US Senate Tables Bipartisan Bill Attacking Corporate Tax Shelters

Tax-news.com

25 May 2000

On Wednesday the US Senate released a draft bill that would face those who market tax shelters for large corporations, and the corporations themselves, with tougher penalties and new disclosure rules. The bill is aimed at companies with annual turnover exceeding $10m, being about the top 2% of US companies.

The bipartisan legislation is promoted by Finance Committee Chairman William Roth, (R-Del) and Sen. Daniel Patrick Moynihan, (D-NY). 'When corporations avoid paying taxes through these shelter schemes, it is the average taxpayer and small business person who has to pick up the tab,' Roth said. 'The question is how do we constructively fix it in a manner that does not unduly affect legitimate business transactions.'

The Clinton administration has been anxious to attack abuse of corporate tax shelters. Treasury Secretary Lawrence Summers has called growth of these shelters 'the most significant compliance problem' confronting the US tax system. But the Republican-controlled Congress has not shown much willingness to go along with the administration until now.

The bill proposes a doubling of the 20% penalty applied to corporations that use abusive tax shelters, and companies would be obligated to disclose the payment of such penalties to their shareholders. Accountants, financial advisers and law firms involved in providing tax shelters to corporations would be liable to a penalty of 50% of the fees received, and this penalty would also be applied to any adviser who did not keep adequate records of their tax shelter work, up from a current nugatory $50.

The penalties could be avoided or reduced if the corporation concerned could show that its use of a tax shelter involved a legitimate business purpose. This is the 'economic substance' test commonly used in tax law, but the bill does not attempt to define legitimacy.

Comments on the draft bill may be submitted up to June 9th - many tax professionals have strongly opposed any new legislation, citing the strong increase in corporate taxes paid this year. When the administration began to agitate for the bill, it could point to a 2% fall in the corporate tax take in 98/99, but the situation has now been reversed, with a 12.5% increase in the current period.

Republican support on the Ways and Means Committee is not assured, and the likely outcome is that an amended bill emerging later this year from the Finance Committee will be re-submitted to the next Congress.

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