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Wednesday, January 12, 2011

Rendering unto Caesar the things that are Caesar's

Why do wealthy people try to evade taxes? One might argue that they became wealthy because they were tight with their money, but in general I don't agree. Rather, I believe it's a question of greed.

Today's Raleigh News & Observer ran a fascinating story about Wendell Murphy, a highly successful farmer -- perhaps I should say animal industrialist -- who is also a former politician and a major player at NC State University. After selling the family's hog business for $450 million in 2000, they entered into a tax shelter arranged by the accounting firm of Ernst & Young.

The IRS objected to the tax shelter and prevailed in lengthy court proceedings. A federal judge ruled further that the Murphys had not proved they had acted in good faith, and thus a 40% penalty is due. Besides substantial legal fees, the Murphys owe about $40 million in back taxes and penalties.

Ironically, E&Y is not a party to the IRS recovery -- even though the firm bagged $2 million in fees from the Murphy family to create the tax shelter in the first place.

If the Murphys had simply been willing to pay their fair taxes on the gains they realized in 2000, this whole episode would not eventuated. It's as though someone wins the Powerball jackpot (or hits incredible odds on a Las Vegas slot machine) and then doesn't want to pay taxes on the windfall income. I just don't understand it.

I wish that the law made E&Y contingently liable for having created a tax shelter that the court found "had no business purpose other than tax avoidance, lacked economic substance, and, in fact and substance, [constituted] an economic sham for federal income tax purposes." Presumably E&Y won't even be required to refund the $2 million fee paid by the Murphys.

In fairness to E&Y, I have read no quote from a spokesperson concerning this case. But I'm not surprised by that.