IRS Shuts Down Tax Loophole, But Not Before It Saves IBM Over $1 Billion

from the just-in-time dept

The government may be slow footed with respect to most things, but it moves awfully fast anytime its tax revenue is threatened. This week, IBM announced that it had avoided paying $1.6 billion in income taxes by using a loophole that involved foreign subsidiaries buying up company stock and using it to pay executives. Following this announcement, the IRS needed only two days to announce that this loophole would henceforth be disallowed. Apparently, variations on this loophole have been in place for 45 years, and each time a company comes up with a new one, the IRS moves quickly to stamp it out, so there's not much reason to think that this will never be done again in some form or another. The incident also serves to demonstrate the inherent regressiveness of a complex tax code, as large multinationals like IBM have the resources to continually discover new loopholes, while smaller firms (without armies of lawyers and accountants) have fewer ways of avoiding their obligations.

Reader Comments (rss)

(Flattened / Threaded)

  1. identicon
    That Guy, Jun 7th, 2007 @ 9:05am

    Well at least...

    They didnt try to patent it.

    reply to this | link to this | view in thread ]

  2. identicon
    StinkBait, Jun 7th, 2007 @ 9:19am


    reply to this | link to this | view in thread ]

  3. identicon
    Rob, Jun 7th, 2007 @ 9:23am

    Re: URL

    Fair tax is the only way forward. Unfortunately it makes too much sense for Washington.

    reply to this | link to this | view in thread ]

  4. identicon
    GoblinJuice, Jun 7th, 2007 @ 9:50am


    Big company evades billion+ dollars in taxes, IRS closes loophole, sane people comment on the insanity. Time passes, process happens again.


    reply to this | link to this | view in thread ]

  5. identicon
    Anonymous Coward, Jun 7th, 2007 @ 9:54am

    IBM... Gotta love 'em

    IBM saves $1.6 Billion in taxes... the annual salary of 26K employees @ average of $60K/year.

    Almost 2700 employees for 10 years.

    Bet the IBM CIO/CEOs get great bonuses!

    Go Blue!

    Oh also the stock is still in the shitter....

    reply to this | link to this | view in thread ]

  6. identicon
    Anonymous Coward, Jun 7th, 2007 @ 9:58am

    Why would IBM announce that?

    reply to this | link to this | view in thread ]

  7. identicon
    BillGod, Jun 7th, 2007 @ 10:08am

    I wonder

    I wonder how much $$ the accountant that figured that loop hole out made on the deal?

    reply to this | link to this | view in thread ]

  8. identicon
    William, Jun 7th, 2007 @ 10:14am

    No way

    Bet is was a Lawyer not an accountant who figured this out. They had to tell the IRS why their tax payments were so low this year though.

    They should of kept Paris in prison.

    reply to this | link to this | view in thread ]

  9. identicon
    Garrett, Jun 7th, 2007 @ 10:20am

    Re: IBM... Gotta love 'em

    Wouldn't that be just one year?

    reply to this | link to this | view in thread ]

  10. identicon
    Anonymous Coward, Jun 7th, 2007 @ 11:16am


    They would announce it because their stock is doing awful and savings like this might buoy interest.

    reply to this | link to this | view in thread ]

  11. identicon
    Anonymous Coward, Jun 7th, 2007 @ 11:29am

    Re: Re: IBM... Gotta love 'em


    reply to this | link to this | view in thread ]

  12. identicon
    Anonymous Coward, Jun 7th, 2007 @ 11:40am


    Im all for big corporations paying of the governments debt. good thing they closed that loophole.

    my logic is this. if they IRS dosn't get there money from big things, then they turn to the little things (ME!) and suck the living life out of it till this isn't enough money to buy a #2 pencil (to fill out next years tax return)

    reply to this | link to this | view in thread ]

  13. identicon
    RH, Jun 7th, 2007 @ 3:11pm

    Two Day??

    Two days, to change law? Oh that's right, its not the law, it regulation that has the effect of law. So I guess a "decision maker," a lawyer, and a regulation writer is all that is required to "change the law."

