 75% of a REIT's gross income be derived from rents from real property; mortgage interest; real property dispositions; dividends or gain from disposition of shares of other REITs; abatement and refund of taxes on real property; income and gain from foreclosure property; consideration for entering into agreements to make mortgage loans or purchase or lease real estate; certain gain from dispositions of real estate; and "qualified temporary investment income". (The latter term is used for other types of investments that are used as temporary parking places for money.)
The first asset test requires that at least 75% of the total assets of a REIT be represented by real estate, cash and cash items (including receivables) and government securities.
The second asset test requires that (i) no more than 25% of the assets represent other securities; (ii) no more than 25% of the total assets be represented by securities of taxable REIT subsidiaries; and (iii) except for those taxable REIT subsidiary securities (I) no more than 5% represent securities of any one issuer; (II) the assets do not include more than 10% of the voting power of any one issuer and (III) the assets do not include more than 10% of the value of any one issuer.
A special rule permits "timber REITs" for logging businesses where more than 50% of the assets are used in a timbering business. And there are many more details to the rules than briefly outlined here.
Already, one can see two things about the REIT rules:
(1) that this is a very complex set of rules for which the discernible intent of Congress was to cover entities that made most of their money from being landlords--holding and leasing real estate;
(2) that the real estate (and logging) businesses undoubtedly lobbied hard to get this kind of break for their property businesses--a break that isn't ordinarily available for corporations that run grocery stores or distribution businesses or manufacturing businesses.
Aside: Real estate developers/owners/leasers are--like Big Oil and other natural resource extractive industries--businesses that exploit natural assets. For reasons likely dating back to the very different circumstances at our founding when people tended to think of America as a vast frontier with almost unlimited resources which required incentives to get people to development them (and of course at the same time overlooking the Native Americans who were already there and using those resources quite differently), Congress has historically lavished largesse in the form of tax expenditure subsidies on businesses that exploit land and minerals and other natural assets.
So why would a prison operator like Corrections Corp of America or a casino operator like Penn National Gaming Inc. that have active business income from operating prisons and casinos be eligible for the REIT break if REIT status is supposed to be for landlords that get rent income? It all depends on whether the business can successfully define its income as "lease" income from real estate (with incidental service income) rather than business income from providing services or running businesses(that take place on physical properties owned or leased by the companies). The IRS has actually been rather flexible in its application of the REIT rules to date, considering cell phone towers "real property" for this purpose, etc. As the journal notes, "some analysts argue that some companies are stretching the definition of landlord." But "stretching definitions" is the key to the tax minimization game, and tax lawyers, accounting firms, and others will keep doing it unless Congress or the IRS narrows the definition (or eliminates the issue entirely).
It seems quite appropriate that the IRS has launched a review "to define what type of companies can qualify as real-estate firms" for this purpose. Even more appropriate is the House Ways and Means Committee's review of the wisdom of providing this preferential tax expenditure for any industry, even if they really are landlords. The SEC has already noted that companies that hold lots of interests in real estate mortgage investment conduits (REMICs) might better be treated as mutual funds rather than REITs, for the safety of the financial system. Id. Rethinking REITs could lead to better securities regulation policy and better tax policy. Elimination of this tax subsidy --which amounts to tax favoritism for these real estate companies, casino and prison operators, and outdoor space advertising businesses--would be the fair thing to do.
Sometimes when you look at the hype on Social Security from the right, you wonder what in the world is going on in the heads of the hypers. Here's the way it tends to go:
1) Social Security is meant to be an insurance program that pays for itself.
2) Down the road in 20 or 30 years it is predicted by Social Security trustees (using prudently conservative estimates based on present valuing for infinity the obligations of the trust fund) that Social Security will be {pick your term: insolvent, bankrupt} and as a result , the program will, at that future date, be able to pay only about 75% of the benefits promised to retirees (which will, nonetheless, exceed the benefits that are currently being paid to retirees).
3) So therefore we should "save" Social Security by "reforming" it now : the way to do that reform is not by lifting the cap (so the rich pay into the program the same way everybody else does) but by cutting benefits so that the program starts paying less benefits today to retirees.
