Bramwell’s Lunch Beat: Highway Fund’s Rocky Road Ahead

At Bank of America, a $4 billion wet blanket on the party
Bank of America’s annual shareholder meeting, scheduled for this Wednesday in Charlotte, North Carolina, was expected to be an upbeat affair. The bank’s stock had rallied, and regulators had recently approved the company’s plan to increase its dividend and buy back billions of dollars of shares. Best of all, its never-ending mortgage woes seemed to be winding down.

But a disclosure by the bank last week that it had $4 billion less in regulatory capital than it thought makes a victory lap premature. Instead, the bank’s top management and 13 outside directors may well face upset owners wondering how so many people inside the company could have overlooked an accounting error that grew – and grew – over five years, Gretchen Morgenson, assistant business and financial editor and a columnist at the New York Times, wrote on Sunday.

“Yes, the size of the mistake may be considered trivial when judged against Bank of America’s $2 trillion balance sheet. And the bungled accounting didn’t affect the bank’s earnings. Moreover, even if the error had been deducted from its capital position, it would have passed its recent regulatory stress tests,” she noted.

“But the failure to account properly for losses still confounds,” Morgenson continued. “The mistake was in a portfolio of debt securities acquired by the bank when it bought Merrill Lynch all the way back in 2008. And the bank’s capital position, overstated by the error, is crucial to its ability to raise its dividend or to conduct other activities that could benefit shareholders. Indeed, the bank had to put off the planned dividend increase and share buyback after discovering the mistake.”

[Click here to read a Bloomberg article on the Bank of America accounting mistake, in which Warren Buffett, who made a $5 million investment in the bank, said the error doesn’t bother him.]

Finding highway compromise ‘tough,’ DOT secretary says
During an interview that aired on Bloomberg Television’s Political Capital with Al Hunt this past weekend, US Transportation Secretary Anthony Foxx said divisions in Congress over boosting funding for bridge repairs and highway construction are making it difficult to pass a long-term measure in time to prevent a disruption in existing road projects, Alan Levin of Bloomberg reported.

The Highway Trust Fund, financed by gasoline and diesel taxes, may soon not be able to meet its financial obligations, according to Foxx’s agency. The Obama administration on April 29 sent legislation to Congress proposing $302 billion for road and mass transit projects over four years, with part of the money coming from new taxes on company earnings overseas, according to the article.

Foxx declined to say what he thinks the odds are that Congress will pass that measure or an alternative before the impending shortfall begins prompting states to halt or delay projects, which he said would be as soon as June or July.

Levin noted that Foxx was encouraged that House Ways and Means Committee Chairman Dave Camp (R-MI) proposed a similar tax boost on businesses to fund highway construction in his February tax reform proposal.

“We think that there’s bipartisan interest in this, but we’re going to be continuing to work the Hill as much as we can,” Foxx said. “There’s a lot of symmetry.”

Republicans put padlock on tax reform
But according to a May 4 article by Bernie Becker of The Hill, House GOP tax writers are warning fellow lawmakers to stay away from Camp’s broad tax reform proposal as they search for ways to pay for highway projects.

Camp’s tax reform draft sought to funnel $126.5 billion toward infrastructure investment through a tax on profits that US multinationals have stored abroad. But Camp and his allies have said that even though tax reform isn’t going to happen this year, the Ways and Means chairman’s draft shouldn’t be viewed as a menu of options for policy initiatives on Capitol Hill, Becker wrote.

“We want to maintain the integrity of the draft and our approach to tax reform. The last thing I want to do is see things get piecemeal,” Representative Charles Boustany (R-LA) told reporters on May 1, according to the article. “I don’t think anybody on the committee wants to start tearing our draft apart and using it for pay-fors.”

However, Boustany acknowledged that the House panel, which is charged with finding ways to pay for whatever highway bill is crafted, was at a loss for the time being on how to fund infrastructure projects.

“Clearly, the trust fund’s running out of money,” Boustany said. “So we have to come up with something.”

[The Senate Finance Committee will discuss how to replenish the depleted fund at 10 a.m. ET on May 6.]

IRS probing Caterpillar parts deals examined by senators
Richard Rubin of Bloomberg reported on May 3 that the IRS is challenging Caterpillar Inc. on overseas transactions involving its spare-parts business, the company disclosed on Friday in a regulatory filing.

The transactions were the focus of a Senate Permanent Subcommittee on Investigations hearing last month at which the panel’s chairman, Senator Carl Levin (D-MI), said Caterpillar had made a “paper change” to book US profits in Switzerland that saved the company $2.4 billion in US taxes from 2000 to 2012.

