Tax Inversions Succeed When Government Lawyers Go Private

Hal Hicks cleared his throat and addressed a roomful of peers in a midtown Manhattan auditorium. The topic: the tax-avoidance technique called inversion, in which a U.S. company claims a foreign legal address.

Waving his hands back and forth as if tracing a pendulum’s swing, Hicks explained how four government attacks over three decades had failed to stop the practice. “There’s been lots of law thrown at these transactions,” he said at the January session.

Hicks ought to know. He was the one doing the throwing, during four years as a top government tax lawyer. Then, he returned to private practice and helped set in motion a spree of inversions that a congressional panel estimates will cost at least $19.5 billion in lost tax revenue over the next decade.

VIDEO: The Double Irish: A One Minute Guide to Inversions

Hicks epitomizes the world of high-level Washington lawyers who have played a behind-the-scenes role in helping these tax-driven address changes proliferate. Top federal tax officials, many of them career corporate lawyers, have sometimes closed loopholes only after companies slipped through them. And former officials like Hicks use skills and contacts honed in office to help companies legally outmaneuver the government.

Changing Address

Until this year, when address-shifting by more than a dozen companies worth $100 billion caught policy makers’ attention and President Barack Obama clamped down again, inversion rules had for a decade attracted little notice outside the small community of international tax lawyers in Washington.

At the Treasury Department and Internal Revenue Service, officials, many on hiatus from private practice, crafted the rules in dialogue with top corporate law and accounting firms.

VIDEO: AIG’s Miller: Board Declined to Join Greenberg Suit

While some European nations have historically relied on career civil servants, the top ranks of the U.S. tax administration have swapped staff with industry for decades.

It’s a low-cost way to provide government with the best legal talent, said Gregory Jenner, a former acting assistant Treasury secretary, who calls it an “incredibly beneficial tradition.”

“Putting rookies into these jobs — they would be overwhelmed,” Jenner said. “It’s too high-level, too sophisticated, too complicated.”

VIDEO: Ireland Budget May Set Stage to End Tax Inversions

The risk, critics say, is that some government lawyers may continue to sympathize with corporate interests, or be swayed by former colleagues.

U.S. ‘Loses’

“The government loses,” said Susan Borkowski, an accounting professor at La Salle University in Philadelphia who has studied IRS staffing. “It’s very hard to be sitting across from someone that you know — you may have dealt with that company in the past and you know you’re going to deal with it in the future — and be totally objective.”

Hicks declined to comment for this story. Since 2000, the five people including Hicks to leave the international tax counsel post at the Treasury joined private law or accounting firms. All but one registered as lobbyists. Only two had stints in government that lasted more than five years.

VIDEO: AbbVie Considers Ending Shire Deal on Tax Rule

In a statement, the Treasury said that hiring from the private sector helps “keep us at the forefront of emerging issues.”

“We have benefited from numerous staff who bring their extensive expertise on a range of issues, including tax policy, financial markets and economics from their time in the private sector,” the department said.

Former Officials

Current and former officials mingle at dozens of tax conferences each year, where the business cards change yet not the faces. At a 2009 conference, Hicks took the opportunity to rib a fellow panelist — an IRS lawyer whom he’d worked with in government — about a rule that Hicks deemed unreasonable.

VIDEO: AbbVie, Shire Could Be Casualty in Treasury Crackdown

“Who the hell are you,” he exclaimed, “and what have you done with my friend Steve Musher?” The audience of tax lawyers erupted in laughter.

The revolving door was again on display at Hicks’s talk in January, at a legal education forum hosted by New York-based non-profit Practicing Law Institute. To his right and left at the panel discussion were three prominent corporate lawyers, all of whom had previously served at the IRS or Treasury.

One was Hicks’ former boss at the IRS, Nicholas DeNovio. Last year, DeNovio helped New Jersey’s Actavis Inc. become Irish in one of the largest corporate inversions. Through a spokesman, DeNovio declined to comment.

Treasury Rules

Some 45 companies have inverted over the past three decades. Most of these companies don’t move their executives or factories out of the U.S., just their legal domicile. Treasury Department rules issued last month to discourage inversions stopped three planned transactions. Six more are still in the pipeline.

The incentive for companies to invert is simple: foreign-owned companies operating in the U.S. typically pay less tax than multinational companies incorporated here. That’s because the U.S. has a corporate income tax of 35 percent, the highest in the developed world. And the tax applies to U.S. companies’ global income; foreign-owned firms don’t pay U.S. tax on their worldwide income.