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Senate Tax Committee Approves Closure Of Shelters And Loopholes

by Leroy Baker, Tax-News.com, New York

19 January 2007


Sen. Chuck Grassley, ranking member of the Committee on Finance, has praised the committee’s passage of a series of measures cracking down on tax shelter abuses.

Grassley originally developed the bipartisan measures when he was chairman; the Senate passed them before but the House resisted them and they were never enacted.

“We need to keep cracking down on tax avoidance abuse,” Grassley said. “Every taxpayer who doesn’t pay what he owes makes a sucker out of everyone who does. It’s appropriate to shut down abuse and use the money from that to help small businesses preserve jobs as they face a minimum wage increase.”

The committee unanimously passed the tax shelter loophole closers as part of the Small Business and Work Opportunity Act of 2007, which extends tax relief for small businesses in conjunction with an expected minimum wage increase. The tax relief includes a tax credit to hire disadvantaged workers and allows retailers and restaurant owners to more quickly write off the costs of remodeling leased buildings.

The tax loophole closers approved as part of the package include:

A further crackdown on leasing tax shelters: These leases involve companies that pretend to sell or lease taxpayer-funded public works systems, such as subways and sewers, and then lease them back to the cities. The companies claim depreciation on these taxpayer-funded assets, while the cities get up-front money from the tax shelter promoter that Grassley has called “chump change”, compared to what the companies get. Under Grassley’s leadership, Congress in 2004 largely outlawed tax benefits from these transactions. Grassley and Sen. Max Baucus have argued that even in cases of leases entered into before the 2004 law, the holders of the shelters should not gain future benefits, especially if the lessee is a foreign person or company, because these deals are so abusive.

The 2004 law mainly restricts leases entered into after March 12, 2004. The new legislation prevents companies from receiving tax benefits for leases entered into with foreign entities on or before March 12, 2004.

Further restriction on 'corporate inversions': In this practice, US companies relocate nominally in overseas tax havens to reduce their US taxes. The 2004 tax law restricted such transactions after March 4, 2003. The bill approved in committee Wednesday moves back the effective date to March 20, 2002, when Grassley and Baucus warned companies considering these deals to proceed at their own peril. This change is meant to capture any inversions that occurred in a rush to beat the new crackdown.

A prohibition of the deduction of civil regulatory fines and penalties, as well as punitive damages from a lawsuit, on federal tax returns: This grew out of some companies’ attempts to deduct the expense of settling cases with the government over wrongdoing.

Encouragement of tax whistleblowers: These further refinements will help make sure the Internal Revenue Service fully encourages whistleblowers to come forward with information about tax cheats. Grassley sees this as an effort to help close the approximately $350 billion gap between taxes owed and taxes paid.

Grassley said the loophole closers are a logical follow-up to the American Jobs Creation Act of 2004, which under his authorship in the Senate offered the strongest crackdown on tax shelters since 1986.

“It’s only fair to fight tax avoidance abuse while giving continued tax relief to encourage job retention and creation,” Grassley said. “Those who play by the rules deserve consideration, and those who abuse the tax code deserve a crackdown.”


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