Shortly after congressional Republicans passed their sweeping tax cuts for the rich, hedge fund managers began creating literally hundreds of shell corporations in the state of Delaware where they planned to shelter their money from a tax on carried interest.
After the shell corporation scheme surfaced in news reports, Treasury Secretary Steve Mnuchin said that he would close the loophole that relies on a vague designation of what qualifies as a "corporation," but wealthy law firms say he probably can't do that.
They say a notice delivered to these corporations from the Treasury Department doesn't include a legal basis.
Tax experts say a notice from Treasury and the Internal Revenue Service issued Thursday fails to give the legal basis for their power to close the loophole. Congress would need to amend the statute, accountants and lawyers said, and Treasury’s attempt to do so through regulation sets the stage for a court battle by one or more hedge-fund titans with a lot of money at stake.
“It’s striking that they don’t cite any authority,” in the notice, said David Miller, a tax partner at law firm Proskauer Rose. “I’m certain someone will challenge this.”
No one has filed a lawsuit yet, but if hundreds of hedge fund managers can save themselves tens or maybe even hundreds of millions of dollars by filing a challenge, I expect they will. They're not going to comply just because Steve Mnuchin said so.
There was a time not too long ago when Republicans, including Trump himself, said it was a patriotic duty to pay as little in taxes as you can legally get away with. In this case, that must include using the S corporation loophole until they're legally forced not to.
If closing this loophole does come down to amending the law in Congress, that's not going to happen anytime soon if ever. It would be very difficult to hold another vote on any measure to amend the GOP's tax cuts and the reality is you probably couldn't find enough Republican votes to close the loophole. Cutting taxes for the rich was the whole point, remember? There may be more members of our Republican-controlled Congress who would call this loophole a feature rather than a bug. Right now, it's convenient enough for them to hide behind Mnuchin's orders, but those orders may not hold up in court.
We've said it dozens of times already, but this is why you shouldn't draft and pass legislation that effects the entire economy in just a few days.