Saudi Arabia’s Intensifying Despotism

On April 7, 2019 By admin

• Breaking News

The Saudi government has wrongfully detained another nine people, including two U.S. citizens, in the latest crackdown on dissent:

Brushing back pressure from Washington, Crown Prince Mohammed bin Salman of Saudi Arabia escalated his crackdown on even the mildest forms of dissent with the arrests this week of at least nine intellectuals, journalists, activists and their family members, according to rights groups and a Saudi associate of the detainees.

Among those held are two dual Saudi-American citizens and two women — one of them pregnant, the groups said. Many of the detainees are suspected of having complained to Western journalists and rights groups about the treatment of imprisoned women’s activists, according to a Saudi national briefed on the case who spoke on the condition of anonymity in order to discuss confidential information.

The increasingly repressive Saudi government locks up anyone that utters a word of criticism or speaks to foreign media about their government. In this case, many of these critics have been detained for speaking out on behalf of the activists unjustly imprisoned in 2018 in a previous crackdown.
The Saudi government rounded up those activists almost a year ago, and it has been subjecting them to cruel and inhumane treatment ever since. The Guardian reported last week on new evidence that details the extent of the torture and abuse used against these activists, who were detained solely because of their criticism:

Political prisoners in Saudi Arabia are said to be suffering from malnutrition, cuts, bruises and burns, according to leaked medical reports that are understood to have been prepared for the country’s ruler, King Salman.

The reports seem to provide the first documented evidence from within the heart of the royal court that political prisoners are facing severe physical abuse, despite the government’s denials that men and women in custody are being tortured.

These people are peaceful activists, journalists, intellectuals, and writers. Their only offense is speaking out against the abuses of their government. Their detention is proof that Saudi despotism is only getting worse, and the U.S. encourages and enables this behavior when it refuses to hold the crown prince and his top officials accountable for these abuses. None of these detainees should be imprisoned, and all of them ought to be released immediately. The U.S. should be urgently seeking the release of all detainees with American citizenship, but we already know that the Trump administration isn’t going to do that.

The crown prince presumably assumes that he can continue suppressing his domestic critics without risking a backlash from the Trump administration, and he has every reason to think that. The administration has gone out of its way to cover for him and has done nothing to censure him for his many crimes. They have made clear that there is no crime so heinous that it will affect their support for the Saudi relationship and the crown prince. The intensifying repression under Mohammed bin Salman is one of the many reasons why the U.S. should be disentangling itself from the “new” Saudi Arabia. Since the Trump administration is so hopelessly subservient to the Saudis, it falls to Congress and human rights organizations here to call attention to these cases and to bring as much pressure to bear on Riyadh as they can to secure the release of political prisoners.

Empirical SCOTUS: Is Kavanaugh as conservative as expected?

On April 7, 2019 By admin

• Breaking News

On Monday, April 1, 2019, the Supreme Court decided the case Bucklew v. Precythe, with the five conservative justices in the majority and the four liberals in dissent. To some, including legal scholar and CNN analyst Steve Vladeck, this ruling ushered in a new conservative court without the moderating anchor of Justice Anthony Kennedy. Going even further, Slate’s Mark Joseph Stern referred to the decision as “beyond appalling,” while Think Progress’ Ian Millhiser described it as “the most bloodthirsty and cruel death penalty opinion of the modern era.” This decision at the very least separates this nascent court like never before as, for the first time, the current justices divided along ideological lines in a highly divisive case dealing with civil liberties (The justices also split 5-4 along the same lines in the immigration detention case Nielsen v. Preap.).

By focusing on these decisions, along with some of his other rulings including his dissent in the abortion stay application June Medical v. Gee, Kavanaugh can easily be characterized as another justice on the far right who will inevitably push the Supreme Court into a conservative era perhaps like never seen before. Indeed, it would be surprising to find Kavanaugh on opposite sides of an abortion or death penalty decision from his conservative counterparts. That said, Kavanaugh’s first set of votes on the Supreme Court presents a picture that may (1) differentiate him from some of the other conservative justices and (2) help us understand where exactly he fits on the court’s ideological spectrum. This post uses data on current justices’ first sets of cases when they joined the Supreme Court to set a baseline for comparison to Kavanaugh’s votes thus far in the 2018-2019 term.

