During the continuing brutal assault on reason perpetrated by campaign ads in election season, it would be nice if the press would do competent work to identify misleading and stupid claims by candidates.
Erin Jordan at Cedar Rapids’ TheGazette.com took a stab at it in her “fact check” of an ad by Pat Murphy, running in Iowa’s 1st congressional district:
“Blum cheated his workers out of overtime.”
“He moved his business to dodge Iowa taxes.”
“He laid off over 70 workers”
Source of Claim: Iowa Sen. Pat Murphy, a Dubuque Democrat running for U.S. House of Representatives
“Blum” is Rod Blum, a former executive at Eagle Point Software, and Mr. Murphy’s opponent. This being a tax blog, let’s look at the tax claim discussion (my emphasis):
Claim 2: “Moved his business to dodge Iowa taxes”
Originally incorporated in Iowa in 1983, Eagle Point, under Blum’s leadership, reincorporated in Delaware in 1995, according to SEC filings. The company’s physical location and all employees remained in Dubuque.
Many U.S. companies — including more than half of those in the Fortune 500 — have their legal home in Delaware for beneficial tax laws and courts.
University of Iowa College of Law professor Andy Grewal, who specializes in tax law, said a company’s Delaware presence — even if it’s just a P.O. Box — may charge royalties on income gained in other states. Companies deduct those royalties from the income taxes they are required to pay in, say, Iowa, while Delaware doesn’t tax the royalties.
From the “conclusion”:
Under Blum, Eagle Point reincorporated in Delaware, generally viewed as having more business-friendly tax laws and courts. In these types of cases, the home state can lose out on corporate income taxes…
The claims in Murphy’s ad are mostly true.
The “fact checker” has no basis for that statement, at least with the tax information in her story. The idea that companies incorporate in Delaware primarily for tax reasons is flat wrong. Delaware is preferred largely for its well-developed business-friendly corporate law.
While Delaware is tax-friendly, the royalty maneuver casually referred to in the story only works if an intellectual property corporation has been set up in Delaware to own the IP; the IP company collects the royalties in Delaware, and the operating company deducts the payments to lower its income in high-tax states. There appears to have been no such entity.
The 1999 10-K filing with financial statements for Eagle Point Software would detail related parties and subsidiaries included in the financial statements. Any Delaware IP subsidiary would be included in the consolidated financial information, because while investors like it when their companies reduce state taxes, they don’t like it if it means real cash leaves the company covered by the financial statements.
Eagle Point’s only subsidiary included in the financials is a Wisconsin Corporation, ECOM Associates. As Wisconsin is a high-tax state, nobody would set up an IP holding company there.
The only “related party transaction” shown in the statements is its lease for its facilities. There is no mention of any intellectual property lease.
And there almost certainly would have been no need for Eagle Point Software to go through the trouble. Corporations apportion their income to Iowa based on the destination of the sale. As a public company, we can assume over 90% of their sales were to non-Iowa customers. That means almost all of its income would not be taxed in Iowa to begin with. And that would have been just as true if the company were incorporated in Iowa, rather than Delaware.
So, apparently without looking at publicly available information on Eagle Point, and with only a general statement by a law-school prof claiming no direct knowledge of the transaction, the Gazette’s “fact checker” called the assertion that the company incorporated in Delaware to dodge Iowa taxes “mostly true.” In fact, there appears to be no royalty agreement to funnel income out of Iowa. And, as most of Eagle Point Software’s sales would have been to non-Iowa customers, there would be little state tax to reduce in the first place.
Conclusion: with respect to the tax claims evaluated by Thegazette.com, I rate their fact-checking effort worthless. I rate the claim by Pat Murphy that Eagle Point incorporated in Delaware to “dodge Iowa taxes” false.
It’s Friday, so it’s Buzz Day! Go see Robert D. Flach for the fresh Buzz, including (of course) his pungent thoughts on the Jersey Shore celebrity who is facing tax charges.
TaxGrrrl brings word of ‘Staggering’ Sanctions Slapped On Wyly Brothers In Offshore Case. $190 million, plus interest, will get anyone’s attention.
Christopher Bergin, The Hobgoblin of Little Minds (Tax Analysts Blog):
This week the Treasury Department got into the act, putting corporate America on notice that it will soon issue regulations that will take “targeted action to reduce the tax benefits of – and when possible, stop – corporate tax inversions.” Treasury said it “will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share.”
I think Treasury will end up regretting this announcement. First, two minor points: So-called loopholes are created by elected officials and include such things as the ability to deduct the interest you pay on the mortgage you got to buy that house you live in. And it’s up to Congress to decide on “fair shares.” The Treasury Department doesn’t get to make law, which is why when it comes to corporate inversions it will ultimately do little more than make a lot of noise and create an initial annoyance.
The point is to score some election season points; if it causes problems down the road, well, they’ll be somebody else’s.
Joshua McCaherty, California Triples Film Tax Credit. (Tax Policy Blog) Because Hollywood needs taxpayer funding.
TaxProf, The IRS Scandal, Day 505
Now he’s probably taken a big step towards fulfilling that vow. Mississippi surgeon found guilty of tax evasion after claiming “vow of poverty”
News from the Profession. Revealed: The tax accountant who runs brothel from Belfast terrace (Belfast Telegraph). Think of the cross-selling opportunities! No word on whether that’s where he gets his extra help for busy season.