Innovation and Constraints on Tax Shelters

By O'Neill, Jessica | Faulkner Law Review, Fall 2012 | Go to article overview

Innovation and Constraints on Tax Shelters


O'Neill, Jessica, Faulkner Law Review


"General Electric [(G.E.)], the nation's largest corporation, had a very good year in 2010." (1) It reported $14.2 billion in profits with $5.1 billion coming from its operations in the United States. (2) More important than the massive profits G.E. collected are tax implications so substantial they cannot be left out. G.E. ended up paying zero dollars in taxes and actually claimed a tax benefit of $3.2 billion along with the profits it earned in 2010. (3) "While General Electric is one of the most skilled at reducing its tax burden, many other companies have become better at this as well." (4)

A 2011 study, released by the Institute for Policy Studies, revealed that at least twenty-five top United States companies paid more to their chief executives in 2010 than they paid to the federal government in taxes. (5) The study focused on the regulatory filings of the one hundred companies with the highest-paid chief executives. (6) According to the study, the companies, including Verizon, eBay, and Boeing, averaged $1.9 billion in profits and paid their chief executives an average of more than $16 million per year. (7) A variety of shelters, loopholes, and tax reduction strategies enabled the companies to evade the 35% corporate tax rate and receive an average of $304 million back in tax benefits. (8) For instance, "Verizon, which earned $11.9 billion in pretax United States profits, received a federal tax refund of $705 million. The company's chairman ... received $18.1 million in compensation." (9)

While company spokespeople disputed any noncompliance and insisted they were fully paying their fair share of taxes, the findings from the study suggest that the current United States corporate tax policy is more conducive to tax avoidance than innovation. (l0) A representative for Verizon claimed that the $18.1 million compensation was only a target that will be paid in full contingent on the rise of the company's stock and when his bonus is fully vested in three years. (11) The representative also said that the report is misleading because it fails to mention the billions of dollars in deferred taxes that Verizon will pay over time. (12) A Boeing spokesperson explained that the reason for the decline in the company's taxes in recent years is due to the huge investments it has made in U.S. Manufacturing--it has added five thousand U.S. manufacturing jobs that were incentivized by tax benefits. (13) The representative further stated that Boeing "paid hundreds of millions in cash taxes and incurred an additional $1 billion in deferred taxes that it will pay at some date in the future." (14) While it is not clear which specific accounting strategies each of these companies utilized to their advantage, it is clear that the tax shelter industry has grown rapidly over the past several years. The complexity of the Internal Revenue Code (I.R.C.) is a primary impediment that hinders the ability of the federal government to develop effective responses that will curb corporate tax loopholes.

Part I of this article gives an overview of the most frequently used corporate tax strategies, including partnership pass-through principals and carried interest. Part II discusses tax avoidance techniques put to use in a high-profile transaction that demonstrate there are few challenges that lie in the way of taking advantage of loopholes. Part III explores various existing penalties for tax-avoidance strategies and analyzes the utility and potential harm each penalty imposes on the current tax system. Part IV considers different propositions that have been introduced as a response to the tax shelter industry. Lastly, Part V evaluates tax arbitrage patterns in hopes of raising awareness and enabling detection of an industry that has escalated far beyond what was intended by Congress.

I. OVERVIEW OF FREQUENTLY USED CORPORATE TAX STRATEGIES

A. Partnership Pass-Through and Carried Interest

There are several strategies and loopholes that companies can take advantage of to secure high wages for their top executives and reduce company taxes paid to the government. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Innovation and Constraints on Tax Shelters
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.