WALGREENS EYES LOOPHOLE END RUN AROUND TAXES

Original Story:  USAToday.com

DIXON, Ill. — The Walgreens drugstore chain proudly touts itself as "the pharmacy America trusts."

But many here in this small river town where the founder of the company got his start complain that the drugstore chain is on the precipice of turning its back on the USA.

Walgreens, the USA's largest drugstore chain, with more than 8,500 stores, soon will decide whether to take advantage of a loophole in U.S. tax law that would allow it to save billions of dollars by moving its headquarters to Europe, where it is on the verge of acquiring controlling interest in Alliance Boots, a Swiss-based company that operates drugstores in Britain.  A Tulsa Business Tax Lawyer said that giant corporations often look to move overseas for the purpose of cutting there taxes.

From the shareholders' perspective, making the move is a no-brainer: It could save the company roughly $4 billion over the next five years.

But here in this town of 16,000 where just about everybody can tell you about company founder Charles Walgreen's impact on the community, such a move seems out of step with how the Walgreen family conducted business.

"I think he'd be rolling in his grave if he knew what was going on today," says Bill Jones, who runs the Northwest Territory Historic Center in Dixon and worked closely with the Walgreen family on building an exhibit at the museum honoring the founder.

The loophole is known as tax inversion, a controversial tactic that allows a company that does most of its business in the USA to cut its federal tax bill by merging or buying an overseas company in a lower-tax country and then nominally relocating its headquarters there.

Despite years of on-and-off efforts by lawmakers in Washington and the IRS to close the loophole, dozens of American companies have used it — several in recent months.

The first corporate inversion to capture attention occurred in 1982, when oil-and-gas company McDermott moved its headquarters to Panama. It wasn't until 1994, after cosmetics company Helen of Troy moved to Bermuda, that the IRS raised concerns that such restructurings were motivated by the desire to dodge taxes.

This year alone, eight major U.S. companies — including AbbVie, Medtronic and Mylan — have announced plans to shift their headquarters overseas in an effort to trim their corporate tax rate, which hovers around 35% in the U.S. and is among the highest in the world.

Earlier this week, President Obama called inversion an "unpatriotic tax loophole" and pressed Congress to pass legislation to stem the flow of corporations that are effectively renouncing their U.S. citizenship. Inversion could cost the Treasury nearly $19.5 billion over the next decade, according to Congress' Joint Committee on Taxation.

Analysts say perhaps no company with a Main Street profile that matches Walgreens' — the country's largest pharmaceutical chain, with $72 billion in annual sales — has used the loophole, and Walgreens' pending decision is bringing unprecedented attention to the issue.

"I don't know how this inversion doesn't happen," says Christopher Geier, of the Chicago-based investment banking firm Sikich. "They'll get some bad press, but I don't see a big enough reaction from consumers on this to change where this appears to be heading."

Here in Dixon, the talk of Walgreens moving to Switzerland resonates in a personal way.

Charles Walgreen moved to Dixon as a teenager and got his start in the business working at a pharmacy, a job he took after injuring himself working at a shoe factory in town. Residents here recall Walgreen taking Boy Scouts up on his Sikorsky S-38 amphibian aircraft, which he would fly back and forth from the Chicago area and land on the Rock River, near the family's estate here.

As a young man, he moved to Chicago to seek his fortunes and eventually started his drugstore chain. But he opened his second pharmacy here in his adopted hometown — where he became revered as the city's second-favorite son. (President Ronald Reagan, who grew up here and caddied for Walgreen at the Timber Creek Country Club, is Dixon's most celebrated hometown boy.)

Walgreen, who died in 1939, saved the Dixon National Bank from going out of business during the Great Depression. The family also led fundraising for a statute erected in 1930 along the Rock River depicting a young volunteer named Abraham Lincoln, who spent time here during the Black Hawk War.

Charles Walgreen Jr., the founder's son, won the bid during World War II to open a store at the newly built Pentagon by giving all store profits to the Pentagon Post Restaurant Council, which supervised food service in the complex.

"Walgreens' attitude was so patriotically generous that no competitor could possibly better it," declared a weekly publication from the War Department.

Myrtle Walgreen, the wife of the company's founder, also was a good friend of the people of Dixon. James Burke, Dixon's mayor, says legend has it that at one of the regular coffee klatches at Dixon's Walgreens, she offered an extraordinary stock tip to some of the city's most prominent citizens.

"She told them we are getting ready to introduce a new line of product that you might consider investing in," says Burke, who has called on Walgreens to ditch the tax inversion plan. "That product was the tampon."

TRADING WALGREENS FOR CVS?

Larry Dunphy, who owns an independent bookstore in Dixon, says he takes pride in buying stocks in Illinois companies such as McDonald's, John Deere and Walgreens. But he says he's told his financial adviser to dump his stock in Walgreens and buy CVS if the company goes through with the inversion.

In the end, Dunphy says the public outcry may not have an impact on Walgreens' decision, but it could have a long-term effect on how companies approach inversion in the future and spur Congress to change laws to give companies an incentive to stay put.

