Tax-Avoidance Gimmicks, Secret Bank Accounts at Risk

Jesse Drucker, the Wall Street Journal reporter who broke the story about Wal-Mart’s use of captive real-estate investment trusts to avoid an estimated $2.3 billion in state corporate income taxes, had another piece in the Journal Monday illustrating how the rich and powerful don’t seem to feel an obligation to pay their fair share of taxes.

The subject of the new article is Philip Anschutz, the professional sports tycoon whose net worth was pegged at $7.6 billion in the last Forbes 400 list. Anschutz is dueling with the Internal Revenue Service in U.S. Tax Court over $143.6 million the feds say he owes in capital-gains taxes in connection with the transfer of shares in Union Pacific (obtained by selling the company several railroads he had accumulated) and in Anadarko Petroleum (which purchased Union Pacific Resources, an oil properties subsidiary of the railroad).

Anschutz claims capital gains taxes do not apply because the deals were technically not completed stock sales. Instead, they are what the tax-avoidance lawyers call “variable prepaid forward contracts.” They involve an agreement to sell a block of shares to an investment bank at a future date. In the interim, the individual lends the same number of shares to the bank and receives an up-front payment. On paper, ownership of the shares has not changed, so it is claimed that no capital gains are due until the actual sale some time in the distant future.

It turns out, Drucker writes, that these arrangements are quite common and are being used by executives at companies such as Starbucks, Costco and Tyson Foods. The only encouraging part of the story is that the IRS is cracking down on these deals and in some cases may be seeking substantial penalties.

Wealthy U.S. tax avoiders are also nervous these days about possible revelations by Swiss bank UBS about accounts that the IRS believes are being used to hide as much as $20 billion in assets and to dodge some $300 million in taxes. The New York Times reported on Friday that UBS is being pressured by federal investigators to divulge information that until now has been strictly guarded by Swiss bank secrecy laws. Some account details have already come to light in cases such as the prosecution of property developer Igor Olenicoff, a UBS client.

UBS, which for so long helped rich Americans cheat Uncle Sam, may now be forced to implicate its own clients. It is refreshing to see the affluent, wondering when the IRS may lower the boom, experience some of the insecurity usually felt only by the likes of undocumented workers anticipating an immigration raid.

One thought on “Tax-Avoidance Gimmicks, Secret Bank Accounts at Risk”

  1. The more ominous aspect of these transactions, which the WSJ fails to note, is that the they sever the supposed link between executive performance and compensation that stock options and grants supposedly create.

    Although these options and grants create a conflict of interest that encourages corporate executives to engage in short-term maneuvers that pump the stock price at the expense of more important, long-term interests, they are touted by corporate cheerleaders and orthodox economists as the best way to align executives’ personal interests with those of the corporations and shareholders.

    Thus, their ability to avoid the risk that their shares in the corporations they run will decrease in value effectively severs the connection between their performance/interests and those of their companies and shareholders, effectively insulating them from the consequences of their own mismanagement.

    It is time that stocks were reduced or eliminated altogether from executive compensation, and boards devise new and more responsive means of measuring executive and corporate performance. Stocks prices are simply too easily manipulated — or hedged — for them to serve the purpose that most observers ascribe to them …

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