When you write it out in stark terms like that, it becomes strikingly clear how idiotic these "reforms" are and how unprincipled the purported "reformers" are. As Paul Krugman noted in an earlier New York Times opinion piece, Krugman, The Geezers Are All Right, New York Times, Opinion (June 2, 2013), they are proposing preemptively decimating benefits today because the program might reach a situation decades off where benefits would be partially reduced of necessity if nothing at all is done.
[I]t does look as if there will eventually be a shortfall, and the usual suspects insist that we must move right now to reduce scheduled benefits. But I’ve never understood the logic of this demand. The risk is that we might, at some point in the future, have to cut benefits; to avoid this risk of future benefit cuts, we are supposed to act pre-emptively by...cutting future benefits. What problem, exactly, are we solving here? Id.
This is not unlike policies of voluntary war--we'll suffer a great harm now (going to war, with the huge cost now in weaponry and lives and the huge cost in terms of long-term care of injured vets later) because we might have to suffer it in the future. As we found in Afghanistan and Iraq, that speculative concern is a very poor excuse for going to war: the result of overthrowing a dictator may be extraordinary costs to the overthrower and the overthrown people and the result may breed more enemies than it kills them. Preemptive war mostly aides warmongers in the military-industrial complex and the private companies (mercenaries and arms dealers) that make money off of war.
Similarly, preemptive reduction of benefits in a program that does not yet require it to "save" us from having to make reductions in the future (since they've already been made and caused even more suffering in the here and now) is absurd. It smacks of no reason other than:
(i) the real possibility of so fooling so many of the people so much of the time,
(ii) being able to gain "kudos" with the government-and tax-haters, and (likely the real purpose, these earlier just being gravy to the doing of it)
(iii) protecting the real clients who are the corporatist wealthy campaign donors who want to see these social welfare (they like to call them "entitlement") programs ended so that their own true "entitlement" programs --preferential capital gains rates; preferential "carried interest" taxation of compensation for service to private equity funds; preferential retirement programs; and preferential taxation of offshoring and Big Oil, Big Pharma, Big IP and similar industries--can continue unabated.
Remember that Social Security serves real needs. To arrive at a decision to cut benefits, just because it seems to be the politically expedient thing to do given the anti-tax furor stirred up by the likes of the Koch brothers and Grover Norquist and the Tea Party groups, is penny-wise and pound foolish--and smacks of class warfare. Do we really want to return to the pre-Social Security situation of a large population of seniors with too little to eat and nowhere to live? Continuing to reduce benefits when wages have been declining for most ordinary Americans (while the tiny number at the very top of the wage pyramid see their wages mushroom) would be disastrous. Just look at the story in the New York Times today about the near-crisis situation for most retirees, even with Social Security. Jeff Sommer, For Retirees, A Million-Dollar Illusion, New York Times (June 9, 2013), at BU-1.
"We're facing a crisis now, and it's going to get worse," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "Most people haven't saved nearly enough, not even people who have put away $1 million."
***
And if you're not close to being a millionaire--if you're starting, say, with $10,000 in financial assets--you've got very little flexibility indeed. Yet $10,890 is the median financial net worth of an American household today . . ..
***
Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top." [quoting Edward N. Wolff, economics professor at NYU]
The "cut benefits" rhetoric is made even worse when "protecting future generations" is added as to the mix as a "principle" that is claimed to underlie Social Security, as in the following
4) And we should do this in the name of caring about future generations, who should not "on principle" be "paying more" to support their parents' or grandparents' generations.
See, e.g., Robert Shiller's op-ed, Want to Fix Social Security? Use the Right Wrench,n New York Times (June 9, 2013), at BU 4 (claiming to be supporting a fundamental "principle" of Social Security that "one generation shouln't be more burdened than another"). The problem with claiming this principle as an underlying principle of Social Security is that the original legislation provided benefits to a slew of seniors who hadn't paid into it anywhere near what they would be getting out of it (even with the then-likely life expectancies) which was made possible, of course, by demographics that led to increasing numbers in the workplace.
And it isn't clear that there is any reason to consider it essential as an underlying principle now. If we have an economy in which there is sufficient resources to support increased benefits for an aging baby boomer population--even if that means that current workers should be more highly taxed than workers were 20 years ago--why not do so?
