Inside the Tax Shelter Mess

Some very useful questions and answers from Business Week:

Are the deals illegal?
The IRS says so, but the courts have not yet ruled on the matter. The IRS has a mixed record in shuttering such transactions. Under what is known as the economic-substance test, the IRS has claimed that shelter deals done solely to reduce taxes are improper. But federal courts have sometimes ruled that such transactions are O.K., even if they carry no economic risk or opportunity for reward beyond their tax savings.

Newest & very scary report on Gulf of Mexico oil production

Theoildrum.com carries a post on hurrricane damage to oil production facilities in the Gulf of Mexico:

There are MANY production platforms missing (as in not visible from the air). This means they have been totally lost. I am talking about 10’s of platforms, not single digit numbers. Each platform can have from 4 to 100+ wells on it. . . .
We are looking at YEARS to return to the production levels we had prior to the storm. The eastern Gulf of Mexico is primarily oil production…
YEARS, people. I know what this means – hope everyone else gets it too…


Click here to read the full post.

Shadid: Night Draws Near: Iraq’s People in the Shadow of America’s War


The Economist reviews UW Madison grad and Pulitzer Prize winner Anthony Shadid’s (“who speaks Arabic like a native and writes English like an angel”) new book: Night Draws Near: Iraq’s People in the Shadow of America’s War

Much more than these bold facts, however, the average western newspaper reader will not know. It is not easy to understand fully what is going on; still less so to make any accurate predictions about how it will end. Targeted by head-chopping Muslim fanatics, most foreign journalists do not leave the generous, if inevitably jaundiced, embrace of American and British troops. And even those who do must rely heavily on official sources—mostly Americans who are out of touch with the complex and changing world outside their fortress compounds, and who, like their government, have tended also to invent good news where there is none.
Thank goodness, then, for those reporters, both western and Iraqi, who are prepared to take risks in search of a more nuanced reality, among them Anthony Shadid, a correspondent for the Washington Post, whose words begin this article. Mr Shadid, an American of Lebanese descent, who speaks Arabic like a native and writes English like an angel, has put his best reporting into this book. Even-handed and keenly observed, containing just enough (and no more) of the author to suggest a decent man worthy of our trust, it is written for the inexpert but has fresh material for scholars. Mr Shadid calls his work story-telling rather than serious criticism, and so it is. But stories this insightful—of dead Iraqi insurgents and their motivations; of a 14-year-old Iraqi Anne Frank, with extracts from her wartime diary—are more than journalism; they are valuable chronicles.

More on Shadid.

States Expand Push for Internet Taxes

In yet another example of our confused tax system:

Going online to buy the latest bestseller or those photos from summer vacation may be tax free for most people today, but it won’t last forever. Come this fall, 13 states will start encouraging – though not demanding – that online businesses collect sales taxes just as Main Street stores are required to do, and more states are considering joining the effort

Lind: Swiss Model of Defense

William S. Lind publishes some interesting thinking on the next model of US Defense Forces:

Two readers, Marion and Herbert, asked whether the Swiss militia model might be relevant. The answer is clearly yes. Switzerland’s defense has been based on a militia for a very long time, and it has enabled Switzerland to preserve its neutrality, maintain its liberties and decentralized political system (real power lies at the cantonal, not the federal level of government) and keep its defense expenditures down. The Swiss militia is an ideal basis for defending Switzerland from 4GW. In fact, Switzerland already has an arrangement other countries will need to move to in a 4GW world: the regular armed services support the militia, instead of the other way around.

Congress and KPMG

Wall Street Journal:

The IRS’s standard in evaluating tax shelters is whether the transaction serves a “legitimate economic purpose,” or is crafted entirely to avoid taxes. Senators Carl Levin (D., Mich.) and Norm Coleman (R., Minn.) have proposed legislation that would enshrine that doctrine in law.
Speaking on the Senate floor last month, Mr. Levin described the distinction: “Abusive tax shelters are very different from legitimate tax shelters, such as deducting the interest paid on home mortgage or Congressionally approved tax deductions for building affordable housing. Abusive tax shelters are complicated transactions promoted to provide large tax benefits unintended by the tax code” (our emphasis). In other words, it’s OK to avoid taxes in any of the myriad ways Congress approves of. It’s abusive if Congress didn’t intend it — assuming anyone can ever figure out what Congress really intends.
Take the scheme known as SC2, one of those KPMG has come under fire for marketing. As reported in the Los Angeles Times, SC2 involved donating nonvoting shares in a Subchapter S corporation to a nonprofit entity; KPMG’s nonprofit of choice was the Los Angeles Fire and Police Pension System. The pension system would accept the shares, making them 90% owners of an S Corporation that would then retain the Corporation’s profits for several years. At that point, the pension fund would sell the shares back to the original owners. The pension plan pockets the proceeds while the S Corporation owners have converted the firm’s profits from regular income into long-term capital gains, taxed at a lower rate.
Does SC2 serve an “economic interest”? Well, the participant in the scheme does pay the pension system for the shares when he buys them back, benefiting the firemen and policemen’s pension fund. The fund adds money to its coffers, and the taxpayer lowers his tax bill. Whether that’s abuse is for a judge or jury to decide, but Mr. Levin’s test — that Congress didn’t intend S corporations to be used that way — doesn’t seem adequate here.

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“Trusted Computing” – Coming Soon to your PC

Bruce Schneier on “Trusted” Computing:

The Trusted Computing Group (TCG) is an industry consortium that is trying to build more secure computers. They have a lot of members, although the board of directors consists of Microsoft, Sony, AMD, Intel, IBM, SUN, HP, and two smaller companies who are voted on in a rotating basis.

The basic idea is that you build a computer from the ground up securely, with a core hardware “root of trust” called a Trusted Platform Module (TPM). Applications can run securely on the computer, can communicate with other applications and their owners securely, and can be sure that no untrusted applications have access to their data or code.

This sounds great, but it’s a double-edged sword. The same system that prevents worms and viruses from running on your computer might also stop you from using any legitimate software that your hardware or operating system vendor simply doesn’t like. The same system that protects spyware from accessing your data files might also stop you from copying audio and video files. The same system that ensures that all the patches you download are legitimate might also prevent you from, well, doing pretty much anything.