A flaw in the 2017 tax legislation has enabled major corporations to save millions of dollars that would have otherwise gone to the U.S. Treasury, according to recent court rulings.
What Happened: The Internal Revenue Service (IRS) attempted to address the issue through regulatory changes, but the U.S. Tax Court unanimously decided last week that the explicit wording of the law permits some companies to receive double benefits, even though this was likely not the intention of Congress.
In a landmark case, Varian Medical Systems, a major medical device manufacturer, successfully claimed over $150 million in tax deductions. Other companies, including electronics giant Kyocera and food distribution powerhouse Sysco, are also involved in ongoing cases, each seeking over $100 million in deductions, as reported by The Wall Street Journal.
The loophole emerged due to inconsistencies in the effective dates of new tax provisions introduced in the 2017 tax law, which Congress did not correct. Although the IRS attempted to mitigate the issue through regulatory measures, the U.S. Tax Court ruled in favor of the corporations.
“These companies are essentially receiving both a deduction and a credit on the same income, which is unprecedented and contrary to previous tax rules,” said Seth Green, a principal at KPMG’s Washington national tax office, in an interview with the Journal.
Background: The controversy centers on Section 245A, a provision added to the tax code in 2017 that allows U.S. companies to bring back foreign earnings without incurring U.S. taxes. However, a discrepancy in the effective dates of the tax break and the accompanying limitations created a loophole that companies with non-calendar fiscal years have been able to exploit.
According to Reuven Avi-Yonah, a tax law professor at the University of Michigan, “This situation reflects the need for bipartisan cooperation to correct technical issues in legislation promptly.”
Why It Matters: This case underscores the financial impact of legislative inaction, as lawmakers from both parties have failed to work together to fix mistakes in the 2017 tax law. The recent emphasis by the Supreme Court on the literal interpretation of laws adds further pressure on Congress to ensure that legislation is clear and free from errors.
The exploitation of this loophole not only results in substantial financial gains for corporations but also highlights the importance of thorough drafting and review processes in tax law to avoid unintended consequences.