In the tax bill passed in late 2010, there is a provision that permits all companies to get 50% first-year bonus tax depreciation for equipment purchases made in 2012.
When I study the past attempts at stimulating the US economy with bonus tax depreciation, it is very clear that there has been very little, if any, job creation from it.
However, there has been a substantial near-term US Debt increase from it, in every case.
My proposal here is to turn this 50% bonus tax depreciation for equipment purchases in 2012 into a much more effective job creator.
Thus, Big Corps, over a certain size, making equipment expenditures in 2012, are allowed 50% first-year bonus tax depreciation, but only if the Big Corp also increases its full-time payroll count sufficiently from Dec 31, 2011 to Dec 31, 2012. I’ll let the Feds decide what a reasonable first-year 50% bonus tax depreciation amount per job added should be.
In addition, the Big Corp receiving first-year 50% bonus tax depreciation for equipment purchases made in 2012, must have their full-time payroll count remain at least at their Dec 31, 2012 level for the following four years, or else the tax benefits from this 50% bonus tax depreciation is recaptured, on a proportionate basis.
This proposal’s near term effect on US Debt should be significantly positive.
And from a fairness standpoint, the US government should be legislating so that the entire country benefits from capital expenditures made by Big Corps, not just the Big Corps.
Friday, July 22, 2011
Big Corp Tax Loophole Closer #6: 100% Tax Expensing of Equipment
In the tax bill passed in late 2010, there is a provision that permits all companies to get 100% first-year expensing of equipment from August 2010 until December 2011.
Clearly, this provision substantially improved the earnings of many large corporations, and also increased US real GDP growth.
But it did very little, if any, job creation, in the aggregate.
My proposal is to now tweak this 100% first-year tax expensing of equipment for all equipment acquired for the remainder of 2011, to turn it into an effective job creator.
Thus, Big Corps, over a certain size, making equipment expenditures from Aug 1, 2011 through Dec 31, 2011, are allowed 100% first-year tax expensing of equipment, but only if the Big Corp also increases its full-time payroll count sufficiently from Aug 1, 2011 to Dec 31, 2011. I’ll let the Feds decide what a reasonable first-year 100% expensing amount per job added should be.
In addition, the Big Corp receiving first-year 100% expensing of equipment for purchases from Aug 1, 2011 through Dec 31, 2011, must have their full-time payroll count remain at least at their Dec 31, 2011 level for the next four years, or else the tax benefits from this 100% first-year tax expensing is recaptured, on a proportionate basis.
This proposal’s near term effect on US Debt should be significantly positive.
And from a fairness standpoint, the US Government should be legislating so that the entire country benefits from capital expenditures made by Big Corps, not just the Big Corps.
Clearly, this provision substantially improved the earnings of many large corporations, and also increased US real GDP growth.
But it did very little, if any, job creation, in the aggregate.
My proposal is to now tweak this 100% first-year tax expensing of equipment for all equipment acquired for the remainder of 2011, to turn it into an effective job creator.
Thus, Big Corps, over a certain size, making equipment expenditures from Aug 1, 2011 through Dec 31, 2011, are allowed 100% first-year tax expensing of equipment, but only if the Big Corp also increases its full-time payroll count sufficiently from Aug 1, 2011 to Dec 31, 2011. I’ll let the Feds decide what a reasonable first-year 100% expensing amount per job added should be.
In addition, the Big Corp receiving first-year 100% expensing of equipment for purchases from Aug 1, 2011 through Dec 31, 2011, must have their full-time payroll count remain at least at their Dec 31, 2011 level for the next four years, or else the tax benefits from this 100% first-year tax expensing is recaptured, on a proportionate basis.
This proposal’s near term effect on US Debt should be significantly positive.
And from a fairness standpoint, the US Government should be legislating so that the entire country benefits from capital expenditures made by Big Corps, not just the Big Corps.
Thursday, July 21, 2011
Big Corp Tax Loophole Closer #5: LIFO Inventory
For US federal income tax purposes, businesses are permitted to use Last-in, First-out (LIFO) inventory.....yeah, another way of saying this is the oldest bought is still here (FISH....First-in, Still Here). By using LIFO, businesses get to increase their Cost of Goods Sold Expense Tax Deduction, and thus get to decrease their Taxable Income, and thus also get to reduce their US federal income tax bill.
