Tax avoidance/evasion

Bad Karma in the Gulf of Mexico Oil Disaster

British Petroleum is, rightfully, taking a lot of grief for the massive oil spill in the Gulf of Mexico, but we should save some of our vituperation for Transocean Ltd., the company that leased the ill-fated Deepwater Horizon drilling rig to BP. Transocean is no innocent bystander in this matter. It presumably has some responsibility for the safety condition of the rig, which its employees helped operate (nine of them died in the April 20 explosion).

Transocean also brings some bad karma to the situation. The company, the world’s largest offshore drilling contractor, is the result of a long series of corporate mergers and acquisitions dating back decades. One of the firms that went into that mix was Sedco, which was founded in 1947 as Southeastern Drilling Company by Bill Clements, who would decades later become a conservative Republican governor of Texas.

In 1979 a Sedco rig in the Gulf of Mexico leased to a Mexican oil company experienced a blowout, resulting in what was at the time the worst oil spill the world had ever seen. As he surveyed the oil-fouled beaches of the Texas coast, Gov. Clements made the memorable remarks: “There’s no use in crying over spilled milk. Let’s don’t get excited about this thing” (Washington Post 9/11/1979).

At the time, Sedco was being run by Clements’s son, and the family controlled the company’s stock. The federal government sued Sedco over the spill, claiming that the rig was unseaworthy and its crew was not properly trained. The feds sought about $12 million in damages, but Sedco drove a hard bargain and got away with paying the government only $2 million. It paid about the same amount to settle lawsuits filed by fishermen, resorts and other Gulf businesses. Sedco was sold in 1984 to oil services giant Schlumberger, which transferred its offshore drilling operations to what was then known as Transocean Offshore in 1999.

In 2000 an eight-ton anchor that accidentally fell from a Transocean rig in the Gulf of Mexico ruptured an underwater pipeline, causing a spill of nearly 100,000 gallons of oil. In 2003 a fire broke out on a company rig off the Texas coast, killing one worker and injuring several others. As has been reported in recent days, a series of fatal accidents at company operations last year prompted the company to cancel executive bonuses. It’s also come out that in 2005 a Transocean rig in the North Sea had been cited by the UK’s Health and Safety Executive for a problem similar to what apparently caused the Gulf accident.

Safety is not the only blemish on Transocean’s record. It is one of those companies that engaged in what is euphemistically called corporate inversion—moving one’s legal headquarters overseas to avoid U.S. taxes. Transocean first moved its registration to the Cayman Islands in 1999 and then to Switzerland in 2008. It kept its physical headquarters in Houston, though last year it moved some of its top officers to Switzerland to be able to claim that its principal executive offices were there.

In addition to skirting U.S. taxes, Transocean has allegedly tried to avoid paying its fair share in several countries where its subsidiaries operate. The company’s 10-K annual report admits that it has been assessed additional amounts by tax authorities in Brazil and that it is the subject of civil and criminal tax investigations in Norway.

In 2007 there were reports that Transocean was among a group of oil services firms being investigated for violations of the Foreign Corrupt Practices Act in connection with alleged payoffs to customs officials in Nigeria. No charges have been filed.

An army of lawyers will be arguing over the relative responsibility of the various parties in the Gulf spill for a long time to come. But one thing is clear: Transocean, like BP, brought a dubious legacy to this tragic situation.

AIG and other Bailed-Out Companies Fight IRS on Taxes

Rep. John Lewis has come out with the remarkable news that 13 corporate recipients of federal bailout money under the Troubled Asset Relief Program (TARP) are federal tax deadbeats, together owing more than $220 million to Uncle Sam. The Georgia Democrat said he cannot reveal the names of the companies, thus setting off a tantalizing guessing game as to which TARP participants apparently lied on forms requiring all recipients to certify they were not significantly in arrears on their tax payments.

Assuming Lewis is talking about companies in disputes with the Internal Revenue Service, there are some likely suspects—beginning with the country’s favorite villain these days: American International Group. AIG has been battling with the IRS over the disallowance of foreign tax credits associated with cross-border financing transactions. In the notes to the financial statements in its 10-K annual report filed with the Securities and Exchange Commission earlier this month, AIG says that it received a “notice of deficiency” from the IRS for the years 1997-1999 and acknowledged it is likely that the feds will go after the credits for subsequent years as well.

AIG paid the assessed taxes and penalties, but then it turned around and demanded its money back. Last month, AIG filed suit in federal court in Manhattan (SDNY Case 09-CV-1871) against the United States of America seeking the recovery of $306,102,672 that it claims was “erroneously and illegally assessed.” The fact that AIG paid the extra taxes while disputing them may not have qualified it for the list assembled by Rep. Lewis. Yet it is still quite remarkable that, after receiving a $170 billion bailout, AIG did not think there was anything wrong with hauling its rescuer into court to pursue a $300 million tax claim.

