Reprint permission from the August 2, 2001 issue of Crain's Chicago Business.
The corporate income tax is on life support, and Congress needs to show mercy and pull the plug.
The death knell has already been sounded at the unlikeliest towers of power — the majestic U.S. Courts of Appeal in St. Louis and Atlanta, and U.S. Treasury Secretary Paul H. O'Neill's sumptuous Washington offices.
Never mind that politicians' disdain for corporate tax avoidance has become a predictable applause line in their canned stump speeches. Or that the Clinton Administration was only inches away from codifying a "general anti-avoidance rule," which would have made it illegal to dodge taxes — even legally.
In June the U.S. Court of Appeals for the Eighth Circuit, sitting in St. Louis, unanimously reversed a federal district court's ruling that Alliant Energy Corp., a huge electric utility operator based in Madison, Wis., unlawfully cut its tax bill by $100 million by trading overseas stocks in the form of American depository receipts. Alliant's strategy was a tricky one involving its recognition of dividend income eligible for a foreign income-tax credit, along with a tax-deductible capital loss on shares sold "ex-dividend."
A week later, the Eleventh Circuit Court of Appeals, sitting in Atlanta, reversed the U.S. Tax Court, and held that United Parcel Service of American Inc. was entitled to the $1.8-billion tax benefit it created for itself when it restructured its program for providing extra package insurance to its customers. UPS had moved profits to an untaxed insurance affiliate in the tax-haven of Bermuda, and now the appellate court has concluded that the company had every right to reorganize itself to save taxes.
Both the Alliant and the UPS cases hit the IRS hard. As long as there is a patina of "business purpose" behind a transaction — and even a hint of profit prospect or risk of loss — tax-avoidance transactions are likely to be upheld.
No wonder. The IRS has suffered severe budget cuts. Its auditors are demoralized. Congress has imposed new limits on its conduct. And tax shelter promoters are more eager than ever to play the lucrative game.
So, corporations are emboldened to assert their legal right to avoid income taxes by any legal means, a right guaranteed to them as far back as 1935.
But Secretary O'Neill promotes an entirely different agenda, and President Bush and Congressional leaders on both sides of the aisle are listening to him attentively. The secretary would "absolutely" allow the corporate income tax to die a not-so-natural death, and all this fuss about tax shelters would become moot.
Mr. O'Neill sees the corporate income tax for what it is — just another tax collected from all of us by the companies we own, the companies we patronize, and the companies which employ us.
The tax discourages savings, investment and employment.
It also forces companies to grow by going deeper into debt. After all, interest expenses are tax-deductible; dividends are not. And highly leveraged companies are most vulnerable to economic downturns.
By some accounts, the costs of compliance — and avoidance — may be as high as one dollar for every dollar of corporate income tax the Treasury actually collects. As the tax takes its last labored breaths, let's join Mr. O'Neill in wishing it good riddance.
Marc J. Lane ([email protected]) is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law. His recently published book is Advising Entrepreneurs: Dynamic Strategies for Financial Growth (John Wiley & Sons, Inc.).
Copyright © 2001 by Crain Communications Inc.