Under US generally accepted accounting principles, LIFO is one of the many ways that businesses can value their inventory on their balance sheets. The precision of accountants is clearly overrated.
The IRS has the LIFO conformity rule, which lets businesses use LIFO for federal income tax purposes only if they also value their inventory on their financial statements at LIFO.
Companies that economically benefit from using LIFO the most are ones whose inventories have increased in price the most.
Many companies using LIFO are pricing a good chunk of their inventory at prices of decades ago. Does that make any sense? I don't think so.
Just focusing on four US Big Oil Companies, here are their related Dec 31, 2010 Inventories for their Crude Oil and Petroleum Products on their books, and how much it would change if these inventories were instead valued at the much more relevant current cost to replace this inventory.
………………………………………..........Step Up To
…………………………...Inventory…Replacement...Inventory at
…………………………....at LIFO………....Cost…….....Current Cost
………………………..…….........(in millions of US dollars)………
Exxon Mobil……………9,852……….21,300…………...31,152
Chevron………………….3,589………...6,975…………...10,564
ConocoPhillips………..4,254…………6,794…………...11,048
Marathon Oil…………..3,049…………4,166………….....7,215
Total…………………...20,744………..39,235…………..59,979
My proposal here is to eliminate LIFO for all US Multinational Corps in all industries, which have a significant amount of their US inventory priced at LIFO. The cutoff amount is subject to debate, but I would consider something like total LIFO inventory of $100 mil or more….or perhaps, a bit more than $100 mil. And all US Multinational Corps with LIFO inventory less than $100 mil, could elect to switch out of LIFO, and get the same tax benefits under this proposal.
I wouldn’t require pure domestic businesses to switch out of LIFO.
The economic damage to Big Corps from this proposal is substantially softened here.
For the US Multinational Corps that would be required to switch out of LIFO for US federal income tax purposes under my proposal here, the logical action will be for them to also switch out of LIFO in their financial statements. Thus, there will be no income tax expense charge in their income statement from this switch out of LIFO. Further, by switching out of LIFO, this should increase their Gross Margins and their Pretax earnings on their income statements, as well as significantly increase their total inventory and their total stockholders’ equity, both on their balance sheets.
I wouldn’t require the initial switch out of LIFO to be paid for in US federal income taxes immediately. Instead, I would let them pay for it equally in 7 years starting in say Year 4 and continuing to Year 10.
I would also let US Multinational Corps switching out of LIFO here to be permitted to repatriate some of their foreign earnings in either 2011 or 2012, and also receive a significant tax benefit. Let me explain with an illustration.
Say US Multinational Corp A switched out of LIFO starting in 2012. From this switch out of LIFO, the resultant additional US federal income tax owed for this switch is say $140 million.
Under my proposal, Corp A would be permitted to repatriate an amount of its foreign earnings, which results in additional US federal income tax of $140 mil. This $140 mil is then used to liquidate the $20 mil of LIFO tax owed in each of the 7 years from 2015 to 2021.
The end result is that Corp A gets immediate access to a significant amount of its foreign earnings parked overseas. And Corp A, in essence, doesn’t have any US federal income tax owed from this foreign earnings repatriation, to boot.
There will be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Under US generally accepted accounting principles, LIFO is one of the many ways that businesses can value their inventory on their balance sheets. The precision of accountants is clearly overrated.
The IRS has the LIFO conformity rule, which lets businesses use LIFO for federal income tax purposes only if they also value their inventory on their financial statements at LIFO.
Companies that economically benefit from using LIFO the most are ones whose inventories have increased in price the most.
Many companies using LIFO are pricing a good chunk of their inventory at prices of decades ago. Does that make any sense? I don't think so.
Just focusing on four US Big Oil Companies, here are their related Dec 31, 2010 Inventories for their Crude Oil and Petroleum Products on their books, and how much it would change if these inventories were instead valued at the much more relevant current cost to replace this inventory.
