Illegal tax shelters cheat the system


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 or call his

Glendale district office at 240-6330.