TAX ME IF YOU CAN
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interview: rep. lloyd doggett

How serious is the problem of tax shelters? How big a problem is it?

It's a serious problem that runs into the billions of dollars. I believe it is a problem that has been growing steadily. While it initially targeted Fortune 500 companies that could afford to spend millions of dollars to engage in this conspiracy, gradually the schemes have been perfected, so that small, medium-sized companies as well as well-heeled individuals can take part.

What's wrong with the shelters?

There's nothing wrong with people planning to try to keep their tax load at a reasonable level, but the tax shelter business has become basically stealing from the Treasury. It's a matter of a conspiracy between attorneys, accountants, investment bankers and others that develop schemes - really, scams -- to dodge taxes in ways that go far beyond legitimate tax planning.

Should the ordinary taxpayer be concerned about this?

Only if they enjoy paying someone else's share of the tax burden. I think the ordinary taxpayers get hit twice; first, in the cost of compliance. When the tax lottery comes along and they catch one of these tax dodgers, they pay an immense amount to prosecute the complex schemes.

The tax shelter business has become basically stealing from the Treasury.

But more significantly, the ordinary taxpayer, paying their share -- they have to pay for somebody else's fair share of national security, homeland security and all the other cost of government.

If you look at the problem over the past decade or so, what are we talking about in terms of total lost taxes to shelters?

Hundreds of billions of dollars. The estimates -- because these are so secret -- vary considerably, I expect, in accuracy. The wide range of estimates that I've heard begin at $10 billion a year and go steadily upward.

What's the high figure?

The high figure [is approximately] $50 billion to $60 billion a year.

photo of doggett

As a member of the House Ways and Means Committee, Rep. Lloyd Doggett (D-Texas) has for several years been pushing legislation to shut down abusive tax shelters. He describes the tax shelter phenomenon as "a conspiracy between attorneys, accountants, investment bankers and others that develop schemes, really scams, to dodge taxes in ways that go far beyond legitimate tax planning." Doggett also tells FRONTLINE that he believes meaningful reform, including a prohibition against shelters that lack "economic substance," can only be accomplished by congressional action, but that reform is being blocked by the House leadership, including Ways and Means Chairman Bill Thomas and Majority Leader Tom DeLay, because, according to Doggett, "[The] ultimate goal is to eliminate the progressive income tax."

These are figures you hear from tax experts? I mean, they're not just sort of loose talk?

It's not just loose talk. But I must say it's difficult to get an accurate estimate, because so much of this is clandestine. The tax returns are secret. The Internal Revenue Service is so inadequate in dealing with this problem that it is an educated guess as to the size of this problem. …

What is a tax shelter to you? What is this operation?

Another person has defined a tax shelter as basically being something that would appear to be stupid if it were done by any ordinary person for economic purposes. …

So what is the game? What's the point of shelters?

The normal businessperson wants to earn a profit. The normal tax shelter is designed to produce a loss. No ordinary businessperson would engage in this sham transaction, except as a way to generate more and more paper losses in order to dodge taxes.

Who's driving this process? What's the engine behind the tax shelter business? Because it's become, as you say, a very big business. Who's pushing the business?

The force behind this tax shelter movement comes from those who stand to make millions of dollars from having this whole tax farce continue -- principally, the leading accounting firms, the law firms, investment bankers who make a fortune from it. They're out peddling these proposals.

I had one Texas-based company tell me a few years ago they were getting a phone call every week with these kinds of proposals. We've had representatives of the tax bar, the tax lawyers, involved in these measures come forward and describe hundreds of proposals that are coming out, enticing their clients to do things they ordinarily wouldn't do to stay competitive with other businesses that they deal with.

What's going on here? I mean, you're talking about leading accounting firms in America. You're talking about major investment banks. You're talking about prestigious law firms, institutions we look up to. What's happening?

