Overnight, 1,300 miles of pristine shoreline turned to blacktop. Wildlife caked in oil looked like a Hollywood casting call for an Al Jolson biopic. The remote locale made clean-up difficult. Twenty-three years later, fish stocks have yet to return to their pre-spill levels.

A court would eventually level $5 billion punitive damages against Exxon — equal to a single year's profit at the time. The company appealed, chipping away at the sanction until the U.S. Supreme Court (natch!) slashed that figure to $500 million in 2008.

Yet through the miracle of the tax code, Exxon would end up paying only about $325 million. No matter how negligent a company is, court judgments are considered nothing more than a business expense and are therefore tax-deductible.

Republican presidential nominee Mitt Romney is the poster child of offshore tax schemes.
Austen Hufford/Creative Commons
Republican presidential nominee Mitt Romney is the poster child of offshore tax schemes.
Facebook founder Mark Zuckerberg took advantage of a multibillion-dollar tax scam during his company's IPO.
Guillaume Paumier/Creative Commons
Facebook founder Mark Zuckerberg took advantage of a multibillion-dollar tax scam during his company's IPO.

Last year, Sen. Patrick Leahy (D-Vermont) introduced the Protecting American Taxpayers From Misconduct Act. If a court orders damages for malfeasance, U.S. taxpayers would no longer be forced to grab a piece of the tab.

Yet even in the Democratically controlled Senate, liberals realize that exposing their corporate patrons to more tax liability will go over like a dieting booth at the county fair. Leahy's bill never made it out of committee. 2. Delaware, the Cayman Islands of America.

Just outside of Philadelphia sits a tax haven so egregious the Cayman Islands complain about it. It's called Delaware, a tiny state that allows American companies to set up fake headquarters so they can avoid taxes in their own states.

Delaware does it by asking fewer questions than at a needle exchange. Like the Caymans, it doesn't tax assets like royalties, leases, trademarks, and copyrights. So U.S. companies create shell firms in Delaware, then "sell" their intellectual property to them. By leasing their own inventions from these fake companies, corporations have dodged $9.5 billion in state taxes over the past decade.

The trailblazer for such schemes was WorldCom, the famed telecommunications company that imploded in 2002 after being caught cooking its books. In one scam, WorldCom pretended to pay its Delaware shell company $20 billion in royalties for the questionable asset of "management foresight." Though there were no managers in Delaware and no real money changed hands, WorldCom was able to reduce its state taxes by hundreds of millions.

Such scheming is so common that Delaware is home to more corporations (945,326) than it is people (897,934). Even the patron saint of tax evasion, the Cayman Islands, sniffs over the state's corrupt practices.

"There should be a level playing field, and Delaware should have to comply with the same standards as the Caymans," says Anthony Travers, chairman of the Cayman Islands Stock Exchange.

Johnson likens the Delaware strategy to one first professed by Clyde Barrow, the Depression-era bank robber.

"Near the end of Bonnie and Clyde, they're lying around in bed after making out, and Bonnie says, 'Anything you'd do different?' And Clyde says, 'I think we shoulda lived in one state and done our bank robbery in another state,' " says the professor.

"The answer is, if you're a corporation, that's exactly what you do."

1. The corporate blackmail exemption.

In 2006, Starbucks chieftain Howard Schultz sold the Seattle Supersonics to Clay Bennett for $350 million — with the "understanding" he would keep the team in Seattle.

Almost immediately, Bennett — who made his money by marrying the daughter of billionaire Edward Gaylord, owner of Country Music Television — asked Seattle to pony up $300 million for a new arena. The city wasn't eager, since it had already spent $75 million renovating the existing arena a decade before.

Bennett decided to blackmail Seattle, using Oklahoma City as leverage. Oklahoma had no major sports team of its own. So its otherwise conservative legislature offered Bennett a huge welfare package: $120 million for arena renovations and a new practice facility.

Seattle balked. Oklahoma had a new basketball team.

Yet according to the tax code, not all entitlements are created equal. While a laid-off electrician still pays taxes on his $500-a-week unemployment check, Bennett didn't pay a dime on his $120 million welfare bonanza.

This exemption only sweetens corporate incentive to blackmail states and cities whenever they consider moving. Take Toyota.

In 2002, it decided to build an assembly plant for its Tundra pickup, taking advantage of cheap labor in the South. Just like Oklahoma, otherwise anti-entitlement states like Alabama, Arkansas, Mississippi, Tennessee, and Texas stumbled over one another with monstrous welfare packages.

Texas ultimately won by offering $227 million in subsidies. The state had purchased the right to host 2,000 workers at a plant in San Antonio — at a cost of $110,000 per job.

Yet for America as a whole, the deal was a spectacular loss.

It wasn't long before Toyota closed a similar plant in California, killing 4,700 jobs and shifting production to San Antonio and Canada.

The net result: Texas taxpayers forked over $227 million so America could lose 2,700 jobs. The only winner was the Japanese automaker, which walked away with a tax-free welfare package.

Still, Congress continues to offer blackmailers this lucrative break, though it provides no benefit to the country.

"There isn't one bit of improvement whether the Toyota plant goes north or south of the Tennessee-Alabama border," says Johnson. "Yet they will make money off the fact that there is a line between them. It's just nonsense."

Unfortunately, nonsense is the calling card of the tax code. Surely even Mitt Romney can see that.

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4 comments
NobleHunter
NobleHunter

Umm, Octopus is owned by Paul Allen, not Steve Ballmer

ehschoenberger
ehschoenberger

"Loophole" is a misnomer, and should not be used, as it creates the impression that the resultant deduction was not intended.  So the press does the public a disservice when it uses a word that allows people to infer that some tax advisers have arcane, specialized esoteric knowledge, that allows their ultra rich client to get around the substance and intent of the IRS Tax Code definition of income.

 

Socially engineered tax deductions (social engineering) are deductions to elicit certain types of behavior - to encourage investment in specific areas like multifamily housing in the 80s which caused havoc to real estate; and other tax incentives for former colleagues and friends who give to political campaigns, have riddled our tax laws with a maze of favoritism at the expense of tax fairness and revenue for government that has led to our current depression and vast chasm of income inequality. 

 

Only a few decades ago the substance and intent of the code controlled, and form versus substance was pierced by the IRS in going against the most abusive forms contrives to get around substance.

The "step transactions" described herein should be easy for the IRS to attack and prevail, however, today there is no resolve on the part of the IRS to seriously go after some members of the ultra rich who have overly aggressive tax "experts" designing forms to avoid which in fact are - evasion.  And evasion is a felony.

 

Of course people like Romney, and his tax preparers at Price Water House...confidently affirm there is nothing illegal.  What else would you expect when the substance is contrived form to avoid/evade the intent and substance of the code.  These people who claim "nothing is illegal" base their claim on the fact that their avoidance/evasion has not be overturned by the IRS and then by US Tax Court.  But the controlling issue has not been addressed or how could so many blatant step transactions remain in existence when the existence has been revealed on 1040s, including Romney's 1040s that have been released? 

 

To learn more: www.the5thestate.net

 

 

 

 

frankd4
frankd4 topcommenter

this is why it's silly to talk tax rates as if corporations were paying their fair share anyhow - maurice greenberg of starr insurance (he previously ran A I G) estimates $2,5oo,ooo,ooo,ooo in off-shore profits yet to be repatriated and taxes paid on that amount - so even a small change in the current rate say 10% would automatically yield a $25,ooo,ooo,ooo SAVINGS - no wonder lobbyists seem over-compensated when compared to current issues - the big picture is profits previously earned YET TO BE taxed

 
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