"Will there be enough people who go to CVS or the local pharmacy that will offset the $4 billion that Walgreens will make by moving?" Dunphy says. "Maybe not. But I hope the damage this is doing to Walgreens' image is something that companies in the future will consider before moving to cut their share of taxes."

Walgreens CEO Gregory Wasson, who, along with his board, has come under intense pressure from shareholders to move the headquarters to Switzerland, says the company will decide soon whether to move its headquarters.

Early in 2014, Wasson said publicly that an inversion wasn't under consideration. The Deerfield, Ill., company bought 45% of Switzerland-based Alliance Boots in 2012 and has an option to buy the rest of the company next year, which would create the opportunity to make the move.

But after a private meeting in France with a shareholder group — including Goldman Sachs Investment Partners and hedge funds Jana Partners, Corvex and Och-Ziff — Wasson began to change his tune.

He made clear in a call with Wall Street analysts last month that an inversion was very much a possibility as Walgreens restructures the company ahead of completing the Alliance Boots deal.

Michael Polzin, a company spokesman, says Walgreens will do "what is in the best long-term interests of our customers, employees and shareholders."

Polzin won't comment about the impact a tax inversion would have on the company's image. The company also declined to make Kevin Walgreen, the great-grandson of the company's founder and the only member Walgreen family currently involved in day-to-day operations, available for an interview.

"Whether we do an inversion or not, we're still going to pay over $2 billion a year in federal, state, employer and property taxes," Polzin says. "We will still be one of the top job providers in America, with roughly 250,000 employees. We're going to continue to make capital investments in the U.S. and expand our business here for decades to come."

That argument hasn't assuaged some Illinois lawmakers.  A Tax Lawyer Tulsa representative is actively watching the case unfold.

In a letter to Walgreens' board of directors this week, Rep. Jan Schakowsky, D-Ill., warned that the company was in danger of sullying its reputation as a community-minded corporation. She also sought to remind the Walgreens board that roughly a quarter of its $2.5 billion in profits last year were directly connected to federal programs — such as Medicare, Medicaid and the Affordable Care Act.

"Everywhere you look, the success of Walgreens is tied to the opportunities it has been afforded by this country," she wrote. "To benefit from those resources and then to refuse to pay your fair share of taxes needed to fund them is inexcusable."

In a separate letter, Sen. Dick Durbin, D-Ill., took a shot at Walgreens' folksy motto. "Is 'the corner of happy and healthy' somewhere in the Swiss Alps?" Durbin wrote. He added, "I believe you will find that your customers are deeply patriotic and will not support Walgreens' decision to turn its back on the United States."

Burke, the Dixon mayor, says he hopes Walgreens will stay put. But if it pushes ahead with the inversion, Burke notes there are three other drugstores in his town.

"I think Walgreens will see that a lot of Americans will take their business elsewhere," Burke says. "At some point, how much profit is enough?"

Tax Law News

originally appeared on npr.org:

Every time President Obama explains why he wants to increase taxes on the richest 2 percent, Republicans have a ready answer: Most small business owners file their taxes as individuals, and a rate hike would discourage them from hiring new workers.

So when Obama visited the K'NEX factory in Pennsylvania recently to push for his tax plan, House Republicans countered with a campaign-style video, also featuring a Pennsylvania business.

For small business tax help contact this Philadelphia tax lawyer.

In it, Gorski Engineering's owner explains how his company is set up as a "subchapter S" corporation under the tax code. So, however good or bad we do is my income, he says.

But how does that back up the fundamental Republican argument, that a higher tax rate would make it harder for him to hire new workers?

Actually, it doesn't. Which is why, Gorski's owner told NPR in an interview, he specifically avoided saying that in the video. He didn't know that that would be true for his business or a different business unless we understood the complete situation.

Some of these situations, said other business owners, are such that the higher tax rate could actually act as an incentive to hire more employees or invest in new equipment.

Because that would then lower your potential tax rate, according to the owner of Hobby Works, a group of toy stores in the Washington, D.C., area.

If this seems counterintuitive, the answer lies in the way businesses calculate their taxes. Obama's proposal would increase the tax rate, but only for income that exceeds a quarter-million dollars per household.

For some 97 percent of small business owners, that higher rate is irrelevant. They make less than $250,000 a year.

And for those whose income works out to be just over that threshold, one way out of paying that higher tax rate could be to hire one more person — or finally replace that 10-year-old car. These investments would pull net income back under that quarter-million-dollar mark, out of range of that higher rate.

The owner of Paloma Clothing in Portland, Ore., thinks if you're a person who hates paying taxes, hiring another employee for thirty- or forty-thousand a year is a great way to stay below the new so-called marginal rate.

There are situations, though, where Obama's proposed higher rates would make it tougher for particular small businesses to expand.

Owners of franchise restaurants, for example, who need to save up tens of thousands of dollars in cash so they can open up a new eatery, would have a harder time. Such savings are treated as business profit and, therefore, in the case of most small businesses, personal income prior to the reinvestment.

If that money is taxed at 35 percent instead of 31 percent, it would take somewhat longer to get to the necessary goal, according to the CEO of Florida-based Firehouse Subs.

