[lit-ideas] Still More on Corporate Tax Shelters
- From: Eric Yost <mr.eric.yost@xxxxxxxxx>
- To: lit-ideas@xxxxxxxxxxxxx
- Date: Tue, 20 Sep 2005 18:15:39 -0400
http://www.pbs.org/wgbh/pages/frontline/shows/tax/etc/synopsis.html
It was one of corporate America's biggest hidden profit centers in
the past decade -- the tax shelter -- and it became so lucrative
that last year it helped major U.S. companies cut their tax rate to
just half of what they had historically paid, leaving individual
taxpayers to make up the difference.
The General Accounting Office estimates that illegitimate tax
shelters cost the government more than $85 billion in recent years.
"Anything that's not being paid that should be paid, that's
basically what the honest taxpayer is making up," asserts Charles
Rossotti, a Republican businessman who became commissioner of
Internal Revenue in 1997 and spent five years battling bogus
shelters. Rossotti estimates that because the government is not
collecting all that is owed -- the biggest piece of which is
illegitimate tax shelters -- everyone else is paying 15 percent more
than they should.
In "Tax Me If You Can," FRONTLINE correspondent Hedrick Smith
investigates the rampant abuse of tax shelters since the late 1990s.
Through interviews with government officials, tax experts, and
industry insiders, Smith uncovers an avalanche of bogus transactions
-- created by some of America's biggest and most-respected
accounting firms, law firms, and investment banks -- that were then
aggressively marketed to big corporations and wealthy individuals.
"These were close to sham transactions -- some were clearly sham
transactions, [that] had nothing to do with investment," says John
"Buck" Chapoton, former treasury department policymaker in the
Reagan administration. "They simply were financial mechanisms for
creating losses -- tax losses, not economic losses."
FRONTLINE's Smith notes, "Chasing bogus tax shelters for the IRS was
like a game of cat and mouse. The IRS had a terrible time finding
them because they were hidden deep in tax returns. Once the IRS
spotted one type of shelter and issued a regulation to block it, the
shelter promoters had designed a new one. The IRS was forever
playing catch-up."
To overcome this problem, Rossotti argues that Congress must now
enact sweeping legislation to ban any tax shelters that do not have
legitimate business purpose. And he warns of the danger of inaction.
"I think this thing is going to rebound in a serious way as the
economy improves," Rossotti tells FRONTLINE. "The fundamental
drivers of this are still there. It's still a very profitable
business for the promoters. The law is still way too weak and too
murky."
In "Tax Me If You Can," Smith follows the tax shelter trail to some
surprising places. Smith discovers that sewer pipes in the city of
Bochum, Germany, for example, have offered a huge tax write-off to
the major American bank Wachovia, of Charlotte, NC.
It was a deal that Bochum city officials couldn't refuse: Through a
complex, long-term lease-and-service transaction, the city would
lease out its underground sewer pipes to Wachovia for $500 million.
The city would then immediately lease the pipes back, thus retaining
use of its sewer system, and repay the lease over a period of many
years. In return, Bochum was immediately paid a $20 million fee.
Wachovia would eventually get its money back -- plus a fast,
multi-million-dollar tax write-off.
Wachovia declined to be interviewed by FRONTLINE. But working with
Wachovia's annual reports, Robert McIntyre, director of the
Institute for Taxation and Finance, details the payoff to Wachovia's
bottom line from many leasing deals similar to the Bochum transaction.
"Amazingly, in 2002 -- even though it reported $4 billion in profits
-- [Wachovia] reported that it didn't pay any taxes," McIntyre tells
FRONTLINE. "They worked it by sheltering all of their income. They
said they saved $3 billion in taxes over the last three years from
leasing -- huge write-offs."
"Tax Me If You Can" also reveals how some of America's most
respected accounting firms drove the tax shelter wave, generating
dozens of shelters that were mass marketed and then found to be
illegitimate by the IRS and the courts. In the documentary, Smith
speaks with a former tax attorney for KPMG, who describes how the
firm's accountants and attorneys were ordered by KPMG tax executives
to design -- and market aggressively -- as many tax shelters as
possible, since the firm made a profit based on how much it saved
its clients in taxes.
KPMG declined to speak to FRONTLINE. But recently the firm fired
and/or retired several of its leading tax partners who had overseen
KPMG's tax shelter operation, after they had been called to testify
in a congressional investigation. And on Feb. 19, the company
announced that federal prosecutors have launched an investigation
related to "certain tax strategies" no longer offered by the firm.
"Tax Me If You Can" concludes by reporting that while the
Republican-controlled U.S. Senate has passed broad tax shelter
reform legislation, both the Bush administration and private sector
companies, such as accounting and leasing firms, oppose a
Senate-backed provision requiring that shelters have economic
substance and genuine business purpose to be legal. The House of
Representatives has so far declined to pass such legislation, which
remains bottled up in the Ways and Means Committee.
"You're talking about powerful accounting firms, powerful legal
firms, powerful investment bankers in a conspiracy to promote these
tax shelters," declares Senator Chuck Grassley (R-Iowa), chairman of
the Senate Finance Committee, who sponsored the Senate bill. "They
also have a fourth arm. They hire some of the most powerful
lobbyists in town to work against this legislation."
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