We know that we could increase the amount available by simply removing the payment amount cap on wages taxed, while continuing a payout cap based on a reasonable index --ideally, a more generous one than currently used. That just requires the really rich to participate in the insurance system in a way similar to everybody else. We could also make the system more intentionally redistributive, with significantly higher payments in the "bottom bracket" of paid-in amounts (to everybody) and rapidly descreasing payments in additional brackets of paid-in amounts. After all, most insurance is redistributive according to the degree of loss, with higher payments to those that suffer great losses made possible by the more or less consistent premiums paid by everybody, including those who suffer few losses.
n The footnote
I've put a footnote indicator at the Shiller article because there is a lot more about this Shiller op-ed worth pointing out. Shiller is a Yale economist--a profession that too often seems to be at the center of all discussion of tax policies but that tends to spend too much time trying to sound scientific (by reducing everything to equations) and thus missing the mark on truly understanding economies.
Shiller's op-ed starts out talking about the "mere 20 years" when Social Security is predicted to run out of reserves and noting the proposals for addressing that problem.
His second sentence states as near fact that "the public [is] apparently opposed both to tax increases and benefit cuts" to address the problem.
That raises red flags for me. I'm not convinced of the truth of the statement on increasing taxes. I consider it quite plausible that a survey in which the public was asked, in a reasonable framework, about increasing taxes to support Social Security benefits would yield a majority that favor removing the cap on wages to which the Social Security tax applies. If you gave people enough information, it might even be likely that a majority would support removing the preferential rates for capital gains and applying the Social Security tax to all income.
He gets something right: "[t]he purpose of Social security is to help families."
This is something that many on the right tend to ignore when talking about Social Security--it's all treated as a matter of "personal responsibility" (the dislike for so-called "entitlements"--even though these entitlements are earned benefit programs and the push for privatization--as though that would automatically make people able to save enough to take care of themselves no matter their actual financial condition) and fiscal sanity (the tendency to emphasize the potential future shortfalls in benefit payouts as a justification for reducing benefits today, and the implication that otherwise we will face an unimaginably steep deficit, etc.). Very little is about the importance of a social safety net to ensure that our seniors (and children) are not left in dire circumstances, poverty-stricken in a rich country.
He spends the first third of the article seemingly moving towards providing a solution to "the problem"--that if nothing is done, "the Trust Fund runs out in 2033" and the system would only be able to pay about 75% of promised benefits. He discusses the current indexing system, Obama's proposal (which would reduce benefits, stupidly), and then his "alternative" proposal--to index benefits to GDP, leading to increases in growth periods and potentially cutbacks in recessions.
Then he admits that his "alternative" (offered as an alternative to suggestions for changing the index to address the problem of insolvency, since tax raises and benefit cuts are disliked by everyone) doesn't address "the identified problem" of potential future insolvency
But he claims the change should be adopted because it would instead "support the principle that one generation shouldn't be more burdened than another."
This is said as though this "principle" is something everyone recognizes. But let's be clear--there is no per se reason that one generation should be less burdened than another. It depends on need and ability to pay.
As we came out of the Depression and WWII, the younger generation was quite clearly the one burdened with paying for the older generations who had contributed very little for the benefits they were receiving, appropriately so. Even if we end up with fewer workers supporting more baby boomers during the baby boomers retirement years, that's okay--especially if we are wise enough to remove the cap (as suggested above). There is no inherent injustice in that. The injustice would only come into play if the sacrifice asked of a later generation was so great that it outranked the offsetting sacrifice that would be asked of the earlier generation in cutting benefits. That is hard to measure, for sure, and not obviously true merely if later workers pay slightly more in taxes to support earlier workers.
Now, there may be some good reasons for changing the index to a dirrect correlation to GDP, as Shiller suggests. But the op-ed left me wishing he had just addressed that. All his cloaking of his proposal in language that would get the attention of those on the right--talk of insolvency, talk about tax increases not being on the table, talk about the current proposed solutions to the "problem" and his "alternative", which turns out not to be an alternative solution but an alternative indexing proposal that is being proposed for different reasons than the ones that underlie the proposals his is an alternative to--distracts from the meat of his article.
As noted in an earlier post focusing on the way intimidation of the IRS tends to lead to more tax avoidance and even tax evasion through promoted "shelters", Hewlett-Packard official Ray Lane engaged in a phony tax shelter back in 2004. He got caught and has apparently settled the $100 million tax bill. See, e.g., Reuters, H-P Board member Ray Lane Settles long-running tax bill (June 6, 2013); Tax Prof listing of assorted stories.
