Mark Weinberger didn't serve long as George W. Bush's assistant treasury secretary for tax policy, but until he retired last April, he was a man with a mission. Before and since -- and apparently during -- his brief stint at the U.S. Department of the Treasury, Weinberger worked at Ernst & Young, the outspokenly unpatriotic accounting giant [See Robert S. McIntyre, "Putting Profits over Patriotism," TAP, March 25, 2002.]. He was sent to the Treasury to accomplish one key goal: Undermine a law requiring corporations seeking a tax credit for research and experimentation to engage in, well, actual research and experimentation.
The law that raised the ire of Ernst & Young (along with other accounting firms) was enacted by Congress in 1986 to curb notorious abuses of the research tax break. Quite sensibly, the 1986 reform added two new conditions to get the credit: a "process of experimentation" and a focus on "discovering information."
But since then, the big accounting firms have routinely advised corporations to ignore the 1986 law's requirements. To reassure their understandably nervous clients, the accountants agreed to make their huge percentage fees contingent on this audacious ploy being upheld in court. Despite all the high-priced corporate lawyers, however, as research-credit cases have gradually made their way to litigation, the courts have repeatedly rejected these blatant attempts to evade the clear language of the law.
The felonious Sideshow Bob of The Simpsons warned that he'd eventually get out of jail because, "You can't keep the Democrats out of the White House forever!" Switch "Democrats" to "Republicans" and, by the end of the 1990s, fulfillment of that hope looked like the only way the accountants could possibly sustain their billions of dollars in ill-gotten research-credit gains.
Of course, the accountants' wish for a GOP White House came true -- and Weinberger's appointment to Treasury's top tax policy job, like Harvey Pitt's to head the Securities Exchange Commission, was one of Bush's rewards to the accounting industry for all the financial support it had given him. As soon as Weinberger took office in early 2001, he scrapped the Treasury's prior, statutorily authorized research-credit rules. Then, at year's end, he proposed a very different regulation designed to give the accountants the huge payday they sought.
His nefarious mission accomplished, Weinberger left the Treasury last April and returned to a grateful Ernst & Young -- to "spend some much-needed quality time" with his family, as he put it. A possibly tongue-in-cheek Ernst & Young press release in May crowed: "Weinberger joins a long list of members of Ernst & Young's tax practice who have been recruited for senior-level government positions and who subsequently rejoined the firm following their time in government service. ... When we lost him to the Treasury Department, the country's gain was Ernst & Young's loss. However, we are unabashedly delighted to have him return to the firm."
When I wrote about the research credit rip-off earlier this year [See "The Taxonomist," TAP, Jan. 1-14, 2002.], the accounting firms' scheme to parlay their influence with Bush into a big bill charging average taxpayers for bogus research credits seemed unstoppable. But fortunately, Weinberger's proposed regulation isn't yet final. And since he issued it, a few things have changed.
First of all, public regard for accounting firms has gone down the toilet. Arthur Andersen's Enron debacle, Ernst & Young's brazen advice to corporate clients that "the patriotism issue needs to take a back seat" to profits, PricewaterhouseCoopers' aborted plan to reincorporate itself in tax-free Bermuda and all the other scandals have made it much harder for even the accountants' most loyal political allies to continue their public toadying.
Second, in late August, the 10th U.S. Circuit Court of Appeals issued a sharply worded decision reaffirming the 1986-enacted research-credit limits, and pointedly criticized Weinberger's proposed gutting of those rules as deserving neither "deference" nor "respect."
Finally, the Treasury's new assistant tax policy secretary, Pamela Olson, is distinguished by the fact that her previous employer was not an accounting firm. As far as one can tell from her résumé, she's never had a client seeking unjustified research tax credits. And in her first few months on the job, she's shown an encouraging aversion to at least some tax-sheltering scams.
So here's a challenge, Ms. Olson: Show some guts, not to mention integrity, and reverse the indefensible Weinberger research regulation. Because if you don't -- or can't -- it will be another reason to dismiss President Bush's newly professed zeal to crack down on corporate corruption as nothing but empty rhetoric.
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