I think that money has driven it all, and the approach they might have taken in an ethics course in business school. The desire to make millions of dollars here has driven them to do things that are inappropriate, and they've gotten a great deal of encouragement here in Congress, where the attitude is that "Friends don't let friends pay taxes."

Let's look at Congress. What are you talking about? Where is the stumbling block here? What is it Congress should have done, and why aren't they doing it?

The Congress should have passed comprehensive tax shelter legislation to prevent these shams from occurring. I have been working on this since 1999. Finally, this year, the United States Senate has moved forward with bipartisan legislation to correct this problem. The House, however, has refused to even consider the problem. It doesn't want to hold hearings. It doesn't want to look at Enron tax returns. It doesn't want to take any action at all, and there's a good reason for that.

The same people that benefit from these tax shelters provide tremendous benefits to the leadership of the House and the House Ways and Means Committee to block this. They don't have to dominate or control all members of Congress, as long as they have a stopper in the House Ways and Means Committee. With Tom DeLay in the Republican leadership here, they can kill any tax shelter reform legislation, and that's what's happened.

How do they do it?

They do it by never permitting an amendment to a tax bill on the floor of the United States House that has not been approved by the Ways and Means Committee. The Ways and Means Chairman Bill Thomas discourages his members from voting for any amendment in committee that he does not approve. As long as he's standing there opposing this reform, as long as he has Tom DeLay's approval to do that, nothing will happen.

And how? Which lobbies are you talking about and which groups? How do they get their influence?

They get their influence every time there's a campaign fundraiser here. They get their influence by being smart, creative, effective individuals who oil the machinery of government with substantial hundreds of thousands of dollars, millions of dollars of campaign contributions. The accounting firms, the law firms, lobbyists like Ken Kies, -- they're oiling the machinery of government. But in this case, they don't want to produce anything; they just want to stop any meaningful reform.

Specific case -- Larry Summers, when he was Treasury secretary in the last years of the Clinton administration, proposed a series of reforms in the area of tax shelters, increased penalties, definitions of economic substance, disclosure requirements -- a whole variety of things. What happened to Larry Summers's proposals for reform on tax shelters?

In the House, absolutely nothing. We got one hearing in 1999. There has not even been a public hearing since that time. I've offered amendments and substitutes at various times in committee, sometimes through the Democratic substitute on the floor of the House. Nothing has occurred in the House. The opponents of reform have been totally effective in blocking almost any debate, much less approval of legislation in the United States.

In the Senate, we fared better. Fortunately, through the increasing leadership of Senator Grassley, the Senate -- a Republican Senate -- by overwhelming margins, 95-5, have approved legislation that includes these tax shelter measures. But that has not changed the atmosphere here in the House of Representatives. …

Tell me a little bit about you. You had two confrontations with Ken Kies in March and November of 1999. Put them together; what is the essence of what you and Ken Kies locked horns about?

The confrontations were significant only by the lack of serious questions by other members of the committee. But Ken and I locked horns over whether or not there is an abusive tax shelter industry, whether it even exists, and whether it is promoting proposals that are designed solely to encourage tax dodging. Further, we disagree. Ken and I disagree over whether any meaningful reform is necessary. Like so many others, he's all for addressing abusive tax shelters. They just don't want any legislation to do that.

So Ken Kies and the leasing industry are essentially saying there is really not much of a problem? You don't need to do anything?

They're saying this can all be dealt with under current law, by effective enforcement of that law and by the actions of the Treasury Department. Of course, this raises another whole problem, and that is the incestuous relationship between the tax shelter industry and the Treasury Department, which is in charge of coming forward with the proposals, being an advocate for the Treasury. Instead, they've been advocates for the tax shelter scams.

What's the incestuous relationship?

The tax shelter promoters and the attorneys who defend them move for the industry, peddling these tax shelters right into the Treasury Department, which is supposed to regulate and prevent these tax shelters. The Coalition for Corporate Taxpayers was formed by Ken Kies [and] Barbara Angus. Barbara Angus is now a leading official in the Treasury Department. The whole purpose of that coalition was to kill the tax shelter bill I offered.

