"Tax Me if You Can" would have been better if you'd explained not just the structure of the LILO transaction, but how the tax benefit is generated. I kept waiting the entire program to learn that.
Finally I skimmed testimony in the Grassley Committee hearing and the anoymous witness explained it in a few paragraphs. Essentially First Union is buying the German municipalities unneeded depreciation.
My question though is how can Congress fix it without damaging legitmate subleasing operations (What the leasing back to the German towns is).
I suppose leasing assets back to the original lessor could be outlawed, but corporations could evade by setting up dummy third party intermediaries or fourth party or fifth party ... The IRS could be chasing the leases and sub leases and sub sub leases all over Europe or whereever (I think LILO has been done here in the U.S. too.)
So, what's the solution?
Falls Church, Va.
You gotta love the logic of these pro business/anti government folks. Using their mindset, it would seem justifiable to rob your grandmother because her perpetual saving all of these years is taking money out of the economy and hurting America. These are the same schisters who cry about too much government regulation and once you remove the regulation they use every trick to cheat the country and their own investors.
And yes folks, big businesses are real entities, with real profits and they need to pay taxes back into the system that supports the prosperiety they enjoy. After all, they are using the infrastructure provided by our tax dollars to make their buck so why shouldn't they contribute? If nothing else, this informative Frontline piece illustrates the need for more government regulation and a bigger, more powerful IRS with real teeth. I shudder to think of it; but, unfortunately, the greedy in this country make that necessary.
Please explore both sides of the issue regarding income taxation and discontinuing stating that the tax code is so complex, that no one but state and federal officials are capable of understanding it. If the tax code was that difficult to understand, they would'nt allow lawyers to do it.
The IRS has hundreds of government forms they have refused to educate the public on such as (4598, 4852, 8275) as an example, which allows americans to question their employers claims of gross income, which the IRS vehemently tries to deny. The IRS denies its own tax code without recourse, in order to hide the fact that the taxing codes have never really changed for over seventy years. The IRS gives the impression that they have the authority to change it but do not. They just present it in a different context and no one challenges it. If left up to our elected officials, they are bent on self proliferation for themselves, and defecation on the American people and their way of life. Its a sad situation that all we are left with are leaderless leaders.
la mesa, ca
One fact in particular jumped out at me while watching Hendrick Smith's report: Corporations are allowed to keep two sets of books: One for shareholders where they boast of their profits, and one for the IRS which hides as much projit as possible. It seems like a simple law doing away with this practice would stop a lot of the abuses that Smith described.
Why don't we make it so whatever corporations report to shareholders has to agree with what they report to the IRS? It seems the system would govern itself much more effectively. At least it would be a first step. Ultimately, the entire tax code needs to be burned.
What follows is a press release responding to FRONTLINE's program, "Tax Me If You Can," from The Equipment Leasing Association (ELA), which represents the $218 billion equipment leasing and finance industry:
"'We were taken aback by some of the language used in the Frontline segment and ELA wishes to clarify some of the statements used,' said Michael Fleming, ELA President. 'The industry welcomes a policy discussion around the appropriate role for leasing to tax-exempts. But, calling a legal business practice a scheme or fraud, that is inappropriate. Inflammatory statements, such as the ones made in the television segment, make it difficult for policy makers and an industry to address a very serious policy subject.'
Fleming points out that the equipment leasing and finance industry provides significant, much-needed capital and jobs across many different industries, companies and organizations. ...
Critics of leasing have attempted to depict some finance leasing to tax-exempt entities negatively to justify efforts to change longstanding and well-established tax principles surrounding the leasing industry.
'Leasing levels the economic playing field between profitable taxable entities and non profitable or tax-exempt entities with regard to the cost of acquiring equipment,' notes Fleming, citing that for decades Congress has encouraged investment in capital goods through tax depreciation. 'Tax depreciation allows an entity to recover the investment made in an asset. Congress and the courts have affirmatively provided for lessors to utilize tax depreciation when leasing to taxable corporations as well as tax-exempt entities.'
