It’s clear that this stuff needs to be eliminated.

The most valuable asset of the IRS is the fact that Americans as a rule pay their taxes, and the more the big players get away with stuff like this, the more ordinary tax payers will find the system unfair, and so will be tempted to cheat themselves.

IRS moves to close tax shelter used by IBM | CNET News.com

By David Cay Johnston Story last modified Wed Jun 06 22:06:46 PDT 2007

For the second time in 12 months, the government has moved to block a tax shelter that had been aimed at converting billions of dollars of corporate profits, on which taxes have yet to be paid, into profits that will never be taxed.

The move by the Internal Revenue Service came two days after IBM said that it used the technique to avoid paying $1.6 billion in income taxes.

As part of a $12.5 billion stock repurchase, IBM used a foreign subsidiary to buy back shares through foreign exchanges. The subsidiary then used the shares to pay its corporate parent in America for goods and services.

“It’s just a way to bring the profits into the United States without paying taxes by using the stock as currency,” said H. David Rosenbloom, an international tax lawyer at Caplin & Drysdale and director of the international tax program at New York University Law School.

On May 31, the Internal Revenue Service issued a notice declaring that the technique could not be used to eliminate taxes. The notice said it would disallow any transactions beginning on that day.

The technique “raises significant policy concerns,” the IRS said. The IRS shut down a simpler version of the same shelter in September.

Under a 1962 law, corporations can defer paying taxes on most profits earned abroad as long as the money remains outside the country. The taxes come due, however, if the money is returned to the United States.

The technique was believed to be in wide use by corporations that have substantial profits offshore and are also buying back large amounts of their own shares to return value to investors. IBM appears to be the only company that publicly disclosed its use of the tax shelter.

The tax shelter is known as “Killer B,” after the letter used to designate a provision in the tax code governing certain corporate reorganizations.

By avoiding the 35 percent federal tax on profit, a company can buy three shares for every two it would be able to acquire with profits that had been taxed.

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