Please Define "Tax Loophole"

Much has been stated and written about “tax loopholes.” In all of these mentions, no one has provided an example of a tax loophole. What is the definition of a tax loophole? Is it income that should be taxed but isn’t? Does it refer to expenses which are deductible but shouldn’t be? Is it a combination of both? Why hasn’t anyone given an example? What is the definition of a “tax loophole”?

As a tax accountant, I can categorically state that there is no such item that is a tax loophole. When General Electric pays zero income tax, the company is following existing tax law. When Warren Buffet pays less tax than his secretary, he is following the current tax code. You may not like or agree with these results, but there is nothing wrong or illegal with these filings. As long as taxpayers comply with the letter of the law, there are, in effect, no tax loopholes. When business and personal clients hire professional tax preparers, we are obligated to perform due diligence to ensure that our clients pay the least amount of tax.

Tax bills are passed by Congress and signed into law by the President. The primary source of tax law is the Internal Revenue Code (Title 26 of the U.S. Code). Various judicial and administrative resources interpret the Internal Revenue Code. Each of these resources carries a different degree of authority. It should be noted that IRS publications and forms are not considered authoritative.

Interpretations of the Internal Revenue Code are divided into 2 main branches; Administrative and Judicial. The Administrative side is comprised of IRS Regulations, Revenue Rulings, Letter Rulings, Announcements and Notices, and more. The Judicial side is comprised of the Tax Court, District Courts, Claim Courts, Appeals Courts and finally the Supreme Court.

Judge Learned Hand stated in the U.S. Court of Appeals case of Gregory v. Helvering in 1934, “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.”

Until our legislators have the political courage to enact major tax reform, we will be forced to retain the current unnecessarily complicated tax code. So the next time anyone talks about “tax loopholes,” please ask for an example?

Leonard Steinberg is president of Steinberg Enterprises LLC, and a member of the Small Business & Entrepreneurship Council. Steinberg also represents SBE Council on FASB’s Small Business Advisory Committee.

Pawlenty Lays Down a Marker with His Economic Plan

It's probably way too early for most people to start thinking about the next presidential election. But, of course, the race is already well under way, with a big focus on the contest for the Republican presidential nomination to see who will square off against President Barack Obama in November 2012.

At this very early stage, it appears from polling that Mitt Romney, former Massachusetts governor, is the GOP frontrunner. Among the declared candidates are Newt Gingrich, former Speaker of the House, Tim Pawlenty, former governor of Minnesota, Rick Santorum, former U.S. senator from Pennsylvania, Texas Congressman Ron Paul, business executive and activist Herman Cain, and Gary Johnson, former New Mexico governor. And others are considering a run as well.

On June 7, Pawlenty laid down a marker with his economic plan, with tax relief taking center stage.

Romney has yet to offer specifics on his economic agenda. As noted on June 8 in The Caucus, the politics and government blog of The New York Times, "But Mr. Romney has not yet offered many specifics about his plans for the economy. He promised to cap federal spending at 20 percent of the nation's gross domestic product. And he said that as president he would make taxes competitive, create jobs, modernize regulations and reduce bureaucracy. That vagueness has opened the door for Mr. Pawlenty, who vowed on Tuesday to keep federal spending at 18 percent of G.D.P. - lower than Mr. Romney promised - and proposed large and specific tax cuts that would slash business and individual rates to their lowest levels in decades."

The Pawlenty tax plan features the following...

Read the rest of this SBE Council Cybercolumn by chief economist Raymond J. Keating here.

Will Tax Reform “Talk” Turn to Action

U.S. tax rates are uncompetitive. President Obama has acknowledged such, and a team at the U.S. Treasury Department is working on “business tax reform” with a focus on lowering corporate taxes. Key leaders in both political parties seem to want to address our nation’s high corporate tax rate.

This week, I met with key officials at Treasury charged with undertaking this project. Clearly, I noted, the U.S. needs to lower the corporate tax rate in order to stay competitive. However, government leaders cannot forget about small business owners as they look to lower corporate rates, I added. After all, most small businesses are not structured as corporations so it is just as important for our elected officials to be talking about lowering rates for all entrepreneurs and firms.

This week, House Ways and Means Chairman Dave Camp (R-MI) stated he wants to cut the top individual and corporate tax rates to 25 percent. Chairman Camp would eliminate deductions and simplify the system -- an approach long supported by small businesses, given the outrageous complexity (not to add the instability) of our nation’s tax system.

(Read SBE Council Chief Economist Raymond Keating’s Cybercolumn on this topic by clicking here.)

Of course, efforts to reform the tax system have come and gone. Commissions have been appointed; recommendations made, and then shelved. Is it different this time?

Reforming the tax system will take leadership, and hopefully someone with the passion and energy to tackle this critical initiative will step forward.

Karen Kerrigan, President & CEO