Johnston: SC Johnson Cleans Up by Dodging Wisconsin Taxes

Reuters, Wiping Out Wisconsin Taxes, by David Cay Johnston:

The heirs of the SC Johnson fortune, the richest family in Wisconsin with four multi-billionaires according to Forbes, paid not a penny of Wisconsin corporate income tax on profits from their global household products business and two smaller companies from 2000 through 2008, public records show.

"How did the Johnson companies pull in such profits without having a penny of Wisconsin taxable income?" asked Jack Norman, research director for the Institute for Wisconsin's Future in the August issue of its Who Does Not Pay Taxes? newsletter [SC Johnson and Sister Firms Pay No State Income Tax; State’s Wealthiest Family Is a Master of Corporate Tax Avoidance].

Now thanks to a 15-page document prepared in April 2008 by PricewaterhouseCoopers we have an answer -- at least for the family's main holding, SC Johnson & Son, Inc, makers of world famous household products ranging from Raid bug spray to Ziploc bags.

Reuters received the document unsolicited. Besides making suggestions for the future, it describes how the company avoided taxes in the past.

The conclusion? That Wisconsin taxable profits could well have been converted into tax-deductible expenses by paying royalties and interest to family-owned subsidiaries in low-tax and no-tax jurisdictions.

The state tax court held in 2009 that such accounting alchemy was improper when done by Hormel Food Corporation because the transactions had no purpose except to make state taxes go away. [Hormel Foods Corp. v. Wisconsin Dep't of Rev., No. 07-I-17 (Mar. 29, 2010)]

The question the PwC document raises is whether the Johnsons will be held to the same standard by the Wisconsin tax authorities as Hormel Food. Why must ordinary Wisconsin businesses and individuals bear the burden of state government while the richest family in the state runs tax-free enterprises? ...

The PwC document offers powerful evidence that tax avoidance, not economic substance, enabled the main family business to escape Wisconsin state taxes. Without economic substance, companies can just move symbols around on paper and manufacture unlimited tax deductions.

Entitled "State and Local Tax Observations and Considerations," the document shows how the Johnson family escaped all Wisconsin corporate income tax on its SC Johnson & Son, Inc business and shows how to shield future profits from tax. ...

All of this is significant in the context of what the Wisconsin Tax Appeals Commission held in Hormel Foods: "Reducing taxes is a perfectly legitimate business goal so long as it is not the primary purpose for a transaction. In this case, the evidence shows that Hormel's other alleged purposes for engaging in the challenged transactions were a mere 'fig leaf' covering its real purpose, which was tax avoidance."

So, will SC Johnson be held to the same standard as Hormel and, at a minimum, face a thorough audit by the state and the IRS? Or will the richest family in Wisconsin get favored treatment while everyone else bears the burden of state government?

Prior TaxProf Blog coverage:  Johnston: Whistleblower Accuses SC Johnson of Tax Fraud (Dec. 6, 2010)

Update: SC Johnson Responds to David Cay Johnston