I can't resist pointing readers to tax professor Jim Maule's excellent post chastising everybody--from those obviously slanted propaganda-tank tax gurus Chris Edwards (you all know him as the purported tax expert from the right-wing pseudo-libertarian Cato Institute, whose other associate, Dan Mitchell, makes similar ridiculous claims in touting the purported "Laffer Theory" about how tax cuts restore tax revenues--I should note that I debated Chris in the run-up to the 2012 elections on Herman Cain's ridiculous tax "plan") and Steve Malanga (you all know him as the purported tax expert from the right-wing Manhattan Institute) to generally reasonable Taxpayer Advocate Nina Olson--about their ridiculous claims of a tax code that runs to the tens of thousands of pages. See James Maule, Code-Size Ignorance Knows No Bounds, MauledAgain (June 5, 2013).
Many of those claims about a giganormous Code that is pressing down on taxpayers from the sheer weight of its pages stem from three facts: (i) that the CCH looseleaf service itself notes that the service (in 20-odd volumes, with extensive and often duplicative annotations to cases, private letter rulings, notices, and various legislative history and rev.proc and rev.rul. items as well as the actual current Code provisions and regulations promulgated thereunder) runs more than 70,000 pages; (ii) that it is very useful to propaganda tanks and others bent on painting a negative picture of IRS tax enforcement and collection and taxes in general to portray the rules as so complex and lengthy that no one in their right mind could think it appropriate; and (iii) people without those bad propaganda intentions frequently serve as shilling boom-boxes for those (false) claims, because they don't stop and think or do their own homework. So the claims are repeated, over and over, and --as psychologists have shown--once something is repeated often enough, it gets to be accepted as fact even by those who should know better.
What people need to know --besides the obvious one fact that Congress, not the IRS as often insinuated in those blogposts condemning the length of the "code", writes the tax laws--is that:
(1) the CCH tax service includes more extra "stuff" that tax practitioners find very useful to help interpret the actual statutory language and the regulations promulgated thereunder than actual Code and Regulations! The tax code itself is relatively short--you can read it quicker than most good novels. (Additionally, the regulations have a lot of specifics applicable to particular types of taxpayers and situations, but even they aren't tens of thousands of pages long. And the page counts also depend greatly on the size of print on the page, folks. Word counts are much more meaningful.)
(2) most of the complexity that actually exists in the Code affects only the 3 in 10 taxpayers who "itemize" their deductions on their tax returns--and then, mostly the ones in the very tip-top of the distribution--the 1 in 10,000 who have lots of complexity in doing that itemization; and
(3) most of that complexity is necessary to prevent abuses by those who can hire very expensive lawyers, accountants and banks to set up schemes to avoid (or even evade) taxes.
Bob Goodlatte, (R-VA) is chair of the House Judiciary Committee. He has said that the House won't pass the measure already approved by the Senate that would require online businesses to collect state and local sales taxes like "brick and mortar" businesses do and he wants an "alternative" to be developed in the House.
Goodlatte says (from the Main Street Press Office, quoting the Washington Examiner) that he shouldn't have been taken as killing any legislation requiring online collection, but that he has "serious concerns" and thus wants the House to investigate "alternatives that could enable states to collect sales tax revenues without opening the door to aggressive state action against out-of-state companies. Furthermore, any alternative in the House would address fairness to all businesses and consumers.”
So he doesn't want "aggressive state action against out-of-state companies." When out-of-state companies sell items into the state, they should collect the taxes due to the state. Just what would Goodlatte consider "aggressive" actions in that context, I wonder.
But wait. Goodlatte also said that the Senate bill is "unfair" to consumers because "they'd have to pay more." Of course they'd have to pay more if they pay the taxes due on the purchase! But they should pay more! Consumers still owe those taxes that aren't now collected by online businesses--it is just really hard for a state or locality to collect them when they can't collected them through online businesses at the point of sale. There is no "fairness to consumers" issue in whether they pay the taxes due or not.
So just what does Bob Goodlatte want? Could it be protection of online business (excess) profits from the comparatively lower prices they can charge because of assisting consumers in evading state and local sales taxes?