    That said, in times past, the federal government derived its tax revenues from import taxes and corporations (once cooperations came into existence). For that reason (and a few others), the corporate structure was not nearly as popular as it now (individuals did not pay federal tax).


    reply to this | link to this | view in thread ]

  14. identicon
    Joe Smith, Jun 7th, 2007 @ 4:08pm

    False Premise

    Like most discussions of loopholes the government starts from the premise that any money we might make belongs to them and any attempt to keep our money is a crime.

    In this case, IBM made money offshore and presumably paid taxes in the jurisdiction where the profit was made. If IBM had transferred the money to the parent corporation in the US then it would have had to pay US taxes on it. Rather than do that the subsidiary decided that the best thing it could do for shareholders was to buy IBM shares.

    If the subsidiary, for example, bought the shares directly from off shore holders the money never had to go through the United States. Hard to see why IBM would be expected to structure their deals in a way which unnecessarily increased their American taxes by unnecessarily transferring income to the United States.

    reply to this | link to this | view in thread ]

  15. identicon
    g, Jun 7th, 2007 @ 4:54pm

    Fair Tax is NOT Fair, and progandized names dont h

    Clear Skies Act did not make our skies less free of soot, and No Child Left Behind did not ensure that no child was left behind in education.

    Fair Tax proposal is NOT fair, and heres why so many major capitalists (like Forbes) want it:

    Rich people dont spend most of their money in retail. They "invest" (different than buying things according to taxes) it into a wide variety of areas.

    They make money on this, and are taxed on it, and don't want to be. If they only had to pay taxes at retail, they would save on almost all their potentially taxable income, as it's not being spent on retail items. Moving them even further out of the group that pays high percentages of their actual income in taxes.

    People in lower economic standings do NOT invest their money, they spend almost all of it in retail settings or rent and services. An enormously higher percentage of their income is spent at retail.

    Do the math on someone who makes a billion a year and buys 10 ferraris and lots of diamonds and other expensive crap on top of normal purchases, versus someone who makes $30K a year and buys normal purchases. The $30k a year guy pays a very significant amount of his yearly income at the retail level. The billion dollar a year guy spends maybe 0.5% of his income on retail.

    Now, why do rich people want a retail based tax system instead of an income based tax system?

    Look at who the rich supporters of this system are, and find out what they say when addressing OTHER rich people about the system, instead of what they say on sites dedicated to getting the working man and woman on their side.

    reply to this | link to this | view in thread ]

  16. identicon
    Jack, Jun 7th, 2007 @ 6:29pm

    inventing loopholes?

    1) Companies (nor individuals) "come up" with loopholes.
    2) Complex tax legislation begets complex tax loopholes.
    3) Complex systems of any kind beget complex unintended consequences. (Ever maintained complex software?)
    4) Just like in IT, the best course is to simplify, simplify, simplify.

    reply to this | link to this | view in thread ]

  17. identicon
    reed, Jun 7th, 2007 @ 6:47pm

    Re: inventing loopholes?

    Let me get this straight, IBM gets out of paying 1.6 billion dollars in taxes using a "loophole" but if I forget to pay the two thousand dollars I owe the IRS they will screw me up against the wall real slow like.

    Sounds like a fair and equitable system if I ever heard of one. God bless our form of capitalism where those who have the most keep it all and everyone else loses their shirt of their back.

    reply to this | link to this | view in thread ]

  18. identicon
    Anonymous Coward, Jun 8th, 2007 @ 12:19am

    Re: Fair Tax is NOT Fair, and progandized names do

    Your argument doesn't make any sense. On the one hand you're saying that rich people don't spend money, but on the other hand you're saying they buy a ton of stuff.

    But let's pretend for a second that what you said is true. Let's say that they don't spend money but instead invest it. How is that a bad thing? That means they are investing their money to built your houses, cars, computers, and a load of other stuff. It's investors who fund the corporations that supply us with every thing we use.

    reply to this | link to this | view in thread ]

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