“We disagree with these proposed adjustments, which the IRS did not propose in previous audits of US tax returns in which the same tax positions were taken,” Caterpillar said in its quarterly filing, using different and more specific language to describe the inquiry than it did in February, Rubin noted.

In the filing, Caterpillar said it would “vigorously contest” the IRS challenge in appeals. The inquiry covers the Peoria, Illinois-based company’s tax returns for 2007, 2008, and 2009.

Levin issued a report detailing how Caterpillar took its profitable US-based spare-parts business, changed little if anything about how it operated, and moved it to Switzerland.

Pfizer’s AstraZeneca bid puts tax strategies in spotlight
By touting the tax benefits of its $106.43 billion offer for British pharmaceutical company AstraZeneca PLC, US-based Pfizer Inc. has put a spotlight on stuttering global efforts to rein in tax gamesmanship, Tom Fairless and Charles Forelle of the Wall Street Journal wrote on May 4.

The United Kingdom has been at the center of those efforts. Fairless and Forelle noted that Prime Minister David Cameron last year made reworking international tax rules a priority during Britain's presidency of the Group of Eight leading nations. And a public protest led Starbucks Corp. last month to agree to move its European headquarters to the United Kingdom from the Netherlands, increasing the coffee chain's tax bill.

Pfizer plans to acquire AstraZeneca through a so-called inversion that would result in the combined company having its tax residence in the United Kingdom, where corporate rates are lower than in the United States. AstraZeneca on Friday rejected Pfizer's latest offer, in part citing the risk related to getting approval for the tax structure.

The merger offer “looks like one that is being driven by tax planning,” Labour Party shadow business secretary Chuka Umunna said in a radio interview on Friday, according to the article. “Do we really want a jewel in the crown of British industry – our second-biggest pharmaceutical firm – to basically be seen as an instrument of tax planning in some tax-planning game?”

Switzerland urges US to treat its banks fairly in tax probe
John Revill of the Wall Street Journal reported yesterday that the Swiss government wants to ensure the US Justice Department doesn't treat Swiss banks more harshly than others as the United States cracks down on the stashing of money in hidden offshore accounts.

“Switzerland is committed to ensuring with the US authorities a fair and balanced procedure in accordance with the principle of proportionality in order to prevent Swiss banks from being treated worse than other banks,” the Swiss finance department said in a statement following a meeting between Swiss Finance Minister Eveline Widmer-Schlumpf and US Attorney General Eric Holder on Friday, according to the article.

The pair talked about ways to settle the tax dispute and ongoing US criminal investigations of banks, the Swiss finance department said. The investigations have left several Swiss banks facing the possibility of hefty fines and criminal charges for allegedly helping clients dodge US taxes.

Credit Suisse Group AG said in a quarterly report released on Friday that it was “working hard” to bring the US tax issue to a close but that “the timing and outcome remain uncertain,” Revill wrote. The bank has booked more than 700 million Swiss francs ($796 million) in related legal charges in advance of a possible settlement with US authorities.

US wants Credit Suisse to plead guilty in tax dispute: Report
But according to Swiss newspaper NZZ am Sonntag, US authorities are ratcheting up pressure on Credit Suisse to plead guilty to helping wealthy Americans hide untaxed money in Swiss bank accounts, Reuters reported on Sunday.

A source quoted by the newspaper said US authorities had made “extreme” demands regarding potential fines and wanted the names of all US citizens who had stashed away untaxed money in Credit Suisse accounts, NZZ am Sonntag said.

“Washington is asking for a guilty plea,” the newspaper said on Sunday, quoting an unnamed source close to the bank, according to Reuters.

Credit Suisse is one of more than a dozen Swiss banks under criminal investigation in the United States over whether and how they helped wealthy Americans dodge taxes. Pressure on Credit Suisse increased last week as one of its former employees pleaded guilty to helping US clients avoid taxes, Reuters reported.

IRS seeks applications for the Internal Revenue Service Advisory Council
The IRS is accepting applications through June 13 for the Internal Revenue Service Advisory Council (IRSAC).

The IRSAC provides an organized public forum for IRS officials and representatives of the public to discuss relevant federal tax administration issues. IRSAC members submit a report to the IRS commissioner annually at a public meeting in the fall.

The panel is comprised of up to 35 members who are appointed to three-year terms by the commissioner. Applications are currently being accepted for approximately seven appointments that will begin in January 2015.

Nominations of qualified individuals may come from individuals or organizations. IRSAC members are drawn from substantially diverse backgrounds. Membership is balanced to include representation from the tax professional community, including but not limited to: tax attorneys, CPAs, enrolled agents, academia, and the business community. Federally registered lobbyists cannot be members of IRSAC.

More information, including application forms, is available on the IRS website. Questions about the application process can be e-mailed to publicliaison@irs.gov.

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