Justices prior to Kavanaugh

Justice Clarence Thomas, the longest-serving current justice, was in the court’s majority 22 times and in dissent four times in his first set of decisions in orally argued cases. (To track Kavanaugh the cap was set to 22 decisions, yet all decisions made on the same day as a justice’s 22nd day were incorporated into this analysis.)

There were eight Supreme Court compositions in Thomas’ first set of decisions (Note that in these graphs when vote spaces are empty and without an intervening line, these votes are the same as the votes above until the next line is reached.). The court was unanimous in 17 out of the first 26 cases in which Thomas voted. Thomas voted most closely with Justice Antonin Scalia. The only case in which their votes were not the same was Dawson v. Delaware, in which Thomas was the lone dissenting justice. On the other end of the spectrum, Thomas and Justice Harry Blackmun voted in divergent directions in nine of these first 26 decisions, and Thomas and Justice John Paul Stevens came out on opposite sides in eight. Thomas’ early voting decisions already placed him toward the right edge of the court ideologically.

The next justice to join the Supreme Court was Justice Ruth Bader Ginsburg in 1993. Ginsburg is the only sitting justice who was in the majority in every one of the first set of cases she heard on the court.

Fewer of Ginsburg’s first set of cases were decided by a unanimous Supreme Court than Thomas’, with 10. Also unlike Thomas, who had no 5-4 decisions in his first set of cases, Ginsburg had two. She authored the first, Ratzlaf v. United States, which dealt with criminal bank fraud. The majority in that case was ideologically mixed, with Stevens, Kennedy, Scalia and Justice David Souter joining Ginsburg. Kennedy authored the second, United States v. James Daniel Good Real Property, which examined forfeiture rules for property associated with criminal violations. Ginsburg was in the majority, along with Kennedy and the liberal justices Souter, Stevens and Blackmun.

Focusing on voting relationships, at one end of the spectrum Ginsburg voted in the opposite direction from two justices – Blackmun and Thomas — five times. Contrastingly, she was closest to Souter, who only voted once in the direction opposite to hers. These early pictures of Ginsburg’s and  Thomas’ voting behavior already begin to portend how they will decide cases, and which justices they will often side with, throughout their tenure on the court.

Fast-forwarding to 2005, we next look to Chief Justice John Roberts’ first set of decisions on the court.

Roberts was in dissent twice and in the majority 23 times in his first 25 decisions. He voted on the same side as Scalia in each of these decisions. He voted in the direction opposite to Stevens’ most often, with five such instances. Roberts was also involved in two 5-4 decisions in his first set of cases. He was in the conservative majority for the first, Brown v. Sanders, an Eighth Amendment capital-punishment case, along with Scalia, Justice Sandra Day O’Connor, Kennedy and Thomas. Roberts was in dissent in the other case, Central Va. Community College v. Katz, which looked at sovereign immunity as a defense in bankruptcy proceedings, joining conservatives Scalia, Thomas and Kennedy. These decisions early in Roberts’ career on the Supreme Court already aligned him with the more conservative justices and placed him in opposition to the court’s liberals.

Now focusing on President Donald Trump’s nominees to the Supreme Court, the timing of Justice Neil Gorsuch’s nomination differed a bit from the other justices previously described, as he began his career on the court toward the end of a term rather than at the beginning.