………………………………………..........Step Up To
…………………………...Inventory…Replacement...Inventory at
…………………………....at LIFO………....Cost…….....Current Cost
………………………..…….........(in millions of US dollars)………
Exxon Mobil……………9,852……….21,300…………...31,152
Chevron………………….3,589………...6,975…………...10,564
ConocoPhillips………..4,254…………6,794…………...11,048
Marathon Oil…………..3,049…………4,166………….....7,215
Total…………………...20,744………..39,235…………..59,979
My proposal here is to eliminate LIFO for all US Multinational Corps in all industries, which have a significant amount of their US inventory priced at LIFO. The cutoff amount is subject to debate, but I would consider something like total LIFO inventory of $100 mil or more….or perhaps, a bit more than $100 mil. And all US Multinational Corps with LIFO inventory less than $100 mil, could elect to switch out of LIFO, and get the same tax benefits under this proposal.
I wouldn’t require pure domestic businesses to switch out of LIFO.
The economic damage to Big Corps from this proposal is substantially softened here.
For the US Multinational Corps that would be required to switch out of LIFO for US federal income tax purposes under my proposal here, the logical action will be for them to also switch out of LIFO in their financial statements. Thus, there will be no income tax expense charge in their income statement from this switch out of LIFO. Further, by switching out of LIFO, this should increase their Gross Margins and their Pretax earnings on their income statements, as well as significantly increase their total inventory and their total stockholders’ equity, both on their balance sheets.
I wouldn’t require the initial switch out of LIFO to be paid for in US federal income taxes immediately. Instead, I would let them pay for it equally in 7 years starting in say Year 4 and continuing to Year 10.
I would also let US Multinational Corps switching out of LIFO here to be permitted to repatriate some of their foreign earnings in either 2011 or 2012, and also receive a significant tax benefit. Let me explain with an illustration.
Say US Multinational Corp A switched out of LIFO starting in 2012. From this switch out of LIFO, the resultant additional US federal income tax owed for this switch is say $140 million.
Under my proposal, Corp A would be permitted to repatriate an amount of its foreign earnings, which results in additional US federal income tax of $140 mil. This $140 mil is then used to liquidate the $20 mil of LIFO tax owed in each of the 7 years from 2015 to 2021.
The end result is that Corp A gets immediate access to a significant amount of its foreign earnings parked overseas. And Corp A, in essence, doesn’t have any US federal income tax owed from this foreign earnings repatriation, to boot.
There will be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Big Corp Tax Loophole Closer #4: Big Oil Intangible Drilling Costs
For US federal income tax purposes, Big Oil and Big Oil-related Corps are presently permitted to deduct in the first year, 70% of their Intangible Drilling Costs (IDCs). These IDC expenditures include labor, fuel, materials, supplies truck rent, repairs to drilling equipment, and depreciation for drilling equipment. The portion not deducted in the first year is amortized over 5 years.
My proposal here is to require 100% of these IDC expenditures of Big Oil Corps and Big Oil-related Corps to instead be initially capitalized and amortized over 10 years.
I would not apply my above proposal to smaller Oil and Oil-related companies.
The economic damage to Big Oil Corps and Big Oil-related Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these IDC expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Oil Corps and Big Oil-related Corps from my proposal here.
There will be significantly positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
My proposal here is to require 100% of these IDC expenditures of Big Oil Corps and Big Oil-related Corps to instead be initially capitalized and amortized over 10 years.
I would not apply my above proposal to smaller Oil and Oil-related companies.
The economic damage to Big Oil Corps and Big Oil-related Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these IDC expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Oil Corps and Big Oil-related Corps from my proposal here.
There will be significantly positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Wednesday, July 20, 2011
Big Corp Tax Loophole Closer #3: Health Insurance Claims and Premiums
Health insurance companies are able to deduct each year, for federal income tax purposes, some of their estimated insurance claim liabilities, even though they are not fixed in amount.
In addition, health insurance companies are also able to defer each year, for federal income tax purposes, the taxability of some of their unearned premiums received in cash.
In both of the above cases, these Health Insurance companies are receiving federal tax benefits that are inconsistent with the general federal income tax principles of not getting federal income tax deductions until they are fixed, and of taxing revenues, for federal income tax purposes, when they are received in cash.
My proposals here are to allow all Big Health Insurance Corps to deduct insurance claims only in the year when they are fixed, and to recognize premium revenues in the year when they are received in cash.
I would not apply my above proposal to smaller Health Insurance companies.
The economic damage to the US Big Health Insurance Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions and revenues from these insurance claims and premiums will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Health Insurance Corps from my proposals here.
There should be significantly positive CBO scoring to the US Government from these proposals, for the next 10 years and for many years thereafter.
