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How to Save the Corporate Income CURRENT AND QUOTABLE (C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. tax notes® How to Save the Corporate sues of fact or intent rather than statutory ambigu- ity. The stakes, however, were high. Through the Income Tax Korean War years, the high tax rates of World War By M. Carr Ferguson II still prevailed. The top rate for individuals was 91% and for corporations, 52%. Capital gains were taxed at a comparatively modest 25%. Today’s top M. Carr Ferguson is senior counsel at Davis Polk tax rates have been reduced for individuals to 40%, & Wardwell LLP, adjunct professor at New York corporations to 35% and capital gains to 15%, a rate University School of Law, and visiting professor at dispensation which has been extended to dividends the University of San Diego School of Law. The as well. In 1954, the individual income tax ac- author would like to acknowledge the invaluable contributions of his colleagues at Davis Polk, espe- counted for somewhat over half of all federal rev- cially Catherine Paskoff Chang and Michelle enues; the corporate income tax another third, with Messer, who deserve full credit for any accuracies, the rest coming from employment taxes, principally while the author alone is responsible for the rest. Social Security, along with tariffs, estate and excise An abbreviated version of this address was taxes. Last year, by contrast, collections of indi- delivered on April 8 at the University of San Diego vidual income taxes and employment taxes were School of Law as the second annual Richard Craw- each about 43% of federal tax revenues while more ford Pugh Lecture on Tax Law & Policy. than half of the remaining 14% came from customs, Copyright 2011 M. Carr Ferguson. excise and estate taxes. The corporate income tax All rights reserved. has shrunk from one third of our revenues when I started practice to less than 7% today,1 prompting at least one Congressman to claim that multinational Introduction companies like GE practically set their own rate.2 The honor of offering the Richard Crawford Indeed, as embarrassing publicity about General Pugh Lecture is increased by my long friendship Electric’s tax returns shows, some of our largest with Dick. Since one of my proposals is a smaller corporations, earning huge profits within the role for legislators and a larger one for judges in United States and around the globe, are able to pay developing the corporate tax law, it seems fitting little or no corporate income tax. A belated an- that we first worked together in the 1960s while he nouncement by a GE public relations officer that the was serving in the Department of Justice as the company had discovered it could report a small Deputy Assistant Attorney General of the Tax Divi- amount of US income tax on last year’s US earnings sion. He and Mitchell Rogovin, the Division’s As- of over $5 billion does not disguise the hard truth sistant Attorney General, were preparing a study of that the effective tax rate for our largest corpora- the jurisdiction of the various federal courts over tions is nowhere near 35% of their profits. tax disputes and requested my assistance. The work This spring, Congress is conducting hearings and proceeded congenially. Their report recommending gathering the testimony of various experts, many efficiencies in the system was thorough, clear and with reforms to suggest or sacred cows to defend. compelling; and, like many such reports, it disap- Large issues of integration, geographic limitations, peared down the political well without a splash. For and even desirability of any corporate income tax me, the reward of the project was Dick’s friendship will be debated, no doubt. These issues are worthy and the chance to renew friendships with career of discussion among these all-knowing foxes. The attorneys with whom I had served in the Division homely points this hedgehog would like to think as a trial attorney over a decade earlier. Actually, it was 57 years ago — over half the life of the modern income tax — when I tried my first tax case for the government, a matter involving the 1See David Kocieniewski, ‘‘At G.E. on Tax Day, Billions of corporate World War II excess profits tax. Life was Reasons To Smile,’’ The New York Times, Mar. 25, 2011, at A1. 