The Tax-Free Bermuda Getaway

Tax season would sure be a lot less painful if we were all corporations with big legal staffs at our disposal. How would you like to deduct the same loss twice? You can't, but Bank of America sure could, saving $418 million last year. How would you like to keep living in your current home, but tell the Internal Revenue Service to go pound sand in Bermuda, because you're a legal resident of that lovely island? You can't, but toolmaker Stanley Works plans to save $30 million a year by moving.

So what if our country is at war against terrorism and is spending billions extra for defense and homeland security? That's our problem, not the tax dodgers'. Their problem is raising profits to get their stock price higher. What could possibly be more important, since a good stock market is good for America, right?

I'm not accusing these companies of doing anything illegal. But is it right for them to invest so much energy in finding exotic loopholes to shave their tax bill, sticking the rest of us with the tab? Watching corporations vanish into a Bermuda Tax Triangle in these post-9-11 days is a tad hard for us wage slaves to take. It's silly not to minimize your taxes in simple, straightforward ways. But it's a whole other thing to torture the tax code to concoct complicated schemes Congress never intended. Sen. Charles Grassley likens abusive tax maneuvers to Supreme Court Justice Potter Stewart's description of hard-core pornography: it's difficult to define, but "I know it when I see it." Grassley isn't some anticorporate left-wing lunatic. He's a conservative, pro-tax-cut Republican, the ranking minority member of the Senate Finance Committee. He and committee chairman Max Baucus may propose legislation this week to curb corporate tax maneuvers like the beeline to Bermuda and the B-of-A double deduction. Given these guys' stature, it's probably a lock to pass the Senate. The House will be a tougher hurdle.

Corporate tax avoidance is a big, messy, complicated issue that's easier to grasp with a specific example or two. Take the move to Bermuda. It's been legal since 1994, but was rarely used until recently because it was distasteful, and because it subjected shareholders to tax. When a company moves, the IRS considers shareholders to have sold their stock, and assesses taxes accordingly. If, however, the stock is below what holders paid for it, you get a freebie.

We'll focus on Stanley Works, because it's the best known of the new wanna-be Bermudans. Stanley says the move will cut its U.S. income-tax bill to about $50 million from $80 million. (Shareholders will vote on the relocation at a May 9 meeting. I hope they vote it down, but I won't hold my breath.) I suspect that will almost eliminate its U.S. taxes, because it paid only $30 million of them last year. The other $50 million were deferred. Gerald Gould, Stanley's head of investor relations, says the $50 million will ultimately be paid. But who knows when? I also raised the obvious question: will a Bermuda-based Stanley begin siphoning profits from the United States to Bermuda with intracompany transactions? "We have no such plans," he said. But that, of course, remains an option.

It would be one thing if Stanley were the only company doing this. But it's become a beach party. Four other sizable companies--Cooper Industries, Ingersoll-Rand, Foster Wheeler and Nabors Industries--have moved to Bermuda recently or are in the process of doing so. Dozens more are waiting in the wings with their towels and sunscreen. The trend feeds on itself. Even if a company thinks moving is tacky and unpatriotic, it has to start thinking of heading to Bermuda if its competitors do.

Now to Bank of America. In January the bank announced that its fourth-quarter profits had been increased by a $418 million tax maneuver. Had the company not bragged about it, it might have passed unnoticed. Here's what happened, stripped to its simplest form: B of A sold lots of its bad loans to a wholly owned subsidiary called Strategic Solutions. SS sold the loans at a loss for the first deduction. Then--I don't know exactly how--B of A got a second loss by selling a stake in SS to third parties. This provoked the Treasury, which reads the financial press, to move with lightning speed (by Washington standards) and issue an advisory banning similar transactions as of last month. B of A spokesman Robert Stickler said, "The transaction we did was legal and we believe it was appropriate," and asked me to note that B of A paid $3.2 billion of federal income tax last year. Noted.

What does the Bush administration, which is beating the patriotism drum, think about all this corporate tax-revenue vanishing? Mark Weinberger, assistant Treasury secretary for tax policy, says he and his staff are moving as fast as possible to close loopholes. "However," he says, "we have to be sure that whatever legislation is attempted helps, not harms, the situation." A more quotable congressional tax techie likens it to an octopus: "You go after one tentacle, and the other seven get you."

What article about corporate tax dodging would be complete without a reference to Enron's supposed abuses? Sure, Enron played all sorts of games. But first, it probably never made any real profits. Second, it realized huge and legitimate tax deductions from employees' stock-option profits. But like all option profits, Enron's 35 percent tax saving was more than offset by the taxes employees paid on the profits.

A final thought: Justice Oliver Wendell Holmes once wrote, "Taxes are what we pay for civilized society." Clearly, the man wasn't CEO material.