Originally published on Forbes.com Oct 3rd, 2014
As I trolled through the tax cases decided in the last couple of days and noted something titled Cause of Action v. Treasury Inspector General for Tax Administration (TIGTA), I figured it had to be pretty interesting. TIGTA is the agency that guarantees that the IRS scandal (On Day 511 according to the Taxprof as I write this) never has to end, since its reports will always have something scandalous, given that the IRS is required to use actual human beings, although fewer and fewer as the years go by, to perform its mission. I didn’t realize how interesting. We have TIGTA, itself, trying to cover up what it is doing in relation to possible, well conceivable, IRS leaking information to the administration. And the possibly leaked information? Tax information about Koch Industries. Woo hoo!
About The Plaintiff
Cause of Action describes itself as “a non-profit, nonpartisan government accountability organization that fights to protect economic opportunity when federal regulations, spending and cronyism threaten it”. It is a new organization – started July 21, 2011 according to its initial Form 990. COA is certainly off to a running start having raised nearly $1,000,000 in its first year ended June 30, 2012 and over $3,000,000 for the year ended June 30, 2013. I asked Daniel Epstein, the executive director and, until recently, sole governing board member, if that happy trend has continued through the year ended June 30, 2014, but he did not want to disclose financial information not available on guidestar.org.
Protecting Taxpayer Privacy
It’s all about Code Section 6103 which protects taxpayer information from disclosure. Essentially people who have access to tax return information are not supposed to go blabbing about it or disclose it at all except in very limited circumstances. So if the IRS was feeding tax return information to other parts of the administration for political purposes that would be a very bad thing. It is, in fact, the type of thing that TIGTA is supposed to investigate. There ends up being a bit of a Catch-22. If TIGTA does investigate leaking of information from the IRS to other parts of the administration, it might not be able to disclose the results of its investigation, since that would have the effect of disclosing return information. As Daniel Epstein explained it to me, there is a desire to make 6103 be very sweeping to create a culture of non-disclosure, but that sweeping nature might be used by the President to hide violation of 6103 by members of the administration. As Mr. Epstein puts it the statute can be used as a sword against the public and a shield for the President.
Gossiping About Koch Industries
The controversy starts in 2010 with a press briefing by Austan Goolsbee, then one of President Obama’s senior economic advisors, in which he was discussing the narrowness of the corporate tax base. According to this story he said:
So in this country, we have partnerships, S corps, we have LLCs—we have a series of entities that do not pay corporate income tax. Some of which are really giant firms. You know, Koch Industries, I think, is one, is a multibillion dollar business, and so that creates a narrower base because we got literally something like 50 percent of the business income in the US is going to businesses that don’t pay any corporate income tax.
So how could Austan Goosbee know whether Koch Industries was an S Corporation? Inside information from the IRS ??? Another possibility was that he got the idea from reading Forbes, which listed Koch as one of the largest private companies in the country and he assumed that it was an S Corporation. The trope is that S corporation status when it was created in the sixties was meant to provide relief to “small” businesses
Qualification to be an S corporation, though, is based on who can be a shareholder and how many shareholders there are. It strikes some people as altogether wicked that a large company with few shareholders could use this break meant for little people. If someone has that mindset and they start thinking about who is likely to have executed this perfectly legal, but altogether wicked, strategy the Koch brothers, would likely be on their short list, since they loom rather large in the consciousness of the Left. The Koch brothers play a role for the Left, similar to what our Kenyan born Muslim president, who cannot salute properly and plays too much golf, plays for the Right.
Tax Geek Interlude
One of the main reasons that I read and write about tax cases is to play Monday morning quarterback on the work of other tax professionals expressing either amazement, wonderment, disdain or schadenfreude among other emotions. So I ended up being fascinated with the question of whether Koch Industries is an S corporation and why or why not. I was able to pretty definitively establish that there was a point in the past when Koch Industries was not an S corporation.
That point was 1983, which really doesn’t seem all that long ago to me. In that year William Koch was bought out of Koch Industries. The details of the transaction are laid out in tax litigation that William Koch had with the state of Massachusetts. Right before the redemption William had transferred the KI stock to 25 Delaware S Corporations, which allowed him, as the law was then, to avoid Massachusetts tax on his gain. If Koch Industries itself had been an S corporation, it would not have permitted the transfer, since an S corporation is not a permitted shareholder in another S corporation.
Closer study brought me closer in time. Koch Industries, itself, had a tax case that went all the way to the Tenth Circuit. It concerned whether one of its indirect subsidiaries could use the percentage of completion method for what the Tenth Circuit determined was actually warranty income. Since Koch Industries was seeking a $20,133,883 refund of corporate taxes, we know that it was not an S corporation for the affected years which went up to 2001. The case also shows the trouble that Koch Industries goes to to protect its privacy, since many of the documents in the refund litigation are sealed.
More to the point and closer in time, in the wake of Goosbee’s statments, Koch Industries indicated that it did pay corporate income tax, although it did not release any further details. Taking that at face value, it is interesting to wonder why that would be. Why would a company like KI not take advantage of S status if it could? I think someone assuming that KI would elect S is projecting tax planning assumptions suitable for mere millionaires to a higher level. If you are reinvesting the vast bulk of your earnings, whether it takes more cash to distribute enough so that your shareholders can pay on the flow through or just pay corporate tax will vary over time.
This condition so disturbed people at my last employer, Grant Thornton, that they were actually advocating something called a business equivalency rate to protect S shareholders from paying more than the maximum corporate rate. Somebody explained this to me at a leadership conference as one of the reasons why I should contribute to the Grant Thornton PAC. It didn’t work.
