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August 18, 2014
Tax Analysts Exclusive: Conversations: Sen. Carl Levin
by Meg Shreve

Full Text Published by Tax Analysts®

Michigan Sen. Carl Levin (Tax Notes/Derek Squires)As chair of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, Sen. Carl Levin, D-Mich., has focused on corporate tax avoidance and tax planning, calling corporations like Caterpillar Inc. and Apple Inc. before the panel to testify on their tax practices. Levin, who first joined the subcommittee in 1984, has served as the subcommittee's chair or ranking minority member since 1999. He is retiring from Congress at the end of the year.

Levin recently spoke with Tax Analysts' Meg Shreve about his time on the subcommittee, his accomplishments, and the future of the subcommittee's investigation into IRS enforcement of section 501(c)(4) regulations. The interview has been edited for length and clarity.

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Tax Analysts: What are the advantages that the Permanent Subcommittee on Investigations (PSI) has over other committees when it comes to taking an investigative role?

Sen. Carl Levin: A number of advantages. Number one, we can investigate any subject that involves any government-related activity, so we have broad investigative authority. We can't write legislation. We're not a legislative committee; we're an oversight committee. We don't, as a subcommittee, have hearings on bills, and we don't have markups on bills.

But what we have [is] broad authority. We have the subpoena power in the chairman, which is important so you don't have to go through the whole committee or subcommittee to get approval of a subpoena. We have very strong protection for the minority. And it's by design and by structure a more bipartisan committee than others because by rule the minority can initiate an inquiry. Now, they cannot have an investigation technically, but nonetheless, in the name of the subcommittee they can initiate an inquiry. And then under our practices -- not under the rules, but under the practices -- typically every fourth hearing will be on a subject that the minority initiates. So it's a very bipartisan committee, which gives it real strength. I think the fact that all of our witnesses are under oath is important under our rules.

TA: Have there been any disadvantages or limitations you've found over the years that have limited your abilities?

Levin: Not that I can think of.

TA: Your subcommittee's work has really put the spotlight on corporate America's tax practices, and you've had some really big names appear before the subcommittee. How do you decide which of those companies you're going to bring in to look at their tax practices?

Levin: We get a lot of information that comes from various sources. It could be whistleblowers. It could be magazine or newspaper articles. It could be people coming in to describe a situation. Just word of mouth -- we've heard something has gone on and we've initiated an inquiry. It comes from various sources.

And then we sort it out as to what we think has got something that's interesting in terms of what we are looking at generally, maybe fits a pattern. And then we spend a hell of a lot of time on an investigation, because these investigations probably average about a year -- some longer, a few shorter. Usually they typically involve millions of documents.

And this is again -- I'd list this on the advantage side -- is that I think we have credibility for a number of reasons, including the bipartisan reason, but also because our investigations are in-depth. They really dig deep. We don't just take a headline and have a hearing. There's a legitimate reason for that kind of a hearing, and other committees do that. But we spend -- we dig and dig and dig and dig, and then over the course as investigations proceed or inquiries proceed, some get more and more interesting, some get less interesting. And if they're less interesting because it turns out there's not much there that's worthy of explanation or investigation, then they'll be dropped. We obviously can't do everything that people suggest or that we'd like to do. We just can't do it because we have a very small staff. Staffs work closely together, the minority [and] majority staffs work very closely together, but even put together, it's a small staff.

TA: How did you decide to bring a company like Apple in front of the subcommittee to talk about its tax practices?

Levin: Well, I don't know how the original information came to us, but in the case of Apple, I think they were the ones that had billions of dollars of revenue which was going to Ireland instead of to Uncle Sam -- taxable in Ireland, which was no tax at all. They found a sweet spot where there was no tax. Ireland says you're taxed where you are controlled, and Apple is controlled in the United States.

There were stories about it. And we wanted to find out how is it you don't pay any taxes anywhere? And the further we got into it, the more interesting it became. How do you find a location? How do you find a place where you can have your revenue be transferred to where you're not paying any taxes anywhere? Under our law, you're taxed where you're incorporated. They were incorporated in Ireland, so not taxed anywhere.

And then with Microsoft, I don't know the origin of the information. They were able to ship 49 percent of their U.S. revenue to Puerto Rico. How do you do that? What's the gimmick they used? What's the structure? What's the tax avoidance? I call them gimmicks, but how do you avoid paying taxes on revenue here? We even got involved in companies that had shifted their intellectual property to themselves in a tax haven. How do you do that to avoid paying taxes?

