Bramwell’s Lunch Beat: ACA Tax Subsidies Take Major Hit in Federal Appeals Court

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Renaissance avoided more than $6 billion tax, report says
The Senate Permanent Subcommittee on Investigations said on Monday that a Renaissance Technologies LLC hedge fund’s investors probably avoided more than $6 billion in US income taxes over 14 years through transactions with Barclays PLC and Deutsche Bank AG, Zachary R. Mider of Bloombergreported.

The hedge fund used contracts with the banks to establish the “fiction” that it wasn’t the owner of thousands of stocks traded each day, said Senator Carl Levin (D-MI), the committee’s chairman. The maneuver sought to transform profits from rapid trading into long-term capital gains taxed at a lower rate, he added.

“It meant enormous profit for both the banks and the hedge funds,” Levin told reporters yesterday in Washington, according to the article. “Ordinary Americans had to shoulder a tax burden of billions of dollars, a burden that was shrugged off by those hedge funds.”

Mider wrote that the panel urged the IRS to collect taxes from the fund’s investors at the higher rate that Americans pay on wages and salaries. It said Congress should remove legal obstacles to audits of hedge funds and other large partnerships, whose returns the committee said are rarely questioned.

Executives from Renaissance, founded by billionaire mathematician James Simons, are scheduled to testify on Tuesday in Washington about the transactions, as are representatives of Barclays and Deutsche Bank.

Appeals court panel deals blow to Obamacare
Richard Wolf of the USA Todayreported that a federal appeals court on Tuesday dealt a potentially major blow to President Obama's healthcare law, ruling that participants in health exchanges run by the federal government in 34 states are not eligible for tax subsidies.

The 2-1 ruling by a three-judge panel of the US Court of Appeals for the DC Circuit, which is sure to be appealed by the government, threatens the framework of the healthcare system for about 5 million Americans without employer-provided health plans.

The case, filed by a coalition of states, employers, and individuals, had been considered a long shot effort to derail the Affordable Care Act. Federal district judges in the District of Columbia and Virginia previously had ruled for the government. Three similar cases remain pending, Wolf wrote.

The appeals panel ruled that as written, the healthcare law allows tax credits to be offered to qualified participants only in state-run exchanges. The administration had expected most if not all states to create their own, but only 16 states did so. The court also said the IRS went too far in allowing participants in other states served by the federal exchange to qualify for billions of dollars in government assistance. The aid has helped boost enrollment figures to more than 8 million, according to the article.

If allowed to stand, the ruling would blow a major hole in the law, since tax credits or subsidies are what make the private health insurance policies offered on the exchanges affordable to most Americans without employer-sponsored insurance plans, Wolf wrote. If the subsidies are invalidated in 34 states, then many of the tax penalties imposed on employers and individuals for noncompliance with the law also would be eliminated.

IRS: Lerner emails may exist after all
In testimony released on Monday by the House Oversight and Government Reform Committee, Thomas Kane, IRS deputy associate chief counsel, told investigators last week that the agency was examining whether all the backup tapes that held ex-IRS official Lois Lerner’s emails have been recycled, Bernie Becker of The Hillreported.

The IRS told lawmakers in June that the tapes had been recycled, one of the reasons that an untold number of Lerner’s emails were missing. Since then, IRS Commissioner John Koskinen has repeatedly stood by those statements in congressional testimony.

But Kane, the top IRS official in charge of producing documents for Congress, said on Thursday that: “I don’t know if there is a backup tape with information on it or there isn’t. I know that there’s an issue out there about it,” according to the article. “It’s an issue that’s being looked at.”

In the transcript released by House Oversight Chairman Darrell Issa (R-CA), Kane also insists that the IRS believed that the tapes had been recycled when it told Congress more than a month ago that it couldn’t recover all of Lerner’s emails. He doesn’t say why that might not be the case anymore, Becker wrote.

“Finding out that IRS Commissioner Koskinen jumped the gun in reporting to Congress that the IRS ‘confirmed’ all backup tapes had been destroyed makes me even more suspicious of why he waited months to inform Congress about lost Lois Lerner emails,” Issa said in a statement.

Koskinen is scheduled to appear before the House Oversight panel to discuss the investigation on Wednesday, marking his third appearance before the committee in a month, according to the article.