Gorsuch dissented four times in this set of decisions and he was in the majority on 20 occasions. At both ends of the spectrum, he voted on the opposite side from liberal Justices Stephen Breyer and Sonia Sotomayor eight times, and he was only once on the opposite side of a vote from Thomas. Because Gorsuch began his work on the court toward the end of the 2016-2017 term, and the court tends to decide its more contentious cases near the end of its terms, his first set of decisions involved more 5-4 votes than the first sets of any of the other justices, with five. From the 2016-2017 term, he was in dissent in McWilliams v. Dunn along with conservatives Justice Samuel Alito, Roberts and Thomas. In the second 5-4 decision he was in a conservative majority along with Kennedy, Roberts, Alito and Thomas in California Public Employees’ Retirement System v. ANZ Securities, Inc. The majority composition was the same for the court’s 5-4 decision in Davila v. Davis. At the beginning of the 2017-2018 term, Gorsuch was in dissent in Artis v. District of Columbia along with conservatives Thomas, Alito and Kennedy, and he authored the majority opinion in Murphy v. Smith, which was joined by Roberts, Alito, Thomas and Kennedy. In Gorsuch’s case, we can see his conservative contours taking shape with this early set of decisions.

Kavanaugh

Kavanaugh’s first set of decisions places him to the right of the Supreme Court, but he doesn’t align with the right to the same degree as some of his more senior colleagues on the court.

Kavanaugh aligned most closely with Roberts, as they both voted in the same direction in all but one of Kavanaugh’s first set of decisions. After Roberts, Kavanaugh voted in the same direction as Alito in all but two instances and Breyer in all but three instances. This places Kavanaugh in an interesting space that might, at least initially, not be as far to the right as some of his conservative allies on the court.

As previously mentioned, Kavanaugh has participated in two 5-4 decisions thus far. In both Nielsen and Bucklew, the Supreme Court split along ideological lines with Roberts, Alito, Thomas, Gorsuch and Kavanaugh in the majority, and Justices Elena Kagan, Ginsburg, Sotomayor and Breyer in dissent. These decisions also show the potential for a strong conservative majority when all five of the conservative justices’ views are aligned.

To examine Kavanaugh’s voting alignments at a more granular level, we can look at his agreement levels with each of the individual justices. The justices are split into the liberal and conservative sets. The figures show when Kavanaugh was in the majority or dissent on the X-axis, and when each of the other justices was in the majority and dissent on the Y-axis. The justices’ votes are aligned when they are both in majority or dissent (quadrants four and two), and they are not aligned when one is in majority and the other is in dissent (quadrants one and three).

Kavanaugh voted along the same lines as Breyer more often than with any of the other liberal justices on the Court, at almost 86 percent of the time so far this term. He then voted alongside Kagan in 81 percent of the decisions in which he participated. Kavanaugh next aligned with both Ginsburg and Sotomayor just over 76 percent of the time so far this term.

These percentages of association with the liberal justices become even more meaningful when compared with the same figures for the conservative justices.

Kavanaugh voted on the same side as Roberts more often than with any of the other justices, at approximately 95 percent of the time. He voted alongside Alito the next most often, at 90 percent of the time. The somewhat surprising finding is that he voted with Breyer more often than with Gorsuch or Thomas. He voted with Gorsuch in 80.95 percent of his votes, which is the same frequency of voting alignment he shared with Kagan. Kavanaugh voted equally least frequently with Thomas, Ginsburg and Sotomayor, all at just over 76 percent of the time.

Although Kavanaugh is perhaps a milder conservative than expected at this point in the 2018-2019 term, he sided with the conservatives in the two cases in which his vote made the biggest difference – Bucklew v. Precythe and Nielsen v. Preap. It will not be surprising to see Kavanaugh side with the conservatives in these highly contentious cases, but it will be interesting to see if Kavanaugh and Roberts (whose possible shift to a more moderate position on the court was discussed in a recent post) make up the more moderate end of the conservative spectrum, with Gorsuch, Alito and Thomas more toward the edge of the continuum.

Voting composition figures for the remaining justices’ first set of votes can be found below.

This post was originally published at Empirical SCOTUS.

The post Empirical SCOTUS: Is Kavanaugh as conservative as expected? appeared first on SCOTUSblog.

The IRS Tried to Take on the Ultrawealthy. It Didn’t Go Well.

On April 7, 2019 By admin

• Breaking News

by Jesse Eisinger and Paul Kiel

On June 30, 2016, an auto-parts magnate received the kind of news anyone would dread: The Internal Revenue Service had determined he had engaged in abusive tax maneuvers. He stood accused of masking about $5 billion in income. The IRS wanted over $1.2 billion in back taxes and penalties.