In addition, health insurance companies are also able to defer each year, for federal income tax purposes, the taxability of some of their unearned premiums received in cash.
In both of the above cases, these Health Insurance companies are receiving federal tax benefits that are inconsistent with the general federal income tax principles of not getting federal income tax deductions until they are fixed, and of taxing revenues, for federal income tax purposes, when they are received in cash.
My proposals here are to allow all Big Health Insurance Corps to deduct insurance claims only in the year when they are fixed, and to recognize premium revenues in the year when they are received in cash.
I would not apply my above proposal to smaller Health Insurance companies.
The economic damage to the US Big Health Insurance Corps from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions and revenues from these insurance claims and premiums will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Health Insurance Corps from my proposals here.
There should be significantly positive CBO scoring to the US Government from these proposals, for the next 10 years and for many years thereafter.
Big Corp Tax Loophole Closer #2: Upfront Costs on Big Financial Derivatives
With all of the horrible financial havoc that financial swaps and other financial derivatives have played on the US and world economies, I think the last thing we want to do is to give tax incentives for any financial derivative, which believe it or not, we presently do.
The Big Financial firms arranging the swaps and other financial derivatives incur a lot of both upfront external costs, including outside professional fees, and upfront internal costs, including employee, employee benefit, travel, and other related costs, in designing, implementing and marketing these very complex swap and other financial derivative transactions.
And frequently, there are also lucrative compensation programs for various executives and employees in which compensation is based on measures such as fees and positive interest spreads earned in swap or other financial derivative transactions.
My proposal here is that all of the substantial upfront external and internal costs incurred by the Big Financial firm that end up resulting, either directly or indirectly, in the generation of the fees received by the financial firm related to the financial derivative, including an allocation of employee costs, related employee benefit costs, and related travel and other costs, as well as all compensation driven by the level of swap fees and other financial derivative fees, should not be tax deductible in the year these costs are incurred.
Instead, in all fairness, all of these upfront costs should be initially deferred for federal income tax purposes, and amortized over the life of the related swap and other financial derivative transactions. Thus, from a fairness standpoint, for federal income tax purposes, the entire costs related to the financial derivatives would be spread over the entire life of the financial derivative, which is how the income is also recognized.
I wouldn’t apply this corporate tax loophole closing to smaller US financial institutions, but just to the clearly very large US Big Financial Institutions. I would apply this proposal to all Foreign Financial Institutions entering into these financial derivative transactions in the US.
The economic damage to the US Big Financial Firms from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions from these financial derivative transactions will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Financial Institutions from my proposal.
There should be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
The Big Financial firms arranging the swaps and other financial derivatives incur a lot of both upfront external costs, including outside professional fees, and upfront internal costs, including employee, employee benefit, travel, and other related costs, in designing, implementing and marketing these very complex swap and other financial derivative transactions.
And frequently, there are also lucrative compensation programs for various executives and employees in which compensation is based on measures such as fees and positive interest spreads earned in swap or other financial derivative transactions.
My proposal here is that all of the substantial upfront external and internal costs incurred by the Big Financial firm that end up resulting, either directly or indirectly, in the generation of the fees received by the financial firm related to the financial derivative, including an allocation of employee costs, related employee benefit costs, and related travel and other costs, as well as all compensation driven by the level of swap fees and other financial derivative fees, should not be tax deductible in the year these costs are incurred.
Instead, in all fairness, all of these upfront costs should be initially deferred for federal income tax purposes, and amortized over the life of the related swap and other financial derivative transactions. Thus, from a fairness standpoint, for federal income tax purposes, the entire costs related to the financial derivatives would be spread over the entire life of the financial derivative, which is how the income is also recognized.
I wouldn’t apply this corporate tax loophole closing to smaller US financial institutions, but just to the clearly very large US Big Financial Institutions. I would apply this proposal to all Foreign Financial Institutions entering into these financial derivative transactions in the US.
The economic damage to the US Big Financial Firms from this proposal is substantially softened here due to this corporate tax loophole closer being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions from these financial derivative transactions will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Financial Institutions from my proposal.
There should be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter.
