Unintended Consequences

Every kid who ever watched Schoolhouse Rock knows it’s a long journey for a bill to become law. It starts as an idea—some folks back home decide it should be a law and call their local congressman. The congressman writes up a law and introduces it in Congress, then sends it to a committee where a few key congressmen debate it. Then the House votes, and if they say yes, it goes to the Senate, where the whole thing starts over again. If the Senate says yes, the bill goes off to the White House to be signed by the President.

You probably think all that scrutiny, debate, and sheer commotion helps ensure that our laws come out of Congress scrubbed and polished to perfection. Sadly, that’s not the case. That old Schoolhouse Rock video whitewashed some of the uglier realities of lawmaking, like corporate lobbyists, “special interests,” and billionaires hiding behind dark-money PACs. Nor does it acknowledge that sometimes people just make mistakes. Which leads us to this week’s sad story about a time when Washington got it wrong.

The Tax Cuts and Jobs Act of 2017 restructured the corporate tax system to broaden the base and lower the rates. As part of that effort, it created a new credit under Section 245A to let multinational companies bring home foreign profits without paying U.S. taxes. At the same time, they limited an older deduction under Section 78 that those same companies had previously relied on.

Here’s the problem. The new restriction on Section 78 took effect for tax years starting after December 31, 2017. The new Section 245A credit started on January 1, 2018.

Now, that would be fine for you and me. We file our taxes on a calendar year ending December 31. There’s no way for individual taxpayers to take advantage of the old rule and the new rule in the same tax year.

But companies that use a fiscal year that ends on any date other than December 31 get to double dip. They can take the old Section 78 deduction and the new Section 245A credit in the same fiscal year. That can mean millions in savings that Congress obviously never intended. Last week, the Tax Court unanimously ruled that Varian Medical Systems could keep $150 million in deductions they claimed using the loophole. Kyocera and Sysco Systems both have cases pending involving $100+ million deductions, and plenty more companies that thought the opportunity was too good to be true will be filing claims for refunds.

Tax laws can get pretty technical, and it’s not uncommon to discover drafting mistakes long after a law passes. Top tax lawyers make fortunes finding the glitches that save their clients money. That’s why they drive Jaguars.

In most cases, Congress can pass “technical correction” bills to fix them. In this case, House Republicans introduced legislation in 2019 that would have fixed several problems with the 2017 law, including one piling extra taxes on Gold Star families’ survivor benefits. But Democrats, still smarting from their party-line defeat on the original law, were in no mood to bail them out. In 2021, Democrats tried to fix it in their Build Back Better legislation. But West Virginia Senator Joe Manchin shot down that bill’s international tax changes. So here we are, gridlocked into more gridlock, while corporations save millions playing financial hokey pokey.

What do you think about the whole kerfuffle? Would you root for the Treasury collecting the full amount of tax Congress intended? Or are companies like Varian simply modern-day Robin Hoods, finagling perfectly legal savings by following the plain text of the law? Rest assured that when it comes to your taxes, our job is to interpret every glitch in your favor!