And with Hewlett-Packard, that was a gimmick, too. You're supposed to pay tax when you repatriate your profits. Well, there's an exception. If you have a short-term loan to yourself -- 30 days as I remember; it may have been 60 days or less -- that doesn't count as repatriation. They shifted it to themselves in short-term loans one day less than the cutoff period, and then created another company overseas and shifted it from company A here for 29 days or 59 days, whatever the cutoff period was. And then that was electronically paid back and that goes to company B offshore -- their own company. They made the next loan for one day less than the cutoff, made a payment back to company A back to the United States for two years without paying any tax. There was a two-year solid loan with no gaps. They effectively repatriated. How do they do that? The law says it was either 30 or 60 days maximum for a loan. Well, we showed how they do it.

I don't think under current law, frankly, that they are allowed to do it, but that's between them and the IRS. We don't make decisions on prosecution. We are an oversight subcommittee.

TA: One of the arguments these companies often make is that they're not doing anything illegal. They're just following the law.

Levin: If you want to change the law, you've got to illustrate the problem that exists. You've got to illustrate the loopholes. There are gaping loopholes that are being used by companies that are highly profitable to avoid paying taxes. Well, what are those loopholes? If you want to try and explain them, these are incredibly complex issues. You could write a paper, which nobody will read. Obviously, you want scholars and experts who read Tax Notes and read technical journals, but you've got to demystify. How do they manage -- making this much profit -- to avoid paying taxes on that profit?

We had one a couple of weeks ago where a hedge fund magically is able to turn, to transform, 300 million transactions in 10 years from short-term capital gains to long-term capital gains. How do they do that? None of them was over six months. Most of them were under one week, probably a majority even under less than a day, but this isn't the high-frequency traders. These are a little bit different issue. But how do they do that? Thirty million a year -- that was the average -- transactions times 10 years they were doing it -- that's where the 300 million comes from. How do you have 300 million transactions over 10 years, none of which lasted more than six months, into long-term capital gains which are supposed to be yearlong investments or more? How do you do that?

It takes me months to dig into this stuff to understand it because it takes a lot of digging to understand it enough so you can explain it, and then to explain it to my colleagues, and then to the public. We've got to close these loopholes. There's a lot of lost revenue here. These are not economically useful activities. This type of tax avoidance doesn't perform an economically useful function.

There's a big argument here over taxes. There's a big argument in Congress. There's a philosophical argument about tax rates and how much Uncle Sam should collect on all that. Part of that argument is whether or not tax reform is the right way to go, and the answer most people say is "Yeah, if you can figure out how to do it in a way which can pass."

There are two types of deductions, credits, loopholes, however you want to describe them -- there are two types. I save the term loophole for what the economically unjustified gimmicks are. So that's where I use the term loophole. But I'm not trying to talk about labels; I'm talking substance here. There's a whole group that performs an economic function. You may disagree with the function, but they perform a function. So I'm going to call those economically justified. Examples: accelerated depreciation. It gives an incentive to go out and buy new machinery, which is good for the economy, good for people, creating new machinery, good for productivity. It's in the tax code, called accelerated depreciation. I vote for it. I like the jobs it creates. I like the productivity.

There's another economically justified deduction or credit that has to do with oil and gas exploration. I vote against it because I'd rather go with more green energy. But it serves a purpose. It's an incentive to go and look for oil and gas. That is a purpose, an economic purpose. Whether I agree with it or not isn't the point; it serves a purpose.

But what about these other loopholes that we've just been talking about that my subcommittee explores? What's the economic purpose in shifting your income from the United States to yourself in a tax haven? The only purpose is tax avoidance, and you go right down the list of these tax avoidance schemes. What's the economic purpose in tolerating American citizens to hide their income and their assets in a tax haven? What's the economic purpose? There is none. That's tax avoidance. We can close those tax loopholes. Hopefully [the Foreign Account Tax Compliance Act] will do it.

Every company, Apple and Caterpillar, they may complain, oh, why do we pick them? And the answer is you've got to demystify it. You've got to have an example which then can be shared with colleagues or with the public, otherwise it's a theoretical problem.

TA: So where does the blame lie? When you have these hearings, does that take pressure off Congress if it's always focusing on the corporate behavior? Does it take pressure off Congress to step up and do something?

Levin: It's the opposite; it puts pressure on Congress because the public reads about it. And public opinion polls are overwhelming. Republicans, independents, Democrats -- people think the tax code is unfair, and it is. They think that profitable corporations are avoiding paying taxes and that that's unfair. And they hear and read about these things, about how people can create accounts overseas and avoid paying taxes, or corporations can shift income or intellectual property overseas and avoid paying taxes. They put a lot of pressure on their members. There's huge, huge momentum here for closing tax loopholes.

