Here is a new term for you, “stateless income.” Thought to have been coined by a Congressional staffer in 2007, the IRS has apparently adopted the term – and the cause. Stateless income occurs when a company structures itself such that its profits are not taxed in any jurisdiction.
An IRS deputy chief counsel announced today that the agency was pursuing “enforcement actions” against companies with stateless income. He suggested that the service had several cases in the pipeline, presumably against companies that structured themselves to avoid taxation of income or to be able to repatriate income tax free. (Many businesses have millions of dollars sitting offshore that they are unable to bring back to the United States without facing a hefty tax bill.)
The recent interest in stateless income resurfaced when Congress learned that Apple avoided $3 billion in taxes through complex tax structuring arrangements. While it makes for good soundbites and political drama to pursue these companies, we wonder if any have broken the law. Although tax evasion is a felony, tax avoidance is completely legal. No one wants to pay too much in taxes and businesses that don’t misuse the tax code shouldn’t be punished for reducing their tax bill. In the words of Judge Learned Hand (later Supreme Court Justice Hand), “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
Within the last few days, both Treasury Secretary Lew and the IRS chief counsel’s office have talked about going after stateless income. No details were provided, however, and we are aware of no businesses charged with any wrongdoing.
Section 482 of the Internal Revenue Code already allows the IRS to distribute or reapportion income among subsidiaries and affiliates of a commonly held business. We are not sure what tools the IRS intends on using to go after stateless income but the message from Washington is clear. Multinational businesses and those that routinely allocate income among different subsidiaries need to revisit their business models and prepare a good audit defense.
The business tax lawyers at Mahany & Ertl help a wide variety of businesses with complex tax planning and IRS audit defense. From small businesses to a national Fortune 150 company, we have helped many businesses protect their bottom line. The CPAmerica organization of accounting firms has named us their exclusive legal services provider for offshore and foreign tax reporting issues.
For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). All inquiries protected by the attorney client privilege.
Mahany & Ertl – IRS Tax Attorneys. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS audit defense available nationwide.
Want more information on stateless income or other tax topics? Our Due Diligence blog has a search engine located in the upper right hand corner. We have posted hundreds of informative articles on our site.
Posted by Brian Mahany, Esq.