So you're saying the fox is in the chicken house?

The fox is completely controlling the chicken house at the Treasury Department of the United States.

What was it that alerted you to the tax shelter problem?

A communication from a constituent in Austin, Texas, drew my attention to a Forbes cover story about the leading accounting firms peddling dicey tax shelters. That led to some questions, a hearing here. Then, the more I dug into this problem, the more outraged I was personally by seeing supposedly legitimate respectable firms out there causing people to do things they wouldn't ordinarily do.

What is the dynamic inside those firms? I mean, we look to leading accounting firms, leading law firms, to guide us as citizens to obey the law. When it comes to taxes, nobody wants to pay any more taxes than they're due, but you nonetheless look to professionals. One thinks of accounting firms and law firms, like doctors and others in terms of ethics. What happened? Was it the go-go 1990s that just undermined the ethics of these professions? You've been studying this for several years. What's your sense of what went on?

My sense is that you take some of the best and brightest people in the country, and you urge them with a strong profit motive to come up with the most creative, imaginative schemes to dodge taxes. They're told "Sell, sell, sell," to sell and peddle these tax products. And they've converted many of our corporations, the corporate tax offices, so that the tax office is no longer involved with compliance as much as it is a profit center. The idea is that the tax department in major corporations should generate profits in the form of tax losses.

If you talk to somebody like Ken Kies and others, they'll say, "Look, what we're doing is perfectly legal. We're doing what the law allows us to do. There's nothing wrong with it, and if you don't like it, you should change the law."

Well, that's their rationalization. They push the law to the limits and then just a little further, and they assure, through their lobbying, that no change in the law ever occurs. They like the system they have now. It allows a few to avoid their fair share of the cost of government, and to shift the burden of government to the many. …

Why are shelters so hard for the IRS to spot and do something about?

They are designed to be so complex that even the IRS can't understand them. Secrecy is the other element of these tax shelters. Many of them are referred to as "black box proposals" that are hidden even from some of the clients of these accounting firms. So [it's] only a few people operating in secret using very complex devices that even the auditors have difficulty deciphering.

Somebody said they're sort of like a bum deal that smart people do, and wouldn't do, if there weren't a tax benefit attached to it?

These tax shelters are deals that anyone would look at and say, "This is stupid to be involved in this transaction" -- stupid, except for the fact that it cheats the Treasury out of billions of dollars. …

Why do you see so often that the Cayman Islands pops up as a place that either a bank has a branch or money flows to or paperwork goes? Why the Cayman Islands?

Because these are jurisdictions that have little or no tax on transactions. They have significant secrecy, so that it's difficult for someone like the Internal Revenue Service to find out exactly what happened there. What you have with all these transactions in common is the use of what are called "tax-indifferent parties." You want something like a municipal entity that pays no taxes. You want a foreign government that pays no taxes here. You want to hide all of your gains and rewards out in a jurisdiction that does not tax them. …

Now the IRS has been whacking away at this problem for quite a while. Every once in awhile you hear a case. They go after Merrill Lynch, they get an agreement with PriceWaterhouse or they get an agreement with Ernst & Young. What do you make of the situation? The campaign against tax shelters has been going on now for five or six years. Has it been effective?

Relative to the billions of dollars that have been lost to the Treasury, I think what the IRS has done recently is to issue a series of parking tickets. They are assigning some penalties to these firms that is nothing compared to what was raked in the way of tax dodges.

Now what's the problem here? Is the IRS playing catch-up? Is it behind the curve? Does it lack resources? What's the heart of the problem?

… There is a shortage of resources at the IRS. These are very complex transactions that require talented auditors. They have a shortage of those. These are secret proposals. All of these are factors that prevent the IRS from doing an effective job.

But the policy for the IRS is coming from the Treasury Department. I think the Treasury Department is sending forth a signal that they don't really care how effective this job is that the IRS does.

