House Tax Subcommittee calls for Greater Scrutiny on Trusts

December 8, 2021

House lawmakers a part of a tax-writing subcommittee took aim December 8th at trusts in the U.S. being used to avoid taxes and called for greater transparency on them.

“That the United States has become an international tax haven is a stunning indictment of our laws, both at the Federal and State level. Certain states have gone out of their way to craft laws to attract hidden wealth,” said Rep. Bill Pascrell (D-NJ), Chairman of the House Ways and Means Oversight Subcommittee, which hosted today’s hearing.

He added: “Letting this accumulation of hidden wealth go unchecked will only exacerbate our two-tier tax system. I will not be complicit in further cementing a ‘have and have not’ economy.”

Today’s hearing stems from a report called the Pandora Papers that showed U.S. trusts being used to legally avoid paying taxes are growing in popularity.

From the Paper: 

[A] burgeoning American trust industry is increasingly sheltering the assets of international millionaires and billionaires by promising levels of protection and secrecy that rival or surpass those offered in overseas tax havens. That shield, which is near-absolute, has insulated the industry from meaningful oversight and allowed it to forge new footholds in U.S. states.

Pascrell mentioned South Dakota having the most trusts where this sort of avoidance occurs. 

“Among the States that loom large is South Dakota. South Dakota is home to a stunning 81 of the 106 trusts located in the United States,” he said, adding that “we will explore how South Dakota has become the Grand Cayman of the Great Plains.”

It is important to note that South Dakota is not doing anything illegal. The chairman’s primary gripe is about tax avoidance, which is legal, and not tax evasion, which is not legal.  

The recently released Pandora Papers noted South Dakota is holding most trusts in the U.S. 

From the Paper: 

The investigation identified 206 U.S.-based trusts linked to 41 countries holding combined assets worth more than $1 billion… The trust documents come mostly from the Sioux Falls office of Trident Trust, a global provider of offshore services… In South Dakota, assets in trusts more than quadrupled over the past decade to $360 billion.

The Paper also identifies Alaska, Delaware, Nevada and New Hampshire as states where trusts could be problematic for lawmakers seeking to collect additional taxes.

One witness at today’s hearing, Beverly Moran, a professor of law at the Emerita Vanderbilt Law School, said that tax avoidance can occur using “ordinary” trusts, and not just those highlighted in the Pandora Papers.

“The Pandora Papers focus our attention on non-charitable purpose trusts as tax avoidance vehicles. Nevertheless, non-charitable purpose trusts are not always necessary for US tax avoidance,” she said.  “Foreign persons can use ordinary trusts to avoid both United States and foreign taxes in relatively straightforward ways. Those ways place the United States high on lists of international tax havens. For example, the ‘Financial Secrecy Index’ measures the effectiveness of a country's laws in concealing money and avoiding tax. From a total of 112 countries, the United States ranks second on that list.”

Daniel Hemel, a professor at the University of Chicago Law School, also testified before the Subcommittee and suggested enacting a withholding tax on portfolios.

“A withholding tax on portfolio interest will require careful design to prevent avoidance, but this should be a top priority for the Ways and Means Committee going forward,” he said.

Another witness who testified before the Subcommittee did not propose legislative fixes for trusts. Instead, Erica Hanichak, Government Affairs Director at the Financial Accountability and Corporate Transparency Coalition, said that the $80 billion for increased IRS enforcement, included in the House-passed $1.75 trillion reconciliation bill, should be used to increase the scrutiny of trusts.

“Increase IRS resources as contemplated by Build Back Better are critically important to make sure that the IRS is able to have the resources and technical training necessary to understand the complex webs of anonymous ownership structures and legal entities that are often relied on for tax evasion and fraud purposes,” she said.

Republican lawmakers on the Subcommittee did not agree with greater scrutiny of these trust. They also condemned Chairman Pascrell for seeking to modify or repeal the cap on the State and Local Tax Deduction (SALT). Republicans view removing or increasing the SALT cap as a form of tax avoidance – the same issue Pascrell spoke against during today’s hearing.

Conservative lawmakers also questioned why the Subcommittee has not investigated whether the tax data exposed in the Pandora Papers was legally obtained.

“This is the Oversight Committee over the IRS, and it has not held a hearing… Why are we not looking into the leak,” said Rep. Lloyd Smucker (R-Penn), adding, “it is an illegal dump of taxpayer data.”

Pascrell stressed that it was not clear if the data was illegally gathered. He also did not respond to questions on whether the Subcommittee would investigate how the information was obtained for the Pandora Papers.

Before gaveling the hearing to a close, Pascrell said he supports using increased IRS funding in the reconciliation bill to improve transparancy of trusts and other entities, but also cautioned that it should be done responsibly. 

“We want to protect privacy. There’s no two-ways about it. But, you know, that’s a two-way street. The point of the matter is, to have oversight we need to understand. We need information. That doesn’t mean just go get it. It means you have to have a solid foundation,” he said.

Pascrell ended the hearing without saying whether or not the Subcommittee would address increasing the transparency of trusts. 

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