Paul L. Caron

Sunday, March 5, 2017

PwC’s Other Debacle: A Tax Boondoggle That Has Ballooned Out Of Control

PWCO199Huffington Post, PwC’s Other Debacle: A Tax Boondoggle That Has Ballooned Out Of Control:

If I mention the Oscars, will people read this long story on tax policy run amok? Let’s find out.

On Sunday night at the Oscars, PricewaterhouseCoopers had one job: hand the correct card to presenters who would go on stage and announce the winner of the category.

When it comes to the line of work it is most known for, the company’s objective is equally simple: make sure the client pays the lowest tax bill possible. On that front, PwC tends to be a bit better at its job. But if House Speaker Paul Ryan (R-Wis.) and the Trump administration have anything to say about it, one of the more ludicrous ways the company meets its numbers will no longer be available.

With the help of PwC, one of the Big Four accounting firms, a growing number of U.S. corporations have taken advantage of a tax break called the “domestic production deduction.” The obscure provision is meant to encourage U.S. manufacturing, except for the most part these companies aren’t actually manufacturing anything. They are instead relying on a poorly worded ― or brilliantly worded, depending on your perspective ― 2004 law, known as Section 199, that created what is now an out-of-control tax break. It was written by a PwC partner.

Companies are not required to disclose if they have used a particular tax break except under rare circumstances, but the IRS, in some of its public filings and court documents, has revealed the general nature of some of those claims. Others have been included in public documents when the tax break has led to a big enough windfall that investors need to know about it, and still others have emerged in unrelated court filings. The picture that emerges from interviews and a review of the paper trail is one of a loophole that has grown so large that it is barely recognizable as anything other than a giveaway to companies that can afford the sophisticated tax prep that companies like PwC can provide. ...

The Treasury Department estimates that claims for the deduction will cost the government $178.7 billion ― that’s billion with a B, as Ronald Reagan would say ― over the next decade.

Ryan’s new tax reform proposal would upend the entire corporate tax system and replace it with an import tax meant to boost manufacturing. The Trump administration has signaled tentative support, but the Koch brothers and other major importers are balking, and it is considered endangered in the Senate. But if it becomes law, the biggest loser may be George Manousos.

If there’s one person to blame for the current 199 predicament, it’s Manousos, a partner at PwC.

By all accounts, Manousos is not a particularly bad person. If he were living in a different kind of republic, he would likely be nearing the midpoint of a satisfying career in the field of tax preparation ― compensated comfortably, with the fulfillment that comes from a good job done well, and looking forward to an enriching retirement: books, golf, cooking classes.

That’s not our republic. Instead, Manousos has used the combined power of his public-private career to help blow a gaping hole in the side of the U.S. Treasury, out of which global corporations have looted hundreds of billions of dollars. 

Manousos was a mid-level tax specialist for PricewaterhouseCoopers before joining the George W. Bush administration’s Treasury Department in 2002 in the Office of Tax Policy.

When Congress passed the the American Jobs Creation Act of 2004, it created a new tax deduction for manufacturing; Manousos was the Treasury official tasked with helping the Republican Congress author the new section of the tax code.

“I was the Treasury representative then ― was working with Congress’ Joint Committee in enacting the provision, helping them, guiding them through it,” he told HuffPost in an interview.

He also wrote the regulations that implement the law. “And then I led the government team on the Treasury side on the underlying regulations that were subsequently issued under Section 199.” 

The code allows a business conducting “qualified production activities” to claim a deduction equal to 9 percent of the income related to those activities. The claim effectively lowers a business’ tax rate on that income by 3 percent. But the legislative language and subsequent IRS regulations were worded so broadly that businesses have used it to claim lots of things no reasonable person would consider production, and allows the companies to pad out their estimates of how much income was actually related to that activity. A company that built a website might try to claim that almost all its revenue is related to that website, for instance.

His job finished, Manousos returned to PwC in 2006, this time as a partner. Today, he is held out as the leading private authority on Section 199, helping make sure businesses understand how to use it. Read any trade publication story about the fight over 199 and you’re likely to come across Manousos advocating for its broad use. ...

Manouses sympathizes with the IRS. “The government does the best with the resources that they’re given,” he said. “We all read about how they continue to have budget cuts handed to them and they have to adapt to that.”

But as far as he is concerned, the deduction is working just fine: “From my perspective, the incentive works as it was designed to work, in large part.”

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Eric, you are too modest. Why confess ignorance as to Mr. Manousos' motivations just because you have no knowledge or evidence? You will never win a Pulitzer that way, let alone a Nobel.

Posted by: Mike Petrik | Mar 5, 2017 4:35:40 PM

This article would be more impressive if it explained how Section 199 is "out of control". Congress passed an incentive. Taxpayers used it. Congress could repeal or modify it at any time. Criticizing the technician who wrote the legislation is inappropriate.

Posted by: John Gunn | Mar 5, 2017 2:54:53 PM

As Mr. Ackerman says in his comment, it is okay and normal and even good for tax experts to move from private to public sector and back. The claim in the article--- which may or may not be true-- is that in this case the lawyer deliberately wrote imperfect regulations so that he could be an expert on using those imperfections once he left Treasury.

Posted by: Eric Rasmusen | Mar 5, 2017 2:32:24 PM

This article reads like a hit piece aimed at pwc; and, calling out a tax partner who led a Regulations project is shameful. Tax professionals at the Big Four and certain law firms serve the US Treasury for 2-4 years and often relocate to DC. They provide a viewpoint which is not confined exclusively to that of the government, where most employees' resumes are devoid of private sector experience. That George Manousos is an expert advocating for his clients should NOT lead to a conclusion that he has done anything untoward or unethical. By juxtaposing in the title "pwc" with "debacle" and "out of control," a reader not versed in tax procedure would understandably think that pwc or Mr. Manousos, or both, are to blame for recognition of well-intentioned tax benefits. I would suggest that the author revisit the Federal Administrative Procedures Act to better understand the role of Treasury in issuing regulations to provide guidance for new statutory provisions implemented by Congress. Treasury Regulations interpret tax law and set forth the IRS’s position. If Congress, the law-making body, had intended different results, then it is Congress that can provide Technical Corrections. To blame pwc or Mr. Manousos is just wrong.

Posted by: Trevor Ackerman | Mar 5, 2017 12:02:41 PM