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Taxes and the Corporate Person

by CHRISTOPHER BRAUCHLI

When there is an income tax, the just man will pay more and the unjust less on the same amount of income.

— Plato, The Republic

The question for people who live and work abroad is whether they can turn themselves into corporations. Corporations are, as lawyers have known for years, and as the now famous case of Citizens United reminded us, (even though it did so by being misread by many commentators) people just like the people who live in the house next door.  Since corporations are people and have the same rights as people, the question people of the flesh and blood kind ask is why human persons are not entitled to the same tax benefits as Congress gives corporation persons.

American citizens are taxed on their worldwide income, irrespective of where in the world it is earned.  An American who works all year in France is taxed by the United States on every penny of earned income in France just as if the American had earned that money working in the United States.  (The Internal Revenue Code in fact provides for a foreign earned income exclusion that permits U.S. citizens working abroad to exclude from income up to $92,500 in foreign earnings and, in addition, they can deduct certain housing amounts they receive while working abroad.  Everything in excess of those permitted exclusions, however, is taxed the same as if the citizen were working in the United States.)  Recent news caused persons working abroad to realize that their kind of persons are treated grossly different from corporate kinds of persons and that would seem to be a clear violation of the Equal Protection clause of the United States Constitution.

The equal treatment for tax purposes came into focus because of recent news about the practice of large United States corporations of diverting billions of dollars of work into foreign subsidiaries.  Those transfers protect the earnings of those subsidiaries from U.S. taxes unless the parent company repatriates the earnings into the United States.  So long as the earnings are held abroad they are not taxed.  The amount that the U.S. corporation persons may exclude is not the $92,500 that human persons may exclude.  It is all of the earnings of the subsidiary.  Those amounts are often in the billions. If that rule were applied to human persons they would not owe income tax if they spent their earnings outside the United States.

A Wall Street Journal article described in some detail how many U.S. corporations take advantage of this tax law.  According to the WSJ, in 2012 60 large U.S. corporations parked $166 billion overseas thus enabling them to protect 40% of their profits from U.S. taxes.  The only time those profits will be taxed by the IRS is if the company brings those earnings into the United States.  Among the companies surveyed, the WSJ reported that Abbott Laboratories has $40 billion in untaxed overseas earnings, Honeywell International Inc. has $11.6 billion, Microsoft Corp.  has $60.8 billion and Apple has $100 billion.  That report came at the same time it was announced that Apple planned to buy back $50 billion of stock from shareholders.  Since Apple has $100 billion parked overseas it would be easy for Apple to use those funds to effect the buyback.  Repatriating those funds, however, would cost it approximately $9.2 billion in taxes that it would prefer not to pay.  Therefore, it has issued a $17 billion bond offering with a relatively low interest rate.  The $308 million interest it pays on those bonds will be deducted by it on its tax returns giving it approximately a $100 million income tax deduction.  In addition to enjoying the tax deduction,  it avoids the $9.2 billion it would have had to pay had it repatriated funds in order to effect the buyback.

It does not take a tax scholar to realize that the deal corporate persons get on money they earn abroad is much better than the deal human persons get.  If corporate persons got the same deal as human persons then corporations that had earnings abroad in a given year of $1 billion, would have to pay tax on $999,907,500 instead of on $1 billion.  The difference would save the companies more than $3000 in taxes, a somewhat less favorable result than saving $9.2 billion.

There will undoubtedly be the occasional scholar who will remind the writer that a subsidiary of a corporation is not the same as the corporation itself and, therefore, the foregoing analysis is flawed.  The commentator may also observe that in fact Citizens United did not arrive at its conclusion by addressing “personhood” and, therefore, this entire commentary is meaningless. The proper response to the first criticism is if the subsidiary is simply an offspring of the parent corporation then the rule should be that any children of U.S. citizens working abroad should be given the benefit of the tax treatment that is accorded the subsidiary of corporations.  That is, of course, a silly distinction and one that no court, except perhaps the United States Supreme Court, would accept.  The proper response to the second criticism is “and your point is?”

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