In response to concern about taxpayer rights and potentially abusive tax collection activities, Congress passed two "taxpayer bill of rights" laws, in 1988 and again in 1996. Together, these laws protect taxpayers with further notice and information, shift the burden of proof to the government in many cases, and create an office of taxpayer advocate that reports directly to Congress, among many other provisions. The 1988 law (consolidating five different proposed bills into an "omnibus" bill under HR 4333) included provisions that sharply restricted IRS' employees' ability to ferret out tax evasion for fear of potentially violating the law. See summary of HR 2190, "the IRS Administration Reform and Taxpayer Protection Act of 1987", incorporated in the 1988 legislation passed as HR 4333. The 1996 law, HR 2337/ Public Law 104-506, beefed up the Taxpayer Advocate office, modified various penalty and collection provisions, and required an annual report to Congress on IRS employee misconduct. While these laws provided important new protections for taxpayers and noteworthy additions to the law governing collection authority, some were overgenerous to taxpayers and at the least made enforcing the tax laws more difficult for IRS employees.
It was only a short while after the 1996 law was enacted when the Senate Finance Committee held an elaborate series of hearings looking into alleged "abuses" of "innocent" taxpayers by the agency in collecting taxes and investigating potential criminal evasion of taxes: hearings on IRS practice and procedures, Sept. 23-25, 1997; hearings on IRS restructuring, Jan. 28-29, Feb. 5, 11, and 25, 1998; and hearings on IRS oversight, May 28-30 and June 1, 1998. Let it be clear: these hearings targeted the IRS with an apparent objective of changing the agency's focus from enforcement and collection of taxes to "nice-guy" relations with taxpayers. They included "sob stories" about harassment by the IRS from a priest, a divorced mother, a restauranteur and others, and alleged abuses in the collection and investigatory processes within the agency.
Much of the inflammatory testimony in those late 90s hearings was just that--stories, hand-picked to highlight purported problems, with the result that they inflamed the citizenry against the agency. The selected testimony was anything but balanced, in that it ignored myriad examples of just the opposite and included made-up tales of abuse. Danshera Cords, in an article discussing the 1998 Act, describes the restaurant owner's testimony and its lack of truthfulness as follows:
John Colaprete, owner of the Jewish Mother restaurants, "told the Finance Committee that IRS agents and other law enforcement personnel forced children to the floor at gunpoint, leered at scantily clad teenage girls, and generally violated his Fourth Amendment rights against illegal search and seizure, all on the word of his felonious bookkeeper." Ryan J. Donmoyer, Judge May Dismiss Jewish Mother Lawsuit, 83 TAX NOTES 1696, 1696 (1999). Mr. Colaprete testified before the Finance Committee that, while attending his son’s first Holy Communion, "[a]rmed agents, accompanied by drug-sniffing dogs, stormed my restaurants during breakfast, ordered patrons out of the restaurant, and began interrogating my employees." IRS Oversight: Hearings Before the Senate Comm. on Finance, 105th Cong. 75–79 (1998); ROTH & NIXON, supra note 5, at 189.
Danshera Cords, How Much Process is Due? IRC Section 6320 and 6330 Collection Due Process Hearings, 29 Vermont L. Rev. 51, 52 note 7.
That sounds atrocious, until you find out that Colaprete later recanted the whole thing, when it was found that he was actually out of the country at the time it was claimed to have happened. Id.
There were two later reviews of the testimony--the Webster Commission and a GAO study (both cited in Cords' article). The Webster Commission found isolated abuses but no pattern of misconduct by the criminal investigation division. Criminal Investigation Div. Review Task Force, IRS, Review of the IRS's Criminal Investigation Division (1999). The GAO study found no evidence supporting the allegations that tax assessments were improperly handled or criminal investigations inappropriately undertaken. GAO, Tax Administration: Investigation of Allegations of Taxpayer Abuse and Employee Misconduct Raised at Senate Finance Committee's IRS Oversight Hearings (reprinted in 2000 Tax Notes Today 80-13 (Apr. 25, 2000)). David Cay Johnston, in his highly regarded book on the tax shelter business, describes those hearings as "going after the IRS". Perfectly Legal (2003). Bryan T. Camp describes Congress as seeing tax administration as an "inquisitorial" process. Bryan T. Camp, Tax Administration as Inquisitorial Process and the Partial Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 Fla. L. Rev. 1 (2004) (describing the hearings at 78-86).