AIG is not an isolated instance. In its recent 10-K filing, Citigroup states it is “currently at IRS Appeals for the years 1999–2002. One of the issues relates to the timing of the inclusion of interchange fees received by the Company relating to credit card purchases by its cardholders. It is reasonably possible that within the next 12 months the Company can either reach agreement on this issue at Appeals or decide to litigate the issue.” Here’s another ward of the state that does not hesitate to sue its benefactor.

Then there’s Bank of America. Like AIG, it has been at odds with the IRS over foreign tax credits. According to its recent 10-K, B of A faces an “unagreed proposed adjustment” for the years 2000-2002, which sounds like it is at an impasse with the feds. The bank doesn’t mention litigation, but it does not waver from its position, insisting that “the Corporation continues to believe the crediting of these foreign taxes against U.S. income taxes was appropriate.” Receiving $45 billion in TARP funds does not seem to have affected its position.

JPMorgan Chase, the recipient of $25 billion in TARP capital infusions, discloses that it has administrative appeals pending with the IRS. The same goes for some banks in the second tier of bailout recipients. SunTrust Banks ($4.9 billion from TARP) reveals that it is sparring with the IRS over its tax returns for the period from 1997 to 2004. Its 10-K states that “the Company has paid the amounts assessed by the IRS in full for tax years 1997 and 1998 and has filed refund claims with the IRS related to the disputed issues for those two years.”

Capital One Financial ($3.5 billion from TARP) is still pursuing suits filed against the government in U.S. Tax Court in 2005 contesting tax assessments for the period 1995-1999. “At issue,” the company says in its 10-K, “are proposed adjustments by the IRS with respect to the timing of recognition of items of income and expense derived from the Company’s credit card business.”

Under normal circumstances, companies are within their rights to contest IRS assessments. But it is a different story when a company is being kept afloat by the generosity of the U.S. taxpayers. If it is now unacceptable for bailed-out companies to pay lavish employee bonuses, shouldn’t it also be taboo for them to pursue aggressive tax avoidance cases against the IRS? Shouldn’t there be a moratorium on such actions while a company continues to dine at the public trough? AIG, at least, should have the decency to drop its lawsuit and stop biting the hand that has fed it so much.

Pump and Slump: Will Citi Sleep with the Fishes?

A couple of years ago, the mighty Citigroup traded at around $50 a share. Today, March 5, the price hovered around $1 and for a while was below a buck. In other words, one of the largest financial institutions in the world is in effect a penny stock. At one time, a descent to that level would have been enough to get a company delisted from the New York Stock Exchange, but standards have been relaxed.

Penny stocks have traditionally been associated with unscrupulous brokerage practices, such as the “pump and dump” scheme graphically illustrated during some episodes of The Sopranos (photo). A look back at the record of Citi during the past decade does not suggest a moral compass much different from the wise guys of Northern New Jersey. As U.S. PIRG Education Fund notes in its recent report Failed Bailout, Citi helped crooked companies such as Enron carry out deceptive transactions and itself set up scores of entities in offshore tax havens such as the Cayman Islands in order to avoid both taxes and oversight.

Citi’s actions had an impact beyond its own unjust enrichment. As Multinational Monitor editor Rob Weissman and his colleagues show in their new report Sold Out, Citigroup played a key role—thanks to $19 million in campaign contributions and $88 million in lobbying expenditures—in bringing about the demise of the Glass-Steagall Act and other deregulatory moves that paved the way for the current meltdown of the financial system.

Yet Citi’s management is, to a great extent, no longer in control of the company’s fate. Today it is the federal government that is in effect trying to pump up the bank and its stock. The Obama Administration, regrettably, is perpetuating the idea that Citi is too big to fail and thus requires a seemingly unlimited commitment of public resources.

Unfortunately for U.S. taxpayers, the pumping will not be followed by a timely dumping of the federal holdings in Citi at a fat profit. In fact, the federal capital infusions, loss-sharing agreements and loan guarantees are not stabilizing the company and pushing up its stock price. The more the feds put into the bank, the less the market seems to think it is worth. This downward move is attributed in significant part to short-selling of Citi’s common stock by hedge funds. At one time, those funds were apparently in cahoots with Citi. Last fall the Senate Permanent Subcommittee on Investigations charged that Citi was one of the banks that had helped offshore hedge funds engage in tax avoidance. I guess there really is no honor among thieves.

The U.S. government is now in the ridiculous position of having made commitments potentially costing hundreds of billions of dollars to a bank that the stock market, as of today, thinks is worth a total of only about $5 billion. As long as the Administration avoids the seemingly inevitable need to nationalize and reorganize Citi and the other large zombie banks, its strategy amounts to little more than “pump and slump.” Despite the efforts of the feds, the bank whose motto is “the Citi never sleeps” may soon be sleeping with the fishes.

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.