If you go back over this five- or six-year period, that has kind of been an increasingly intensive campaign. The feeling is though, there's a kind of a cat-and-mouse game going on. … Talk about that a little bit.

Because these tax shelters are so complex, it just does not work to deal with them on a case-by-case basis. You hear about IRS effectively dealing with one transaction, and so it's changed slightly, but it comes out in another form. The IRS is just getting a few of the proposals. The creative people who come up with the tax shelters always find a way to circumvent it. That's why we need an economic substance rule, a fraud rule, that will cover more than individual transactions.

Explain what that is. What kind of a rule do you advocate to deal [with the shelter phenomenon]?

We need a general rule that protects legitimate transactions, but that says if what you're doing is to generate losses for the tax collector, not to generate gains for your shareholders, that doesn't have economic substance. Economic substance is nothing more than the kind of analysis that businesses go through all the time to see if the deal is worthwhile.

I would have a broad rule that the courts could apply -- and should apply -- to prevent these sham transactions, not just to catch one and let 10 more go through and wait to get the other nine.

There are people on the other side who say that, if you pass a broad rule that requires economic substance across the board, you will kill the legitimate leasing industry, or you will kill other legitimate business.

… I believe that we can take account of all really legitimate transactions, see that they continue, but not permit these sham transactions. It seems to me to be a very pro-business stance to want the playing field leveled. It's unfair to the business that doesn't engage in these tax shams to be placed at a competitive disadvantage with another company that does.

You mentioned a few moments ago that they had these LILO -- lease in lease out -- agreements in Germany. I thought the IRS shut those down with a rule.

There was an IRS rule on LILOs, and they come up with various other devices -- SILOs, other cousins, nephews of LILOs -- to circumvent and achieve the same result.

So the leasing deals are still going on?

The leasing deals are still going on. That's why some of the leasing industry have fought so vigorously the legislation that I've offered.

We just saw a conference in Paris, what they call big-ticket leasing advisors, I guess. Some of the banks were there, but it was mostly experts. I mean, they're just operating right out in the open, and they're sort of saying, "Well, we're just doing what's legal."

Well, they're doing what's wrong, I believe. One might question -- and I hope the IRS does question -- how legal they are. The big question is why the Congress won't do anything about it. Why we should justify leases that make no economic sense and permit people to dodge their taxes in this fashion?

[Through these leasing deals, are] American taxpayers in effect subsidizing city governments and state governments in rich countries of Europe, Germany, Switzerland, Austria, France?

There is a direct subsidy from our taxpayers there. Those cities, governments, are not doing these deals because they want to help Americans dodge their fair share of taxes. They're doing it because it means millions of dollars for them.

They get fees.

They get fees, they get money from the leases, they get an incentive. The same peddlers that are encouraging our large corporations to dodge their fair share of taxes are telling these municipal governments in Europe that they can make a killing off of this for doing nothing and being exposed to no risk.

What if the legislation that you advocate got passed? Would that lick the problem for good?

It would be a start. But as soon as that got signed into law -- and even before -- there would be new conferences about how to circumvent it. So I think if we get what we need, we will need to begin the reform process almost as soon as it becomes law.

… What about the shelter promoters -- the people you've described as driving the business, the accountants, the law firms, the investment banks? Do they face any risk at the moment?

They need to be subject to penalties directly for promoting these scams. When an accounting firm promotes something that is only a slight change from what the IRS has already declared to be improper, they need to be exposed to penalties directly, so that it's not just the taxpayer, but all of those involved in this tax scam conspiracy.

… What's the situation at the moment? …

At present, there's very little disincentive for this kind of creative outrageous accounting. There's very little reason for someone who wants to make a fortune out of tax scams to not do it. There's little chance they'll get caught. There's little chance the taxpayer involved will get caught, and if they do, there will be no realistic penalty.

Now you're presenting a picture of the IRS and the taxpayer that is almost totally at odds with the last view we had of this world. In 1998, there was a series of congressional hearings, in which the IRS looked like the big, bad Big Brother coming after people unfairly, treating them in almost dictatorial fashion, overpowering. What wrong with the picture?

