Loop Holes




Bob Fahnestock


There is an old joke that a “tax loophole” is a tax benefit that your neighbor gets and you do not. That is pretty much how the term is used today. Any tax benefit utilized by an individual or business that others do not like is referred to as a loophole. Technically a loophole is something that the law is silent on. The tax law is silent when it does not specifically permit a deduction, exclusion, or credit to the taxpayer; nor, does the law specifically disallow a deduction, exclusion, or credit to the taxpayer. The general rule used by tax professionals is that if the law is silent, take advantage of it. The Internal Revenue Code (IRC) is enormous and loopholes are few and far between. When someone does find a loophole that involves significant money, it is immediately challenged by the IRS. If the government does not prevail in the case, then Congress quickly amends the IRC to disallow the use of that loophole in the future. Public corporations that pay zero in income taxes make the news but are quite rare. Businesses and individuals that appear to pay disproportionately low income taxes are simply following the letter of the law. GE paid no income taxes last year but did so quite legitimately. Congress created this situation, not corporate management. GE avoided the income tax by purchasing credits from a foreign subsidiary that had no need for the credits and using those credits to reduce their U.S. tax liability. Money flowed out of the country so that GE could avoid remitting funds to the U.S. government. Congress enacts the tax law and can fix these questionable items at any time. In fact, they make changes to the law frequently. Several years ago they added a special tax break known as the “Starbucks Footnote.” It doesn’t mention Starbucks by name, but by description and provides them with a tax benefit that most other coffee houses cannot take. In the 1980s the head of the House Ways and Means Committee (where tax laws originate) wrote in a provision making season football tickets at LSU a charitable contribution. When the bill got to the Senate Finance Committee the Chair wrote in the same thing for the University of Texas. Again, they described the schools instead of mentioning them by name and this provision applied only to those two schools and to no other schools. This provision has since been eliminated but it does illustrate that the tax law is not written for you and me. The current tax code is immensely complex and easily lends itself to this type of abuse. What really needs to happen is for the corporate income tax to be abolished. The fact is that businesses simply pass the income tax and payroll taxes incurred onto the consumer in the form of higher prices for goods and services. Consumers really pay these taxes. Some investors actually look for the corporations that pay the least in income taxes or have the highest deferred tax amounts on their balance sheets. The theory is that if the business incurs lower taxes, then management must have a prudent tax planning scheme. Additionally the products/services of businesses that pay the least in income taxes can be sold for less than those of the competition giving them an advantage in the marketplace. The fact is that it is time for the IRC to be rewritten from scratch. We need to move to a single flat tax rate with no deductions, three tax rates with no deductions, or to a national sales tax to replace (not in addition to) the current income tax structure. I vote for the latter alternative.