America Reaps Few Benefits from Trump's Tax-Cut Proposal

Money with U.S. tax forms. Flickr/Creative Commons/Pictures of Money

Time to go back to the drawing board.

What many U.S. companies have done since the early 1990s using offshore “sales” transactions has been fraud, plain and simple. The IRS is now slowly (but absolutely certainly) catching all of them, as was shown in the 2012 bankruptcy of Overseas Shipholding Group. The IRS disallowed a number of offshore transactions, increased the company’s tax bill astronomically, and the company filed bankruptcy. Note: There is no time limit for the IRS to impose a “Final Partnership Allocation Adjustment” or to pursue civil fraud claims in such cases.

The $10 trillion or so siphoned off from U.S. tax rolls since the 1990s via the fraudulent offshore parking of profits could sustain today's levels of U.S. government deficits for quite a while. And President Trump could take credit for fixing the U.S. tax system—if he had the courage and imagination to do so. But members of Congress in both parties know they cannot touch that political “third rail” by letting the public know that the members of the S&P 500 have literally “stolen” $10 trillion via offshore tax transactions over the past thirty years.

Anyone that thinks the concept of shifting otherwise recognized income to lower taxed entities using a “Special Limited Investment Partnership” may survive after the Dow case should read the IRS petition explaining the reasoning of the lower court position to the U.S. Supreme Court. It is dated Dec. 7, 2016, and found at 2016 U. S. S. Ct. Briefs 4503. And the IRS is just getting started.

Of course, Trump the populist could announce that his is going to lower personal tax rates and task the IRS to focus all of its resources on finding corporate tax evasion, like that of General Electric and Dow Chemical Co. But Trump the businessman dares not go down that road because he himself has made use of offshore transactions to reduce taxes. Specifically, when Trump’s casino properties went through bankruptcy in the 1990s, he did not file bankruptcy himself. Instead he used a similar partnership structure to that Dow Chemical Co. used to transfer the corporate “equity” of his casinos to lenders, claiming that excused him from recognizing the losses of the lenders as “debt forgiveness income.”

Trump’s tax lawyers have long served as co-counsel with one of the leading tax litigation firms, including to challenge the IRS’s “Final Partnership Allocation Adjustment” for a special limited investment partnership that Goldman Sachs helped Dow Chemical create. When the U.S. Supreme Court refused to consider Dow’s application for review of a lower Court’s holding that the transaction was a sham, tax lawyers around the world shuddered in dread.

Each argument President Trump and his legal team have previously asserted to support avoidance of “forgiveness income” in the 1990s was made by counsel in the briefs and petitions filed in the Dow case. Given the Court’s decision, many companies (as well as lawyers and audit firms) will find that, when discovered, they have no further recourse than to seek whatever deal the IRS will give them. And most of corporate America does not yet suspect the peril that faces them when the IRS decides to review their past offshore transactions.

So don’t be disappointed that the Trump tax-cut proposal lacked substance and included numbers that make no sense at all. Rather, be sad, America, that the man sitting in the White House cannot lead the national discussion on the key issue in taxation, namely the abuse of offshore tax transactions by the largest American corporations. The issue is not merely repatriation, but adjusting corporate taxes by trillions of dollars, in some cases going back decades, to accurately reflect U.S. law and force these companies to pay their fair share.

Christopher Whalen is Chairman of Whalen Global Advisors LLC in New York. He is the author of Inflated: How Money and Debt Built the American Dream (Wiley, 2010), the coauthor, with Frederick Feldkamp, of Financial Stability: Fraud, Confidence, and the Wealth of Nations (Wiley, 2014), and author of  Ford Men: From Inspiration to Enterprise (Laissez Faire, 2017) His website is

Image: Money with U.S. tax forms. Flickr/Creative Commons/Pictures of Money