Tax-avoidance schemes draw scrutiny

Jeremy Hobson Sep 11, 2008
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Tax-avoidance schemes draw scrutiny

Jeremy Hobson Sep 11, 2008
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TESS VIGELAND: Believe it or not, Lehman’s problems don’t end with a 90 percent drop in share price. The tax man may soon be knocking at the door. The company is one of several investment banks accused in a Congressional report of helping foreign clients evade millions of dollars in U.S. taxes. But it turns out these transactions have been around for years. Marketplace’s Jeremy Hobson reports from New York.


JEREMY HOBSON: The report says major financial institutions are profiting from this tax avoidance. It cites data from Morgan Stanley, which shows these schemes allowed customers — including offshore hedge funds — to avoid $300 million in taxes between 2000 and 2007.

Democratic Senator Carl Levin chaired this morning’s hearing. He says he doesn’t oppose the transactions per se.

CARL LEVIN: What I oppose is the misuse of financial transactions to undermine the tax code, rob the U.S. Treasury, and force honest Americans to shoulder the country’s tax burden.

Here’s how it works:

Right before, say, an offshore hedge fund is due to pay a 30 percent tax on dividends, it transfers its investments to a U.S.-based institution. It pays that firm a fee to hold the investments. A few days later, the hedge fund takes the shares back and avoids the tax man.

All the banks say this is completely legal. Here’s Lehman’s John DeRosa:

John DeRosa: Lehman has worked diligently to follow the letter and spirit of the law governing both equity swaps and stock loan agreements.

Charles Elson, director of the Center for Corporate Governance at the University of Delaware, says that may be, but . . .

Charles Elson: There have been a lot of folks who have marketed tax avoidance schemes that have turned out to be tax evasive and determined to be illegal. And what we’re going to have to look at is, in fact, what was being done here. Was this lawful avoidance or was it unlawful evasion?

Just looking into that question could be new ground for the government. The report says both the IRS and the Treasury Department have failed to clarify the rules or enforce abuses.

In New York, I’m Jeremy Hobson for Marketplace.

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