Gorski Engineering's owner similarly faces that higher tax rate when he saves up for a number of years to hire a highly paid employee or a piece of earth-moving equipment.

Gorski Engineering's owner indicated that if he started to build a nest egg again, if I start to invest in equipment and things but I don't have as much to do that, or invest in people, which is our biggest resource, I don't have as much to do that, that's going to be difficult.

Of course, when Gorski finally does hire that expensive employee or buys that pricey backhoe, he will have a large, new expense he can write off — potentially offsetting some or most of the extra taxes he had to pay earlier.

The owner of Hobby Works, says there's really nothing new or unusual about taking the tax code into account when making business decisions.

He indicated the fact of the matter is, businesses, all businesses, large and small, do this all the time.

One business strategy is to continually plow extra profit back into the business to avoid those higher tax rates. Eventually, the owner can sell the business or take it public, and convert those years of deferred income into a big cash payout.

And depending on how it's handled, selling a business can be considered capital gains, taxed at a lower rate right now, a much lower rate.

Tax Legislation Expires

Story first appeared in The Wall Street Journal.
Nine years ago this month Congress passed Bush's Jobs and Growth Tax Relief Reconciliation Act. That bill's lower rates on capital, as well as the continuity in tax policy it established, have helped make our economy far more resilient.

The legislation's centerpiece was a reduction in the taxation of dividends and capital gains to 15%. Unfortunately, the 2003 tax rates, including those on capital income, are due to expire at the end of the year.

Capital warrants special tax treatment because of the central role it plays in generating economic growth and jobs. Capital is the very lifeblood of the market economy, the mainstay of innovation, and the foundation for future prosperity. As more of it is put to work today, labor output and wages will rise tomorrow. An appreciation of that critical relationship should guide how the tax system treats earnings from capital.

The double taxation of dividends—with corporate earnings first taxed 35% at the corporate level and then, when paid out to shareholders, taxed again—has been a long-standing and well-recognized distortion in the tax code. It favors debt financing over equity capital formation, because interest is deducted as a cost of doing business and lowers taxable income, while dividends are taxed twice.

The preference for debt financing and leverage shortchanges shareholders and is not healthy for corporate decision-making. Double taxation penalizes dividend payments and discourages managements from making them, according to Washington DC Corporate Lawyers.

Congress did not eliminate the double taxation of dividends in 2003, but it substantially ameliorated the distortion. Dividends are now taxed at 15%, rather than the typically higher income-tax rates paid by shareholders. Importantly, the 15% tax rate was applied to capital gains as well. Capital gains previously had been taxed at 20% with special rates for assets held five years or longer. This symmetry between dividends and capital gains harmonized and simplified the regime for the taxation of capital and still stands today as a key achievement in modern tax policy.

Corporations responded to the lower rates on dividends by paying out more of their profits, which raises the returns to those holding stock and thus increases equity prices. Both trends strengthen Americans' retirement savings. As recent actions by Google, Apple and scores of other companies attest, corporations today find it more difficult to sit on cash instead of rewarding shareholders with dividend payouts.

Indianapolis Corporate Lawyers feel that with the expiration of the 2003 tax law at the end of this year, taxes—not only on capital earnings but also on ordinary incomes—will return to the much higher levels that previously existed.

This would be devastating to the fragile economic recovery, and to every American still looking for work. Combined with the expiration of temporary payroll tax relief, the United States faces what has now been labeled "taxmageddon"—a fiscal headwind so strong that it threatens a swift return to recession.

What seems to be lacking is a clear path to the future. Here are some suggestions for policy makers.

First, remember the principle that you always get less of anything you tax. For this reason, society discourages undesirable activities by imposing so-called "sin" taxes. By the same token, high marginal tax rates discourage work, risk-taking and capital formation.

Second, tax rates should be held as low as possible, consistent with maintaining fiscal balance. Low tax rates are not in conflict with fiscal sanity if the rate of government spending as a fraction of gross domestic product is reduced, or if the tax base is broadened with more fundamental tax reforms. It is encouraging to see so much interest gathering in support of changes to the tax code that would scrap many special tax breaks in favor of deeply lower marginal tax rates.

Third, St. Louis Corporate Lawyers state that marginal tax rates should be as neutral as possible across different types of economic activities. Otherwise the tax code distorts behavior in ways that sap economic strength, as market participants rely less on market price signals and more on government commands to decide how economic resources are used. Social engineering through the tax code comes at a very high cost.

Finally, policy makers should remember to "do no harm." A reversion to the kind of drastically higher marginal tax rates that existed in the past would be bad enough. It would only add insult to injury to use the economic crisis as an excuse to raise the tax burden on capital formation and thus reduce the lifeblood of America's job creators.

Unfortunately, we face that real prospect, as prominent proposals by the administration would triple the top dividend tax rate to nearly 45%, while doubling the top rate on capital gains to 30%. If one intended to cripple job creation, depress stock prices, and lower the value of retirement savings for working Americans, these proposals would be just what we should choose.

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