Now, I define it the way I define it. And that gets to an issue as to when you reform the tax code -- which I hope we will -- then another issue is what do you do with the revenue that you gained closing, editing credits, deductions, or closing tax loopholes. What do you do with that revenue? That's a major issue here because some people say use at least part of it for deficit reduction, or use at least part of it for keeping our road building program, or not cutting into defense in certain ways, for infrastructure and for education, interest loan reduction. That's where I come from.

I want to use some of the revenue at least. I would close these tax loopholes, by the way, if there were no deficit because they're wrong. People should pay their fair share of taxes.

TA: Have your investigations changed corporate tax behavior?

Levin: Well, we collected a lot of money. The IRS has gone after a whole bunch of folks, and I think in the case of after our hearing on UBS -- I believe it was after -- it was a voluntary disclosure program after that whole business on UBS. I think there were 45,000 taxpayers who owned up who had offshore accounts, and I think we collected $6.5 billion just on that one. The FATCA is just really beginning to get underway. Some banks are no longer taking accounts that are not disclosed to Uncle Sam.

You're talking about corporate behavior. I mean, our hearings partly contributed to [the] Dodd-Frank [Wall Street Reform and Consumer Protection Act]. We mentioned FATCA; that's going to change corporate behavior big time, and I think our hearings contributed to getting that thing done. Enron cooked its books, so we have now an accounting oversight board, the Public Company Accounting Oversight Board. So now CEOs and CFOs have got to certify their financial statements. There's a lot of legislation like that which has affected corporate behavior.

We had a Swiss bank who flat-out came and said, you were right, they were wrong. That was, I think, HSBC. Just came in front of us and said, "You're right." So they changed their banking. Riggs changed their banking here. They went out of business, I think in large part, because of our hearings. This was way, way, quite a ways back.

And I think we've changed the climate in terms of corporate tax loopholes. I really believe that the work that we've done -- because it's large measure, because it's in-depth, it's bipartisan, it's thorough -- it's going to lead to some real, real changes in the area of tax loopholes. Now that doesn't directly answer your question about corporate behavior, but that will affect corporate behavior if we can accomplish the closing of those loopholes.

TA: What's your assessment so far of how the IRS is implementing FATCA? Do you have any concerns about the delays and implementation so far?

Levin: I'm not sure what that timetable has been. I mean, it's been delayed, but it's in place. So generally, I don't think that's the problem. I think the bigger problem is going to be whether they can find loopholes in FATCA. That's a bigger concern of mine than the length of time that it's taking because I'm not going to identify them, although I know of a couple. But I'm not going to assist people who look for loopholes.

TA: Is that a subject you think the subcommittee should look at, the next chair should consider?

Levin: Yeah, if it turns out that my fears are justified, sure. And by the way, FATCA was a bill which I give a lot of credit here to [former Senate Finance Committee Chair Max] Baucus and to [former House Ways and Means Committee Chair Charles B.] Rangel. I think we helped set the table for it, but that bill and that approach was somewhat different actually than the one we had talked about in our bill. So I give them a lot of credit. I've got to be careful I don't take credit for things that I shouldn't be taking credit for. And Rangel and Baucus really put together, I think, something that's really powerful. It's already having an impact.

TA: You do have some legislative proposals that you've put out there. Do you have regrets that more of your proposals haven't been picked up over the years?

Levin: Oh, I've got a whole bill with about 10 loopholes that are identified that I am still hoping will be either adopted this year or will be a part of tax reform [the Cut Unjustified Tax Loopholes Act of 2013 (S. 268 )]. We're very precise on the unjustified tax rules. It's an unjustified tax loophole bill, and we lay it out very clearly as to what they are.

Some of them we haven't talked about, including the carried interest [and] the accounting for stock options, which is incredible that companies can take a deduction for the cost of stock options which is wildly more than they show on their own books as the cost of the option. So they tell their stockholders and potential stockholders these millions of options -- look on Facebook, I think hundreds of millions of options maybe in that case -- cost cents each. So 100 million times 50 cents is $50 million. And that was an accurate value; I'm not saying that was undervalued. When they came into existence, I have no doubt that was an accurate value. So how then do they deduct $50 billion now? Grant or sold? How do they show on their books to the world buying stock that the only cost of that is $50 million, and they get a tax deduction for $50 billion? Now, those numbers are not precise. It may only be $25 billion. How do they show it in a few million on their books and tens of billions to Uncle Sam?

Well, that's the current way in which they're allowed to do it. And that means they're not going to pay taxes for years because you can carry forward that tax deduction. This deduction was created when they sold their stock a few months ago or a year ago now, when they cashed in on those options. They produce something useful, so I'm not -- this isn't the kind of gimmick where you shift your revenue to a tax haven; this is the account of a hole in the law or the accounting rules which allows you to take 100 times more tax deduction than is shown on your books for that same item. We can close that. You ought to close it. By the way, it's part of the tax gap, too, it's part of the income gap, as executive pay now is probably more than half the stock options, which are fine. I'm pro-stock-options. I've got no problem with them; they're useful. But how does that justify this case, and this case alone, being able to get a tax deduction 100 times more than the same item as shown costwise on your books. You know, these kind of things ought to be changed.