The Senate Finance hearings enabled the passage of additional legislation in 1998, the Internal Revenus Service Restructuring and Reform Act of 1998. The law reorganized the IRS, the main agency to enforce the law, into "units serving particular groups of taxpayers with similar needs"--i.e., changing its focus from law enforcement to "serving taxpayers". It "significantly limited" the agency's "historically broad powers". Id. (Cords, at 51). It created a collection due process hearing requirement before the IRS can proceed to collect on taxes due; a bureaucratic (red-tape) approval process for levies, liens and seizures; and severe limitations on examination and audit techniques and impositions of penalties. The agency suffered not only from increased disrespect (from media attention to the inflammatory hearings) that facilitated the right's mission to spread the Reagan mantra that "government is the problem," but also from underfunding, strict limitations on methodologies, and effective intimidation that made it harder to enforce the tax laws and collect unpaid taxes, thus encouraging tax evasion and even tax fraud. Stress, time and resource constraints, and understaffing, got worse, even while Congress dumped more and more administrative responsibilities on the agency.
The always innovative tax practitioners (attorneys and CPAs) noticed. Corporations and their high-wealth CEOs and majority shareholders were already engaging in more tax avoidance with the help of crafty lawyers finding loopholes in the interstices of the tax law and the more restrictive 1988 and 1996 laws that made it harder to enforce or collect. Many now took advantage of the newly flourishing tax shelter schemes from the late 1990s to mid 2000s. These were often promoted by big-money law partners at law firms like Donna Guerin at (now shut down) Jenkens & Gilchrist or Raymond Ruble at Brown & Wood (later Sidley Austin) and financed by investment banks like Deutsche Bank and others eager to profit from derivatives that made deals appear to move money around while essentially leaving it in place, with avid assistance (and sometimes design) by accounting firms like Arthur Anderson, KPMG, and BDO Seidman. The shelters usually had fancy acronyms like "COBRA" and "FLIPs." They frequently involved invented (phantom) losses or phony deductions. Many used purported federal income tax partnership structures to selectively pass gains to tax-exempt or tax-indifferent parties so (phantom) losses could be passed to parties that "needed" a tax loss to offset a large, expected, and real gain.
Hitting the news today is yet another story about a top CEO who engaged in those phantom-loss- generating partnership tax shelters. Zajac & Drucker, Ray Lane Rode Tech-Boom Tax Shelter Wave Broken by IRS, Bloomberg.com (June 7, 2013). Lane, former president of Oracle and current chair of Hewlett-Packard, used a shelter involving partnerships with long and short positions called "POPS"--put together by Sidley & Austin, Deutsche Bank, and BDO Seidman--to shield $250 million from taxation. Id. As Chris Rizek, a tax lawyer at DC's Caplin & Drysdale told Bloomberg, the IRS slacked off on enforcement in those years after the series of bills restricting tax administration because "they were intimidated." Id. "They could be cowed again," Rizek said, given the focus in Congress this month.
We seem to have a "boom or bust" cycle in terms of attitudes towards the IRS as the primary agency for enforcing our tax laws. And that's unfortunate, because a country that cannot force wealthy and corporate taxpayers to pay their share of the tax burden is a country that will fail.
This history should serve as an important warning to Congress, the mainstream media, and citizens as hearings exploiting anti-IRS sentiments spread cries of alleged abuses (seemingly with as little evidentiary support for widespread patterns of abuse as the 1998 hearings) that may again lead to overly restrictive legislation.
While any agency should avoid wasting money on unnecessary travel (and certainly luxury suites is a waste for any government employee), IRS employees should not be restricted from participating in important activities like attending and speaking at the ABA Tax Section's three annual meetings. And while it is important to ensure that there isn't a corrupt abuse of agency power, the hearings so far into the 501(c)(4) selection of various groups (conservative and liberal) for greater scrutiny bear too strong a resemblance to the hyped-up hearings by the Finance Committee in 1997-98, which inappropriately intimidated IRS employees from doing their jobs. Congress should not prevent the IRS from taking forceful actions to fight violations of the tax laws, such as appropriately screening applicants for 501(c)(3) and (c)(4) tax-exempt status.
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