Sen. Hatch: No retroactive legislation on offshore tax deals
Becker also reported for The Hill that during a Senate Finance Committee hearing on tax inversions on Tuesday morning, Senator Orrin Hatch (R-UT), the top Republican on the panel, said that any legislation to battle offshore corporate tax deals should not be retroactive, underscoring the divisions on the matter on Capitol Hill.

Hatch also said during the hearing that any measure aimed at companies shifting their legal address abroad for tax reasons shouldn’t bring in more revenue to the US Treasury Department.

Hatch had said last week that he’d be open to a more targeted, short-term solution to the so-called inversions that have become increasingly prominent in recent months, signaling that there could be growing GOP interest in that sort of measure, Becker wrote.

On Tuesday, Hatch also said that any such proposal should help spur momentum for a broader rewrite of the tax code, and move the United States toward a system that exempts most offshore corporate income from American taxation.

Senate Finance Chairman Ron Wyden (D-OR) and Robert Stack, Treasury’s deputy assistant secretary for international tax affairs, said on Tuesday that Congress should act immediately on a short-term fix, even as they continued to make a plug for tax reform. Wyden added that none of the companies that have moved toward shifting their addresses abroad accepted invitations to this morning’s hearing.

“First, let’s work together to immediately cool down the inversion fever,” Wyden said, according to the article. “The inversion loophole needs to be plugged now. Second, let’s use the space created by these immediate steps to apply the indisputable, ultimate cure: comprehensive tax reform.”

Inversion wave puts tax growth at risk
The United States expects to rake in $332.7 billion in corporate income tax this year, more than 20 percent above the $273.5 billion it collected last year, and that figure could rise as high as $528 billion by the end of 2017, according to White House projections.

But as more companies, such as medical-device maker Medtronic Inc., aim to leave US shores for lower tax havens, that figure could shrink, Emily Chasan, senior editor for the Wall Street Journal’s CFO Journal, wrote on Monday.

Inversions could cost the US government almost $19.5 billion in lost tax revenue over the next decade, according to recent projections from the bipartisan Joint Committee on Taxation.

Miller says tax approach like locking doors amid fire
During an appearance on Bloomberg TV’s Surveillance program on Monday, Steve Miller, chairman of American International Group Inc., said lawmakers should bring US corporate tax rates in line with other nations’ to halt firms from switching their legal address to cut obligations, wrote Kathy Gilblom of Bloomberg.

The US corporate tax rate of 35 percent is the highest in the world, which causes companies to rush for the exits like people do when there’s a “fire in the theater,” Miller said on the program.

“Our politicians want to lock the doors,” Miller said, according to the article. “The real answer would be, let’s put out the fire, which means to make our US tax system competitive on a global scale.”

Senate Finance Chairman Ron Wyden (D-OR), who first said he wanted to address such inversions as part of a broader tax revamp, said last week that he’s exploring near-term options.

Caterpillar says it’s likely to win IRS tax case
James R. Haggerty of the Wall Street Journalreported that Caterpillar Inc. believes it is “more likely than not” to persuade US tax authorities that it complied with tax rules in pursuing a strategy that shifts profits to a Swiss subsidiary, the company said in a securities filing on Monday.

The filing was a response to queries from staff members at the US Securities and Exchange Commission (SEC). Caterpillar didn't provide an estimate of how much additional liability it might have if the IRS disallows its tax practices.

The IRS has questioned Caterpillar’s practice of recording profits on overseas sales of parts for its machinery at a Swiss unit, Haggerty wrote. That practice was the subject of a hearing by the Senate Permanent Subcommittee on Investigations in April. The subcommittee estimated Caterpillar had avoided or delayed payments on more than $2.4 billion of US taxes since 1999 by using the Swiss tax strategy. In recent years, the tax savings have amounted to about $300 million annually, the subcommittee found.

Caterpillar said IRS officials were still auditing its taxes for 2007 through 2009 and hadn't made a final determination of their position. The IRS is likely to make its determination within 12 months, Caterpillar said, according to the article. If the IRS disallows Caterpillar's Swiss tax strategy, the company said, it would appeal that decision, a process that could take years.

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About Jason Bramwell

Jason Bramwell

Jason Bramwell is a staff writer and editor for AccountingWEB. He has nearly 20 years of experience in print and online media as a journalist and editor.


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