The current policy debate on lease financing to tax-exempts has focused increasingly on the nature of the asset, the geographic location of the asset and the nature of the lessee, as was the focus of the Frontline segment.
'However, all of these considerations have been and should remain unimportant under well established legal and tax principles,' said Fleming. 'The appropriate tax treatment of a sale and lease of a transit facility by a governmental entity in Frankfurt, Germany, for example, should be no different than the sale and lease of a transit facility by a governmental entity in Frankfurt, Kentucky.'
Contrary to what the PBS story depicted, the leasing industry is not opposed to the doctrine of economic substance. The economic substance doctrine is already the law, established by regulation and court decisions and is enforced through the IRS. The industry, said Fleming, is opposed to the statutory codification of the doctrine, not to the doctrine itself, because it will make the doctrine too rigid and create enforcement headaches. This opposition to codification is shared by the United States Treasury Department."
Congress has been a complete failure in monitoring and protecting the US tax system. People don't rob banks anymore. They create tax shelters to avoid taxes based on rules and regulations developed and approved by Congress. Given this important revenue stream they are failing miserably at protecting American assets. This is your job.
It was amazing to me that the big accounting firms would openly and knowingly not comply with tax shelter registration rules. While perhaps it is not criminal, it certainly has tarnished their reputations to new lows. I would view this as a material weakness in their corporate governance process, but of course they are private; do not have disclose these shortcomings to the public; and this is probably not an area the PCAOB will look at. These are the companies that are making billions in new fees related to Sarbanes-Oxley compliance and holding companies hostage to minute levels of internal control compliance. Only n America.
Let's make this a congressional election issue. It is time the small taxpayer is protected from the unethical and perhaps illegal activities of major corporations like Wachovia Bank, the WB. Ask your congressperson what he/she has done to adequately protect the process for collecting revenues. They probably devote 99% of their time on project to spend what does come in. Doesn't make sense to me.
The day after your broadcast the Equipment Leasing Association defended their industry with a news release and I sent the association this email:
Hi, I just read your news release at the US Newswire website (Equipment Leasing Association Weighs in on PBS Television Show Frontline's 'Tax Me If You Can' 2/20/04). I have a few comments about what you have written.
The PBS show didn't leave me with the impression that leasing is bad. Just the few transactions made only to give a tax break to someone.
Just because the current law doesn't make this sort of thing illegal doesn't make it right! In a nation where many states have had to make drastic adjustments in budgets to cope with the changing financial picture we must be willing to admit these schemes have seen their end and work toward a more honest and ethical tax system.
You guys are going to have stop calling this a legitimate business practice and call it what it is - tax evasion!
end of email
Thanks for another thought provoking FRONTLINE.
West Columbia, SC
FRONTLINE's editors respond:
The press release from the Equipment Leasing Assocation is published here in this discussion area for others to read.
If the tax-shelter activities you exposed on your program had taken place in the early years of this country, the participants would have been charged with treason for defrauding the government of tax revenues. How longer can this country be soft on white-collar crime? Forget the "war on drugs" and concentrate on tax shelters. Something tells me there is a lot more money involved.
As a practicing CPA with a Masters Degree in Taxation, I watched with great interest your program "Tax me if you Can". I work for a small local accounting firm in Akron, where even considering the prospect of selling a tax shelter is not even an option. I've worked for quite a few small local public accounting firms in my career, and none of them ever considered selling any type of tax planning devise that would be considered illegal.
While I generally agree with much of the program, there are a few points that I feel need to be considered and to date I've yet to see these points made in any public discussion.
The first point is that there is a certain element in our political climate that has made it a focus of their message that paying taxes is either immoral or unpatriotic. Between their speeches on Capitol Hill to their talk show demagogues (sp) they have employed the strategy that we Americans are over taxed notwithstanding the fact that tax rates in this Country are far far below that of the 1970s. Given this message from those who lead, is it not logical and plausible that there will be those in our society who see tax shelters as a way to lower their tax bill to what they believe is their fair share?