Tuesday, July 19, 2011
Big Corp Tax Loophole Closer #1: Deposits on Open IRS Audits
Under US generally accepted accounting principles, public companies are required to disclose in their footnotes included in their annual reports filed with the SEC, their best estimate of what they owe in total to all taxing authorities for all of their open tax audit years. The bulk of these amounts disclosed relate to the amounts owed to the US Federal Government. Also included in this total are amounts owed to State Governments and to Foreign Governments.
Back in October 2010, I did a quick review of footnotes of some large US corporations, and also some large foreign corporations with heavy US operations, and from just my very limited review, I found 384 companies that had amounts owed for all open IRS tax audit years in excess of $100 mil each, that in the aggregate totaled $268.1 bil, including accrued interest, at the most recent fiscal year end, which for the majority of these companies was December 31, 2009.
It takes a very long time for these companies to settle their tax audits with the IRS and other taxing authorities. For the largest Dow companies, there was an average of more than 8 years of open tax audit years.
Huge US Multinational Corps make up a large portion of the Aggregate Balance of Total Tax Reserves for all Corps having Tax Reserves above $100 mil each. Here is a stratification of these Corp Tax Reserves by size:
..Tax Reserves.....
Above $5 bil…………......12 Corps…..$82.1 bil….30.6% of total
$2 bil to $5 bil…………...20 Corps….$56.9 bil….21.2% of total
$1 bil to $2 bil…………....24 Corps….$31.5 bil….11.8% of total
$500 mil to $1 bil……....49 Corps….$35.5 bil….13.2% of total
$250 mil to $500 mil….93 Corps….$32.7 bil….12.2% of total
$100 mil to $250 mil…186 Corps….$29.4 bil….11.0% of total
All above $100 mil…….384 Corps..$268.1 bil…100.0%
In this post, I am updating this earlier quick review of these income tax footnotes of these large companies.
Here are the 50 US companies which had a Tax Reserve of at least $1 bil at the most recent date, which was December 31, 2010 for the majority of these companies:
………………....................Date……..Tax Reserve
…………………………......................(bils of US$s)
JPMorgan Chase.......Dec 2010.........9.4
Pfizer.......................Dec 2010.........7.7
GE............................Dec 2010.........7.4
Microsoft.................Jun 2010.........7.3
Merck......................Dec 2010.........6.5
Wells Fargo..............Dec 2010.........6.4
Bank of America.......Dec 2010.........6.3
AIG..........................Dec 2010.........6.2
ATT..........................Dec 2010.........5.7
IBM..........................Dec 2010.........5.7
General Motors........Dec 2010.........5.5
Exxon Mobil............Dec 2010.........4.8
Entergy....................Dec 2010.........4.6
Citigroup..................Dec 2010.........4.4
Morgan Stanley.........Dec 2010.........4.0
Verizon.....................Dec 2010.........3.8
Oracle.......................May 2011.........3.8
Chevron....................Dec 2010.........3.7
TE Connectivity.........Sep 2010.........2.9
Cisco Systems............Jul 2010.........2.8
Abbott Labs..............Dec 2010.........2.7
JNJ...........................Dec 2010.........2.6
PepsiCo.....................Dec 2010.........2.6
Procter & Gamble......Jun 2010.........2.5
Dell............................Jan 2011.........2.5
Time Warner..............Dec 2010.........2.4
Goldman Sachs..........Dec 2010.........2.3
Hewlett Packard........Oct 2010.........2.3
Covidien....................Sep 2010.........2.1
Comcast....................Dec 2010.........1.9
Energy Future Hldgs..Dec 2010.........1.8
Eli Lilly......................Dec 2010.........1.8
American Express.....Dec 2010.........1.6
Chrysler....................Dec 2010.........1.6
Accenture.................Aug 2010.........1.5
Kraft Foods................Dec 2010.........1.5
Boeing.......................Dec 2010.........1.4
Schlumberger............Dec 2010.........1.4
ConocoPhillips...........Dec 2010.........1.3
Boston Scientific........Dec 2010.........1.3
Johnson Controls.......Sep 2010.........1.3
Google.......................Dec 2010.........1.2
Apple.........................Sep 2010.........1.2
Freddie Mac...............Dec 2010.........1.2
Ford...........................Dec 2010.........1.1
Amgen.......................Dec 2010.........1.0
Walmart.....................Jan 2011.........1.0
Metlife.......................Dec 2010.........1.0
United Technologies..Dec 2010.........1.0
Berkshire Hathaway...Dec 2010.........1.0
Total for all 50...............................159.0
In this new study, I found many new Big Corps which had Tax Reserves above $100 mil. And, although some of them had smaller Tax Reserves, I found that a large number of these Corps had higher Tax Reserves now than they disclosed a year ago.