Maybe both views are right. Much of the focus of 1998 was on the way the IRS treated some individual and small business taxpayers. None of that focused on abuse of the giants of industry. I think the IRS has misallocated some of its resources in the past, and I think some of the hearing of 1998 was totally unjustified. It was part of an effort here by some in Congress to demonize the IRS and the entire system of progressive taxation in this country.

So you think people wanted to neutralize and sort of terrorize the IRS, and make them sit back on their heels?

I think there were those who wanted to terrorize IRS employees and discourage them from doing their job. There was a need to deal with the legitimate abuse within the IRS -- and there was some -- but not with reference to tax shelters. I don't think there's ever been a situation of the IRS devoting too much in the way of resources and being too aggressive in fighting tax shelters. …

What do you think the IRS did in response?

I think the IRS pulled back. I think they did even less of their job than they were doing before 1998, and they weren't doing a good job in 1998 on corporate tax abuse.

You have a picture then, I guess, of the IRS, in terms of dealing with the big-time tax shelter business, as being outgunned, outmanned, outshot.

The IRS is totally outgunned. Some of the same people that are blocking reform here in Congress are the ones that want to tie the IRS's hands by giving it inadequate resources to police corporate tax shelters.

Who are you talking about?

I'm talking about the leadership of the House of Representatives -- specifically Tom DeLay, my colleague from Texas.

And committees?

The Appropriations Committee as it relates to the IRS adequacy; the Ways and Means committee and Bill Thomas, as it relates to tax shelter administration. …

Let me be sure I'm hearing you right. What you're saying is that there's a deliberate effort in Congress, by the Republican leadership in the House, to sabotage the ability of the IRS to effectively monitor tax cheating?

I believe that is what happens here. I think there are many people in this House of Representatives who don't believe in progressive taxation. They want to substitute an entirely different system, and to the extent the IRS cannot do its job, it helps make their case for a total rejection of the progressive tax system.

So you're saying the House Republican leadership, Tom DeLay, maybe others, deliberately want the IRS to fail at its job?

I believe they do. They still want dollars to come in to pay for various pork barrel projects and the like.

And the congressional salaries?

The congressional salaries and everything else. They want revenue in. They don't want government to cease operating; at least yet. But they want a totally different form of taxation. The more failures the current system has, the more they can justify throwing out taxation of income and moving to a totally different system.

… [The] economy appears to be coming back. Where are we headed on tax shelters? What are we going to see? Say there is no reform by Congress; there is no legislation passed. You have indicated you think is likely to be the case. Where are we headed if Congress doesn't take steps?

We're headed toward an unequal tax burden that becomes more unequal, that shifts more of the cost of government to individual taxpayers and might eventually lead to the elimination of corporate taxation entirely. …

What can ordinary taxpayers do about this?

Demand accountability from their elected officials. They can't replace the board of directors at the corporation that does this. They can't prevent the accountants in the law firms from trying to work every angle to dodge taxes. They can demand accountability of their officials.

Whom do we hold accountable? Who is accountable?

I think every member of this Congress is accountable and responsible for the failures of the Congress, for not being more forceful in demanding that reform occur.

… You've seen the Senate take action. If the Senate takes action, then who is accountable?

In the United States House, Bill Thomas as chairman of the House Ways and Means Committee, Tom DeLay as Republican majority leader, are together blocking any reform. Every member of this House who votes to keep them in power ought to be held accountable for what they have done.

What is the goal of folks who don't want to see an effective tax reform to beat tax shelters?

I believe their ultimate goal is to eliminate the progressive income tax. They don't want any tax on corporations at all. They want to shift to a different system of taxation that involves no taxation of income. As nice as that seems when you're approaching April 15, we have to pay for national security and homeland defense. We have to pay for it some way, and this is the most progressive and reasonable system I believe for doing that. …

 

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posted february 19, 2004

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