The New York Times
October 5, 2004
Republicans Try to Dilute Provisions in Tax Bill
By EDMUND L. ANDREWS
WASHINGTON, Oct. 4 - Despite widespread agreement that abusive tax shelters are costing the federal government billions of dollars a year, House Republicans are working to eliminate or dilute provisions in a new corporate tax bill aimed at cracking down on illegal shelters.
The provisions, opposed by a range of business lobbyists and tax lawyers, are part of a larger battle in Congress over how hard to attack the rapidly expanding use of complex transactions that turn real-world profits into tax-world losses.
The issue is coming to a boil in a House-Senate conference committee that Monday night resumed considering a corporate tax bill that would provide up to $170 billion in tax breaks.
With only a few days left before Congress is supposed to adjourn, lawmakers are trying to make hundreds of last-minute changes that could affect tens of billions of dollars in tax revenue. Business groups, ranging from the National Association of Manufacturers to the Business Roundtable, have worked with tax lobbyists and accounting firms to protect the tax shelters.
A study prepared last year for the Internal Revenue Service estimated that abuse of tax shelters cost the federal government $12 billion to $18 billion a year.
A study last week by Citizens for Tax Justice, a liberal research organization, reported that 82 of the nation's most profitable companies paid no corporate taxes in at least one of the last three years.
Both the House and Senate have passed bills that would raise billions of dollars by shutting certain kinds of tax shelters. But House Republicans have balked at several provisions that the Senate passed with broad bipartisan support.
One crucial Senate provision, for example, would greatly increase penalties on people who spin complex transactions that serve no other purpose except to avoid taxes.
Supporters of the Senate bill say it would address a glaring weakness of the system: even when a court finds that a tax deal is abusive, it rarely imposes penalties beyond making a company or a person pay back taxes.
"Multinational corporations use complicated schemes to claim they've had losses when they've really had gains," said Representative Lloyd Doggett, a Texas Democrat who has been pushing for such a provision since 1999. "These schemes are so complicated that even the experts have difficulty getting to the bottom of them. One way of challenging these apparent tax losses is to say this complex scheme that may involve many different entities has no economic substance."
The nonpartisan Joint Committee on Taxation, which provides the revenue estimates on proposed tax bills, estimated that just one of the disputed provisions would raise about $15 billion over the next 10 years.
But House Republicans oppose that measure. Representative Bill Thomas, chairman of the House Ways and Means Committee, said two weeks ago that the provision was unnecessary and would have a chilling effect on legitimate business deals.
Mr. Thomas also opposes a provision in the Senate bill that would allow the Internal Revenue Service to demand that companies promoting tax shelters turn over a list of their customers.
Opponents of the Senate bill's tax shelter provisions are particularly incensed about a provision that has strong support from Senator Charles Grassley, Republican of Iowa and chairman of the Senate Finance Committee.
That provision would tighten the definition of tax shelters, putting into legislation the well-established judicial doctrine that a financial transaction has to have "economic substance," which means it has to have a purpose beyond reducing taxes.
Kenneth J. Kies, a prominent corporate tax lobbyist in Washington who has defended some of the biggest tax shelters, said the Senate bill would have ensnared scores of companies engaged in routine transactions.
"This is a much broader provision than its being made out to be," Mr. Kies said. "It would set up a standard for economic substance that would be very hard for garden-variety business transactions."
But supporters said the provision would simply add some teeth to a concept that courts have used for years.
The dispute goes to the heart of all kinds of tax shelters, but it could have a big impact on one of the biggest kinds of transactions in recent years: leasing deals in which cities, including New York City, sell subway trains and other public infrastructure to private investors, who then lease them back and take advantage of tax write-offs for equipment depreciation.
The goal of the deals is to give investors tax breaks that are of no use to municipal governments, including many cities and organizations outside the United States, that pay no federal taxes. For the cities, the deals reduce the cost of new equipment at the expense of the federal Treasury.
Both the House and Senate bills would prohibit such deals in the future, but the Senate bill could invalidate many deals that are already in existence. As a result, the Senate bill would raise about $45 billion over 10 years, while the House bill would raise about $19 billion.
But if the final law includes the Senate provisions on "economic substance," investors who entered into such deals could face stiff penalties on top of losing their tax shelters.
Joseph Bankman, a professor of tax law at Stanford University, says California has already reaped $1.3 billion from a similar provision it passed one year ago. The California law declared that any tax shelter that fails the test for economic substance could be subject to penalties but it offered an amnesty to people who came forward voluntarily.
"It is still very much the exception rather than the rule that people have to pay penalties," Mr. Bankman said.
Calvin Johnson, a professor of tax law at the University of Texas in Austin, said the Internal Revenue Service would have to impose "gargantuan" penalties before it really frightened off companies or individuals trying to shelter tens of millions of dollars.
But Mr. Johnson said there was a pressing need to attack the widespread view, which he said was generally accurate, that people can avoid penalties simply by obtaining an opinion from tax lawyers in advance of a deal that says the transaction fits the letter of the law.
"There is a common view that you can set up an elaborate scheme and that if you have the opinion of a respectable attorney that you can't be assessed any penalties," he said.
But the conventional wisdom may be changing. In a decision that electrified tax-shelter promoters, a court ruled in August that Long-Term Capital Management, the huge hedge fund that nearly went bankrupt in 1998, took $106 million in improper tax deductions and owed $56 million in taxes and penalties.
"The Long-Term Capital case showed that the I.R.S. has many arrows in its quiver," said Tim McCormley, executive director of the Tax Executives Institute, an association of tax professionals who work at major corporations. "In the past, taxpayers had what they viewed as a 'get out of jail free' card if they had an opinion from a highly respected law firm. That's not the case anymore."