TA: Your subcommittee also was going to look at tax-exempt laws, section 501(c)(4) groups and all that. It's been suggested that during this investigation, you put unnecessary pressure on the IRS to look at those groups. What is your response to that, and where do things stand with your investigation right now? Can we expect a report before you retire?

Levin: We wish the IRS to enforce the law. It's just 501(c)(4)s are not allowed to engage in political activity. They must be exclusively social welfare. Well, you've got 501(c)(4)s -- both Republican and Democrat, conservative and liberal. And by the way, we made that clear in our letters to the IRS that they're both Democratic and many more Republican than Democrat, but we listed both.

We gave the IRS examples of both and said, "How come you've got all these 501(c)(4)s that are predominantly engaged in political activity?" That's where all these so-called super PACs -- although they're not technically super PACs, they're like super PACs -- that's where these hundreds of millions of dollars get spent from (c)(4)s. How do you let that happen? That's what we asked the IRS. That's not what the law says. The law says exclusively social welfare.

Somehow or other, they translate that into primarily social welfare. How they can define exclusive as primarily is a mystery to me, but that's been going on for 10 years, and the IRS says, "OK, you guys didn't do anything about it after we interpreted it that way, you guys in Congress." So I don't want to concede that point, but we'll give them the point for purpose of argument.

Are these (c)(4)s primarily engaged in social welfare? Boy, it sure doesn't look that way on the surface. But anyway, that's for the IRS to determine. So we sent letters to the IRS, look at both. And they should because we've got now this huge influence in the market that's unaccounted for, undisclosed. And (c)(4)s don't disclose who the contributors are.

So I believe they ought to do it. They ought to abide by the law. If they can't do exclusively, which is the law, at least do primarily. And so we got into that subject -- it became highly partisanized over by the Republicans in the House, in my judgment, and the environment is so heated you can't have a hearing on the subject because it will just disintegrate. And that's the last thing I want for my subcommittee is to have any partisan or look partisan or be attacked as partisan.

So there's not going to be a hearing, but there will be a report released. And as soon as we solve a problem over -- this new issue over the missing e-mails or the e-mail issue. That now is something added after we finished our report. We now have to resolve how do we deal with that. Do we keep this whole thing open to be the fifth committee that's looking into the e-mail issue, or do we just say, "OK, we're going to cut it off where we completed and not get into the e-mail issue." Let the other two or three or four committees that are looking into that look into it, and we'll issue our report without addressing that issue. We're at a point where we're going to try to release this as soon as we can resolve that issue on how to deal with it.

To me, the scandal is they don't enforce the law. For maybe the Republicans in the House, the scandal is that they argued and it was enforced in a partisan way, which if it was would be a scandal. But we don't have any evidence that it was.

TA: You mentioned during the press briefing before the hedge fund hearing that the IRS's budget issues are not a reason that it can't respond to the kind of issues you've raised. What do you want to see the IRS do about that?

Levin: Resolve it. They've been looking at it for five years or more.

TA: How do you think the PSI will change with a new chair after you leave? Are there still some outstanding tax issues that you would encourage the next chair to look at?

Levin: A lot depends on the chairman's priorities. They may have very different priorities than I've had. For me, it's been the inequality in this country that's grown, partly driven by these tax loopholes, and the revenue crunch in this country resulting from corporations now paying about 10 percent of our revenue. Many decades ago, 50 percent of our revenue came from corporations, then 40, then 30, then 20, now it's about 10. And now you have this whole issue of inversion, which is a huge issue. In a sense, the Caterpillar hearing, that is kind of an inversion issue. That's going to be a huge issue. I know Finance is looking at it. If Finance is looking at it, there's no reason to duplicate.

TA: What do you think your accomplishments are as PSI chair in the tax world?

Levin: I'm not looking back yet. There will be plenty of time, and others I think will be judging that. I mean, we've obviously named some things that I think we've done well. And I think we made real progress on the individual side.

There's a lot ahead of us that needs to be done. I think we've done important work in terms of illuminating the issues, in terms of setting the table. So I think we've done important work there on the corporate side.

And there's been some corporate behavior change, as the way you phrased it. There's been some laws that have been changed relative to corporations, and including some of the Dodd-Frank law and the credit card law. So we've had some successes. But in terms of the loopholes, the big, big issues, I think we've set the table and we've gotten a lot of material there that people can use in the debate. There's more ahead of us in terms of legislation and change in conduct than there is behind us.

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