Even though there are periods where C corp taxes might work out lower than individual taxes, many closely held companies will hold onto the S status, because they expect that someday the business will be sold, the buyer will want to buy assets and C corporation status, at that point, is a disaster. But of course, there we are talking about mere millionaires. A family that owns perhaps three car dealerships or seven grocery stores or a really, really big hardware store. That’s not the Koch brothers. There is probably not anybody on the planet who is able to come knocking on their door offering to buy all the corporate assets making them wish they had had the foresight to elect S status a decade earlier.
Some of the Koch brothers near neighbors on the Forbes 400 have accumulated vast fortunes from holding C corporation stock – specifically Bill Gates and Warren Buffet. We know that their companies have C status, because they are public.
What Is TIGTA To Do?
TIGTA has publicly acknowledged that it investigated whether Mr. Goosbee’s statement was based on improper disclosure by the IRS. There seems to be a good chance that it was a pretty easy investigation seeing as how it is extremely likely that Goosbee was flat out wrong in his speculation that KI was an S corporation. Taking that as the scenario, how can TIGTA then explain the results of the investigation without disclosing the very thing that was not supposed to be disclosed? Koch Industries’s status as either a C or an S Corporation.
Cause of Action still argued that TIGTA needed to be more forthcoming not only about its investigation of the Goosbee matter but also whether any of its other investigations of improper disclosure involve the White House. Mr. Epstein indicated that you might be able to connect the dots to the Tea Party scandal, if you could find out whether TIGTA is investigating breaches of taxpayer confidentiality involving the White House and applications for not for profit status. Using the very statute that is meant to protect taxpayers against breaches of confidentiality to protect the breachers does appeal to my inner villain as a masterful stroke, so I think Cause of Action has a point.
TIGTA Needs To Disclose More
More important than my opinion is that of Judge Amy Berman Jackson, who was nominated by President Obama to serve on United States District Court for the District of Columbia, shortly before Mr. Goosbee’s unfortunate remark. Judge Jackson ruled that TIGTA should disclose more:
The Court finds that the fact of the existence of any records within the category of records that plaintiff seeks is not confidential “return information” under section 6103 of the Internal Revenue Code, and so defendant’s Glomar response is not supported by FOIA Exemption 3. Furthermore, although the existence of some records might be a fact protected by FOIA Exemption 7(C), the Court finds that defendant has waived reliance on both Exemption 7(C) and Exemption 6 by officially acknowledging its investigation into questions raised by the public statements of a particular administration official, and by failing to offer any other basis that would support a Glomar response on those grounds. Therefore, defendant’s motion for summary judgment will be denied, and plaintiff’s cross-motion for summary judgment will be granted. The Court will remand the case to the agency for further action consistent with this opinion. A separate order will issue.
Other Coverage
This decision has not attracted a huge amount of coverage and what there is does not seem all that studied. Fox News has Obama administration can’t hide investigation into former White House adviser At American Thinker. there is – Court rules administration must acknowledge investigation into release of Koch Brother’s tax returns, in which Rick Moran wrote:
White House explanations on how Goolsbee got the information have been inconsistent and not believable. First, they claim he got the info from a government board. Then they tried to pass it off as something Goolsbee remembered reading somewhere.Next, they’ll probably say the information came to him in a dream.
What little birdie at the IRS whispered in his ear? The same might be asked of other leaks of private tax info of conservatives. And the audits. And the intimidation.
Gee – you get the impression they don’t like conservatives very much up there, do they?
The assumption that “Goolsbee got the information” is interesting, since the most likely scenario seems to be that Mr. Goolsbee did not have any actual information.
CJ Ciaramella in the Washington Beacon wrote :
The Obama administration must acknowledge the existence of an independent investigation into former White House senior economics adviser Austan Goolsbee’s alleged unauthorized access to the Koch brother’s tax returns, a court ruled Tuesday.
That does seem to imply that it was the individual returns of the Koch brothers that were involved, which presumably would be a lot more juicy than the question of whether Koch Industries filed an S election.
Does Austan Goolsbee Owe Lois Lerner A Thank You?
This brings me to a possibly prescient story written by David Corn of Mother Jones in 2010.
If the Republicans gain control of the House of Representatives in the coming congressional elections, Americans can expect to see subpoenas flying like pigeons around Washington next year. Rep. Darrell Issa, the California Republican likely to take over the House oversight committee, has pledged that if the GOPers win the House, he will double the size of his staff in order to mount multiple investigations of the Obama White House. But will these be real probes or trumped-up witch hunts? A taste of what’s to come can be found in the Republicans’ current effort to whip up an Obama scandal: GoolsbeeGate.
Corn concluded
It may well be that the IRS IG dispenses with the matter quickly (and he’s bound to handle the investigation confidentially). Meanwhile, the GOPers and their conservative media allies will be able to yap that the Obama White House is being investigated—cue the ominous music—for possibly abusing confidential IRS information to slam a political foe. With the Republicans manufacturing a scandal and the White House inelegantly responding, this episode may be a preview of post-election Washington life.
I’m thinking that Alan Goosbee caught a lucky break when the Tea Party scandal broke focusing the ire of the Right onto Lois Lerner and having IRS victims much more sympathetic to the general public than the Koch brothers, Well now GoolsbeeGate has caught a breath of wind in its sails, so maybe Ms. Lerner will get a breathing spell.
Afternote
I added the “irony alert”, when I noticed in a forum that someone was indicating I did not have any evidence that the President is a Muslim. It is unfortunate that misunderstandings like that occur, but I still don’t want to entirely abandon occasional ironic statements. The point of the comment is that if you follow both Left and Right commentaries, the Left has a tendency to attribute much that is wrong with the world to the Koch brothers, just as the Right tends to attribute much that is wrong to the President. They both go a little over the top from time to time in my opinion, which is what I was satirizing.