Md. tax avoiders settle at discount

$10 million collected from companies that saved on taxes via Del.

February 21, 2004|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

Maryland has collected more than $10 million from companies that used Delaware shelters to avoid paying corporate income tax here, plus an undisclosed sum from a company that had battled with the state for seven years - all the way to the U.S. Supreme Court.

Maryland Comptroller William Donald Schaefer said he could not legally disclose the terms of the settlement with Crown Cork & Seal, which the state said owed more than $2 million in taxes, interest and penalties. The company's senior vice president of finance did not return a call seeking comment yesterday. But Schaefer said he is pleased with the result, part of an aggressive push to extract money from firms dodging taxes by sending profits to Delaware holding companies.

No one knows exactly how much Maryland is losing to this tax shelter, but it's not petty cash. "It could run over $100 million or more, easily," said Michael D. Golden, a spokesman for the comptroller. "And as we know, that's money that's much needed by the state."

The shelter is made possible because Delaware doesn't tax income from intangible property such as slogans and icons.

A corporation can form a holding company in that state, transfer ownership of intangible property there and then pay royalties to the holding company for the right to use those trademarks.

That reduces the company's income and taxes in Maryland, along with other states in which it does business. The state comptroller's office has been fighting the tax shelter for years.

Last June it won a significant victory when the state Court of Appeals ruled that holding companies for packaging manufacturer Crown Cork & Seal and clothing retailer Syms Corp. owed Maryland taxes despite their Delaware addresses.

The U.S. Supreme court later refused to hear either company's appeal.

In December Schaefer offered a deal to 70 other holding companies he said owed at least $78 million to Maryland: Pay by the end of January and be hit with a 2 percent penalty instead of 25 percent.

Since that offer, 10 holding companies have forked over more than $10.5 million, while 20 others are still negotiating with the state.

"There was some skepticism by those outside the agency - [assuming] that no one would take part - and I think this proves them wrong," Golden said.

"Certainly we would have liked to have had 100 percent participation, but at this point, any money we can get that we haven't gotten so far puts us ahead of the game."

Crown Cork & Seal's settlement was separate from the reduced-penalty offer. Golden said he's hopeful a resolution of the Syms case will be "imminent."

Antone F. Moreira, Syms' chief financial officer, declined to comment.

Christopher S. Rizek, a former Treasury Department attorney and Maryland resident, cautioned against an all carrot and no stick approach to tax collection. It's crucial to have "vigorous enforcement" as a follow-up for any companies that don't pay their bill, he said.

"The problem of any amnesty program, any `come in and we'll give you a break' program, is it encourages repeat offenders," said Rizek, now a tax attorney with Caplin & Drysdale in Washington. "People come to expect them, and in fact some states have gotten hooked on them."

Golden said the state was pursuing companies that had not responded to its offer.

"Court dates are already being scheduled for some of those who have not participated," he said.

Golden also said companies should not count on tax amnesties in the future.

But the window hasn't closed entirely. Holding companies that haven't been informed that they owe Maryland taxes, but owe them regardless, can get the 2 percent penalty deal if they pay by March 1.

The comptroller's office has a list of 240 to audit, so it's potentially a sizable group. Some have already expressed interest in the deal, Golden said.

"The attorney general has 112 lawyers," Schaefer said. "If [holding companies] want to take each case to court, we'll take them to court."

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