The second point is that there are individuals out there who have made a living "catching CPAs mistakes". I point you to an article dated 2/10/2004 on a website www.AccountingWEB.com entitled "Businessmen Specialize in Catching Tax Preparers Mistakes". There are two "entrepreneuers" who will search your return to find what they term "mistakes", and take up to half of the "overpayment". Meanwhile, if they find that the taxpayer paid too little, well they don't bother to clean that up either.
When you combine the above two points, it's clear CPA's and tax attorneys are under significant pressure to find ways to lower a clients tax bill. Some have felt that they need to do it regardless of it's ethical implications, while others like myself try to do it in an honest way...only to get burned for making a "mistake".
Thank you for your very informative program. If I correctly understand it, the final conclusion was that Congress and the IRS needs to eliminate tax shelters. This misses the point entirely. Congress really needs is to eliminate the income tax and replace it with a national sales tax.
I just wanted to add another comment about Wachovia's willingness to pursue profits no matter how unscrupulous. Even as they are being investigated by various regulators for securities fraud the bank is currently has a lawsuit against a Philadelphia area charitable trust to change its commission from a net income base to a total asset base. They only made about $5mil. on an $130mil. trust last year. I guess that wasn't enough, they need to squeeze some more out and to hell with any good the trust provides the community.
Wow! After so many tears and years, I have learned so much from Frontline and PBS. I was hit by a fire some years back and it put me in a situation that I could not buy a home at all. I am just a common man. I don't have a university degree. I do know that I may never own a home. How can the people in this Frontline story do this? --they buy nothing in other countries and I can't get a Bank loan from any Bank for a mere $175,000.00.
We missed something when these people graduated from our great schools, where they learned all this good stuff. It seems a lot of them should have been taken out back to the shed on graduation day (spare the rod spoil the child). After they come out of the shed give them an American Flag. Maybe that would have helped all of us.
Congratulations on a very dramatic and well constructed show.
One or two problems: you got so close to the forest that you missed the trees. Chairman Alan Greenspan, Chairman of the Federal Reserve Board, testified on May 21,'03 before the Joint Economic Committee of Congress that "only people pay taxes... capital (businesses) only push their tax costs off to others."
Exactly! A corporation is only a legal shell; ultimately the profits or wages go to people - so tax the people and quit trying to tax businesses.
Taxing business only distorts the real picture of who pays the taxes that businesses remit to governments; clue: it's the customers (unless a business is failing, then profits go away and wages are cut).
Another missed forest: 120 countries in the world use the "Value Added Tax (VAT) which really acts like a giant tariff on our goods. Worse, when those VAT countries export to our shores, they srip out the VAT in their products prices. Thus the foreign goods are more competitive on our shores than our own goods which are loaded with federal taxes (payroll and profits taxes).
The answer is the "Fair Tax", a bill now in Congress as HR 25 in the House, and S1493 in the Senate. It's a national sales tax which includes a "rebate" so that poor folks won't pay any federal taxes. http://www.fairtax.org/
Manhahattan Beach, CA
I am thrilled to finally see a program on the air discussing tax shelters, schemes used by the largest of corporations and wealthy individuals to minimize their taxes. These tax avoidance arrangements are not new, merely reinvented every time Congress tries to close them up with a new law. Not only are these entities minimizing their US taxes but shelters are used to minimize or eliminate all taxes worldwide. This is a global problem, not just a US phenomenon. Foreign governments are dealing with the same loss of revenues that we face due to these shelters. It stands to reason: the more special interest money comes in-- the more special interest laws go on the books.
It seems to me the best way to eliminate the loopholes is to send a message to Congress via the vote. That's what campaign reform is all about. Congress makes the laws, the IRS just tries to enforce them.
The "Tax Me if You Can" story is infuriating and outrageous, but not surprising. The reports in the piece are predictable in a system where the law-making process is sold to the highest bidder. The banking industry bought deregulation and weak legislation at bargin prices, in the way of campaign contributions. Lobbyists would not get their foot in the door if it were not for the implicit promise of campaign money from their clients.
Taxation and all other social issues can only be resolved in a fair and honest way after the influence of private money is removed from government, and that can only be achieved with public campaign financing.
Clean Money / Clean Elections is the reform that makes all other reforms possible.