2See id. (describing the great success General Electric has had simpler then. The Internal Revenue Code, printed in minimizing its U.S. federal income tax bill and quoting Rep. in one slender volume, could be understood. Tax Lloyd Doggett, D-Texas, as stating, ‘‘That G.E. can almost set its disputes which it engendered were frequently is- own rate shows how very much we need reform.’’). TAX NOTES, August 29, 2011 951 COMMENTARY / CURRENT AND QUOTABLE about with you this afternoon are probably below before taking action and can reliably report their tax their radar, but they are important, whether seismic at year-end. These are simple first principles. They (C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. changes in the taxation of corporations occur or not. are not challenged. Yet the writers of the Code have What has happened to the corporate income tax long ignored them. This has been due less to bad during my half century at the tax bar? The tax politics than to bad drafting habits aimed at displac- refund suits which I defended in the 1950s were ing administrators and judges from their natural about evenly divided between corporate and indi- roles by an opaquely complex set of statutory rules. vidual tax issues. Many involved efforts to substi- Nowhere is this more obvious than in the provi- tute for the confiscatory individual income tax rates sions of our corporate income tax. the lower corporate rates or still lower individual long-term capital gain rates. The need to distinguish Drafting Corporate Tax Legislation: between capital gains and ordinary income, sepa- Who Is in Charge? rate individual income from corporate income, and Today’s corporate income tax provisions suffer address schemes for postponing taxation prompted from changes in the way the law is made and Congress to pass ever more carefully described re-made. For the first 25 years of the tax, Congress statutory limitations and refinements. As I watched would pass a revenue act in each session. By 1938, the Code swell into an obese volume barely con- Congress decided to consolidate the revenue acts tained within paper covers, I decided to pursue an into a permanent Internal Revenue Code which advanced tax degree while I could still carry the would remain the law beyond the life of each Code to classes. Congressional session. It was this 1939 Internal Laptop computers have come to the rescue of Revenue Code, with periodic amendments, which today’s students, for not even the strongest could underlay the rising tide of tax litigation I stepped carry our multi-volume Internal Revenue Code, into in 1954. Some of the traditions of the biennial much less its six-volume set of regulations to class, revenue acts still survived, however. The Treasury and not even the brightest of our talented students Secretary, as the first witness in Ways & Means’ browse today’s immense Code for a sense of its hearings on new tax legislation, would present organization. In many places, its meaning has sunk administration proposals drafted with the help of into a bog of trailing dependent clauses sometimes his Tax Legislative Counsel and lawyers in the hundreds of words long, passive voices with no Legislation and Regulations office of Internal Rev- ascertainable subjects, overgrown with cross- enue’s Chief Counsel. The proposals would have references, defined terms and exceptions. It has been through several layers of review before pre- become lex incognita. Bad things happen when law sentation. The tax writing committees were chaired is occult. In the private sector, taxpayers seek out by highly qualified and responsible senior legisla- the most optimistic advice. Conservative advisors tors secure in their seats, who were briefed by the are driven out by the bold. On the government side, thoroughly experienced career staff of the Joint delays and gaps grow in providing guidance, Committee on Internal Revenue. The head of this which, when it comes, may be defensively arbitrary staff worked closely with the chairs of the Ways & with little more foundation in the statute than the Means Committee and the Senate Finance Commit- aggressive advice of some private practitioners on tee, using the legislative process to improve the the opposite side. In frustration, Congress has administration’s proposals. They controlled the ex- yielded to IRS calls for new, no-fault penalties to tent to which individual members of their tax increase the effective tax rates for taxpayers who writing committees participated in the process. Part guess wrong on how the law will be applied. But of the task of the legislators in the days of periodic penalties do not clarify. revenue acts had been to review intervening regu- How did the income tax descend from Mr. Justice latory and judicial interpretations of a provision of Holmes’ acceptance of it as ‘‘the price we pay for prior law, and reenactment without change was civilization’’ to Jimmy Carter’s disdainful remark seen as tacit approval. Conference committees des- that ‘‘the Internal Revenue Code is a disgrace to the ignated by the two houses to reconcile differences human race?’’ Tax theorists have long recognized operated with the same technical discipline. The that a good tax law must be effective in meeting the resulting revenue acts were cohesive, and cogently fiscal needs of government, fair in distributing its explained in general and technical committee re- burden and sensitive to the abilities of taxpayers to ports.
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