Corporation Tax Break Loophole Ruled Legal

by Geov Parrish

Under present law, Congress has allowed a breathtaking array of loopholes that corporations can use to reinvest income, rendering it untaxable. The only stipulation -- and it is one that companies pay their accountants and lawyers big money to circumvent -- is that the scheme must have a purpose beyond skipping out on the IRS. Most large and mid-sized accounting firms won't touch these sorts of risky tax dodges, figuring that the potential cost of long court battles with the IRS outweighs the benefit.

However, in the years since the Clinton Administration pushed through deregulation of the banking industry, allowing it to be coupled with insurance, investment, tax preparation, and a host of other services, a new breed of financial management companies has sprung up that specializes in risky, high- return tax dodges.

In last week's 5th Circuit case, Compaq Computer had, in the space of one hour, used 46 trades to buy and sell more than $900 million in Royal Dutch/Shell stock. The essentially fictitious transactions saved Compaq more than $2.7 million in U.S. taxes. According to the circuit court, because there was risk involved -- even though the risk was nearly zero, given the instantaneous nature of the trades -- it was a "legitimate" investment, one that just happened to carry enormous tax benefits.

The Compaq plan was carried out through Twenty-First Securities, a New York investment "boutique" that specializes in tax reduction. The court, in reversing a 1999 United States Tax Court ruling on the case, was the only party that didn't seem to know the whole charade was dedicated entirely to skipping out on taxes. The 5th Circuit is now the second U.S. District Court to offer such a ruling -- the 3rd Circuit decided similarly last year in a case involving major defense contractor Alliant Techsystems -- and therefore the U.S. Supreme Court is considered unlikely to take on such a case. So it has effectively become a national precedent.

(There is a special, flagrant irony in a company like Alliant -- which specializes in munitions like the MK46 torpedo and anti-tank land mines -- being almost entirely depending on government largesse for its income, yet standing accused, until the 3rd Circuit rewrote the law, of cheating on its taxes.)

The IRS has made ferreting out such corporate tax schemes one of its biggest investment priorities. It recently announced a program that gives amnesty to corporations if they acknowledge using tax shelters and name the promoters, like Twenty-First Securities, that they use. But now, the shelters are legal, a product not of Congress (which has steadily been reducing the corporate share of the national tax load for the last 40 years, to where it is now by far the lowest of any Western democracy), but of two decades of conservative court appointments. Even during the eight years of Bill Clinton, courts skewed steadily more conservative, with new appointees meeting two "litmus tests:" their stances on reproductive rights, and their stances on corporate property rights.

The result is that today, corporations in America not only have far more rights than the individual, but far fewer responsibilities. Of course, that's not entirely fair; if you can buy $900 million in stock in an hour, you, too, can partake in these schemes.

In the weeks and months since September 11, it has become fashionable for big corporations -- entities that span the globe and owe their allegiance to no country -- to loudly proclaim their patriotism, wrapping themselves, and their products, in the U.S. flag. Far more of those corporations will now be able to avoid paying taxes. That will be left to you and me. No wonder they love America. No wonder they can afford the commercials.