As California contemplates asking working families to pay new taxes
and endure billions of dollars in cuts to programs because of a
$38-billion budget deficit, there are many wealthy individuals and
companies using illegal tax shelters to avoid paying hundreds of
millions of dollars a year in taxes.
In fact, our state Franchise Tax Board estimates that the use of
illegal tax shelters is costing our state between $250 million and
$500 million every year. Nationally, the Internal Revenue Service
estimates these abusive shelters cost the government $10 billion per
For example, Enron Corp. not only manipulated energy prices, but
also used tax schemes to avoid paying nearly $2 billion in owed taxes
between 1995 and 2001. Outside advisors received nearly $88 million
to create these shelters for Enron. A few months ago, the Wall Street
Journal reported that Tyco International’s former chief executives
used abusive tax shelters to hide tens of millions of dollars in
taxes they owed to the government from their stock option gains. The
IRS announced in February that Sprint CEO William T. Esrey and COO
Ronald T. LeMay were being audited for using personal illegal tax
shelters to hide over $120 million in owed taxes. And in 2002, the
Securities and Exchange Commission charged WorldCom with fraud after
investigations exposed $9 billion in improper accounting. Even Bill
Simon, the GOP nominee for governor in 2002 was investigated by the
IRS for investing in an illegal tax shelter promoted by KPMG.
These tax evaders are cheating our schools and public-safety
programs out of hundreds of millions of dollars every year at a time
when California is forced to make dramatic budget cuts. The average
investment for these shelters is more than $10 million, yet the
average penalty for illegal tax shelter promoters is just $1,000!
That is not even a slap on the wrist compared to the millions
promoters can make on these deals. In addition, the average penalty
for tax evaders is a mere 80 cents on the dollar, providing little
deterrent for these types of crimes.
California cannot ask hardworking families to pay more taxes when
so many wealthy corporations and their officers are paying nothing.
That is why I have introduced legislation AB 1601 to establish tough
penalties for those who use abusive tax shelters and to give state
investigators better tools for investigating and prosecuting these
Assembly Bill 1601 would increase the penalties for these
lawbreakers substantially, against the promoters who help
corporations and the corporations who use illegal tax shelters.
Promoters of illegal tax shelters could pay up to 25% of the value of
the transaction, rather than just $1,000, under the bill. Taxpayers
who use the illegal shelter would be forced to pay 50% of the illegal
tax shelter’s transaction value, instead of the current fine of just
20%. In addition, AB 1601 would increase the statute of limitations
for investigating abusive tax shelters from four to eight years,
giving the FTB more time to find and prosecute these criminals.
This bill is modeled after federal legislation by U.S. Sen. Chuck
Grassley (R-Iowa), chairman of the Committee on Finance, who has also
vowed to crack down on corporate tax abuses. Senator Grassley’s
measure passed out of the U.S. Senate on a 95 to 5 vote.
There are many legitimate tax shelters in which people can
routinely and legally invest. But there is a growing trend of big
corporations and wealthy individuals that are investing in unlawful
shelters, knowing that the penalties, if caught, are a slap on the
wrist. Assembly Bill 1601 will help deter and prosecute these tax
cheaters and help put California’s fiscal house in order, capturing
$250 million to $500 million in owed tax dollars a year. Before we
ask working families to pay more, we need to make sure the wealthy
are paying their fair share.
* Assemblyman DARIO FROMMER represents the
43rd District, which includes Burbank. He can be reached via his
Web site at https://democrats.assembly .ca.gov/members/a43 or call his
Glendale district office at 240-6330.