Also, there weren't very many foreign companies included in the 384 with Tax Reserves above $100 mil each that I showed in my earlier study back in October 2010. The majority of large foreign corps, with heavy US operations, follow International GAAP, rather than US GAAP. Thus, they generally do not disclose the amount of the Tax Reserves they have on their books.
Anyway, I can think of no fairer, less innocuous way to derive a portion of the $1 trillion of tax revenues than to simply require all Big Corps with Tax Reserves above $100 mil each, to make partial deposits on their open IRS audits. And frankly, it raises money from a CBO scoring standpoint, but all that is really happening to the Big Corp is that a portion of what Big Corps agree that they owe, and have already recorded on their books, is simply being paid a bit earlier in deposits over time.
I think perhaps these partial tax deposits should be 50% of the amount of Tax Reserves on the books, with that 50% staggered in over the next 10 years. To be even more fair, I think I would require a somewhat higher percentage than 50% for the really large Big Corps and a somewhat lower percentage for the smaller Big Corps.
There is absolutely no negative economic consequences for these Big Corps to make these partial tax deposits. When these deposits are made, the accrual of interest stops. And the US Government’s interest charge here is much higher than what nearly all of the Big Corps could get on their own financing.
So, how much funding do you get here from this proposal?
When I track the last three years, the average increase in these Total Tax Reserves is 8.7% per year. Thus I’ll very conservatively assume only an average of 5% growth per year from here on out.
The Total Tax Reserve for these 384 companies in 2009 was $268 bil. A portion of this $268 bil is for state and foreign income taxes. I’ll say this is more than offset by the many Big Corps with Tax Reserves above $100 mil each that are not included in the $268 bil. And then to be even more conservative, I also won’t grow this $268 bil through 2011.
When you compound this $268 bil at 5% per year, starting in 2012, it comes to $437 bil in 10 years. Thus, the funding over the next 10 year CBO scoring period would be 50% X $437 bil, or $218 bil. So, that’s 21.8% of the $1 trillion funding needed for the Debt Ceiling Deal.
Back in October 2010, I did a quick review of footnotes of some large US corporations, and also some large foreign corporations with heavy US operations, and from just my very limited review, I found 384 companies that had amounts owed for all open IRS tax audit years in excess of $100 mil each, that in the aggregate totaled $268.1 bil, including accrued interest, at the most recent fiscal year end, which for the majority of these companies was December 31, 2009.
It takes a very long time for these companies to settle their tax audits with the IRS and other taxing authorities. For the largest Dow companies, there was an average of more than 8 years of open tax audit years.
Huge US Multinational Corps make up a large portion of the Aggregate Balance of Total Tax Reserves for all Corps having Tax Reserves above $100 mil each. Here is a stratification of these Corp Tax Reserves by size:
..Tax Reserves.....
Above $5 bil…………......12 Corps…..$82.1 bil….30.6% of total
$2 bil to $5 bil…………...20 Corps….$56.9 bil….21.2% of total
$1 bil to $2 bil…………....24 Corps….$31.5 bil….11.8% of total
$500 mil to $1 bil……....49 Corps….$35.5 bil….13.2% of total
$250 mil to $500 mil….93 Corps….$32.7 bil….12.2% of total
$100 mil to $250 mil…186 Corps….$29.4 bil….11.0% of total
All above $100 mil…….384 Corps..$268.1 bil…100.0%
In this post, I am updating this earlier quick review of these income tax footnotes of these large companies.
