Hedge Fund ‘Basket’ Options And The Second Hundred Years’ War
“The investigation of the income tax returns for each successive year reveals the increasingly stubborn fight of wealthy individuals and corporations against the payment of their fair share of the expense of their Government.”
Treasury Secretary Henry Morgenthau, 1937
“More and more enterprises organized abroad by American firms have arranged their corporate structures aided by artificial arrangements . . . which maximize the accumulation of profits in the tax haven . . . in order to reduce sharply or eliminate completely their tax liabilities.”
President John F. Kennedy, 1961
“Too often, too many of these corporations use complex structures, dubious transactions and legal fictions to shift the profits from those products overseas, avoiding the taxes that help support our security, stability and productivity.”
Sen. Carl Levin, 2012
At the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations hearing last week, subcommittee Chair Carl Levin decried the use of artificial structures known as basket options that allow hedge funds to avoid billions in taxes. It was the latest (and possibly last) round in Levin’s long-standing fight against abuse of the tax code by both individuals and multinationals. The senator’s struggle, which will come to an end when he leaves Congress next year, is merely one series of battles in an over-100-year war between wealthy corporations and taxpayers on one side and federal tax collectors on the other. And it’s a war that the government is steadily losing.
Treasury Secretary Henry Morgenthau was instrumental in calling attention to how taxpayers were using legal structures to avoid taxes in the 1930s. In a May 1937 letter to President Franklin Roosevelt, the secretary highlighted “the defeat of taxes through doubtful legal devices which have no real business purpose? or utility, and to which a downright honest man would not resort to reduce his taxes.” In addition to calling for a higher standard of morality in tax compliance (something that should sound familiar to anyone following the latest debate over taxes paid by Starbucks, Google, Apple, and inverting firms), Morgenthau discussed the use of multiple trusts, foreign personal holding corporations, offshore insurance companies, and percentage depletion.
Although the tax code has changed dramatically since Morgenthau’s days, some of the devices he sought to combat still exist in one form or another. Trusts, foreign holding corporations, and offshore reinsurance companies remain at the heart of taxable income reduction techniques used by individuals and corporations alike.