Here are the 50 US companies which had a Tax Reserve of at least $1 bil at the most recent date, which was December 31, 2010 for the majority of these companies:
………………....................Date……..Tax Reserve
…………………………......................(bils of US$s)
JPMorgan Chase.......Dec 2010.........9.4
Pfizer.......................Dec 2010.........7.7
GE............................Dec 2010.........7.4
Microsoft.................Jun 2010.........7.3
Merck......................Dec 2010.........6.5
Wells Fargo..............Dec 2010.........6.4
Bank of America.......Dec 2010.........6.3
AIG..........................Dec 2010.........6.2
ATT..........................Dec 2010.........5.7
IBM..........................Dec 2010.........5.7
General Motors........Dec 2010.........5.5
Exxon Mobil............Dec 2010.........4.8
Entergy....................Dec 2010.........4.6
Citigroup..................Dec 2010.........4.4
Morgan Stanley.........Dec 2010.........4.0
Verizon.....................Dec 2010.........3.8
Oracle.......................May 2011.........3.8
Chevron....................Dec 2010.........3.7
TE Connectivity.........Sep 2010.........2.9
Cisco Systems............Jul 2010.........2.8
Abbott Labs..............Dec 2010.........2.7
JNJ...........................Dec 2010.........2.6
PepsiCo.....................Dec 2010.........2.6
Procter & Gamble......Jun 2010.........2.5
Dell............................Jan 2011.........2.5
Time Warner..............Dec 2010.........2.4
Goldman Sachs..........Dec 2010.........2.3
Hewlett Packard........Oct 2010.........2.3
Covidien....................Sep 2010.........2.1
Comcast....................Dec 2010.........1.9
Energy Future Hldgs..Dec 2010.........1.8
Eli Lilly......................Dec 2010.........1.8
American Express.....Dec 2010.........1.6
Chrysler....................Dec 2010.........1.6
Accenture.................Aug 2010.........1.5
Kraft Foods................Dec 2010.........1.5
Boeing.......................Dec 2010.........1.4
Schlumberger............Dec 2010.........1.4
ConocoPhillips...........Dec 2010.........1.3
Boston Scientific........Dec 2010.........1.3
Johnson Controls.......Sep 2010.........1.3
Google.......................Dec 2010.........1.2
Apple.........................Sep 2010.........1.2
Freddie Mac...............Dec 2010.........1.2
Ford...........................Dec 2010.........1.1
Amgen.......................Dec 2010.........1.0
Walmart.....................Jan 2011.........1.0
Metlife.......................Dec 2010.........1.0
United Technologies..Dec 2010.........1.0
Berkshire Hathaway...Dec 2010.........1.0
Total for all 50...............................159.0
In this new study, I found many new Big Corps which had Tax Reserves above $100 mil. And, although some of them had smaller Tax Reserves, I found that a large number of these Corps had higher Tax Reserves now than they disclosed a year ago.
Also, there weren't very many foreign companies included in the 384 with Tax Reserves above $100 mil each that I showed in my earlier study back in October 2010. The majority of large foreign corps, with heavy US operations, follow International GAAP, rather than US GAAP. Thus, they generally do not disclose the amount of the Tax Reserves they have on their books.
Anyway, I can think of no fairer, less innocuous way to derive a portion of the $1 trillion of tax revenues than to simply require all Big Corps with Tax Reserves above $100 mil each, to make partial deposits on their open IRS audits. And frankly, it raises money from a CBO scoring standpoint, but all that is really happening to the Big Corp is that a portion of what Big Corps agree that they owe, and have already recorded on their books, is simply being paid a bit earlier in deposits over time.
I think perhaps these partial tax deposits should be 50% of the amount of Tax Reserves on the books, with that 50% staggered in over the next 10 years. To be even more fair, I think I would require a somewhat higher percentage than 50% for the really large Big Corps and a somewhat lower percentage for the smaller Big Corps.
There is absolutely no negative economic consequences for these Big Corps to make these partial tax deposits. When these deposits are made, the accrual of interest stops. And the US Government’s interest charge here is much higher than what nearly all of the Big Corps could get on their own financing.
So, how much funding do you get here from this proposal?
When I track the last three years, the average increase in these Total Tax Reserves is 8.7% per year. Thus I’ll very conservatively assume only an average of 5% growth per year from here on out.
The Total Tax Reserve for these 384 companies in 2009 was $268 bil. A portion of this $268 bil is for state and foreign income taxes. I’ll say this is more than offset by the many Big Corps with Tax Reserves above $100 mil each that are not included in the $268 bil. And then to be even more conservative, I also won’t grow this $268 bil through 2011.
When you compound this $268 bil at 5% per year, starting in 2012, it comes to $437 bil in 10 years. Thus, the funding over the next 10 year CBO scoring period would be 50% X $437 bil, or $218 bil. So, that’s 21.8% of the $1 trillion funding needed for the Debt Ceiling Deal.
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