The magnate, Georg Schaeffler, was the billionaire scion of a family-owned German manufacturer and was quietly working as a corporate lawyer in Dallas. Schaeffler had extra reason to fear the IRS, it seemed. He wasn’t in the sights of just any division of the agency but the equivalent of its SEAL Team 6.

In 2009, the IRS had formed a crack team of specialists to unravel the tax dodges of the ultrawealthy. In an age of widening inequality, with a concentration of wealth not seen since the Gilded Age, the rich were evading taxes through ever more sophisticated maneuvers. The IRS commissioner aimed to stanch the country’s losses with what he proclaimed would be “a game-changing strategy.” In short order, Charles Rettig, then a high-powered tax lawyer and today President Donald Trump’s IRS commissioner, warned that the squad was conducting “the audits from hell.” If Trump were being audited, Rettig wrote during the presidential campaign, this is the elite team that would do it.

The wealth team embarked on a contentious audit of Schaeffler in 2012, eventually determining that he owed about $1.2 billion in unpaid taxes and penalties. But after seven years of grinding bureaucratic combat, the IRS abandoned its campaign. The agency informed Schaeffler’s lawyers it was willing to accept just tens of millions, according to a person familiar with the audit.

How did a case that consumed so many years of effort, with a team of its finest experts working on a signature mission, produce such a piddling result for the IRS? The Schaeffler case offers a rare window into just how challenging it is to take on the ultrawealthy. For starters, they can devote seemingly limitless resources to hiring the best legal and accounting talent. Such taxpayers tend not to steamroll tax laws; they employ complex, highly refined strategies that seek to stretch the tax code to their advantage. It can take years for IRS investigators just to understand a transaction and deem it to be a violation.

Once that happens, the IRS team has to contend with battalions of high-priced lawyers and accountants that often outnumber and outgun even the agency’s elite SWAT team. “We are nowhere near a circumstance where the IRS could launch the types of audits we need to tackle sophisticated taxpayers in a complicated world,” said Steven Rosenthal, who used to represent wealthy taxpayers and is now a senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.

Because the audits are private — IRS officials can go to prison if they divulge taxpayer information — details of the often epic paper battles between the rich and the tax collectors are sparse, with little in the public record. Attorneys are also loath to talk about their clients’ taxes, and most wealthy people strive to keep their financial affairs under wraps. Such disputes almost always settle out of court.

But ProPublica was able to reconstruct the key points in the Schaeffler case. The billionaire’s lawyers and accountants first crafted a transaction of unusual complexity, one so novel that they acknowledged, even as they planned it, that it was likely to be challenged by the IRS. Then Schaeffler deployed teams of professionals to battle the IRS on multiple fronts. They denied that he owed any money, arguing the agency fundamentally misunderstood the tax issues. Schaeffler’s representatives complained to top officials at the agency; they challenged document requests in court. At various times, IRS auditors felt Schaeffler’s side was purposely stalling. But in the end, Schaeffler’s team emerged almost completely victorious.

His experience was telling. The IRS’ new approach to taking on the superwealthy has been stymied. The wealthy’s lobbyists immediately pushed to defang the new team. And soon after the group was formed, Republicans in Congress began slashing the agency’s budget. As a result, the team didn’t receive the resources it was promised. Thousands of IRS employees left from every corner of the agency, especially ones with expertise in complex audits, the kinds of specialists the agency hoped would staff the new elite unit. The agency had planned to assign 242 examiners to the group by 2012, according to a report by the IRS’ inspector general. But by 2014, it had only 96 auditors. By last year, the number had fallen to 58.

The wealth squad never came close to having the impact its proponents envisaged. As Robert Gardner, a 39-year veteran of the IRS who often interacted with the team as a top official at the agency’s tax whistleblower office, put it, “From the minute it went live, it was dead on arrival.”

Most people picture IRS officials as all-knowing and fearsome. But when it comes to understanding how the superwealthy move their money around, IRS auditors historically have been more like high school physics teachers trying to operate the Large Hadron Collider.

That began to change in the early 2000s, after Congress and the agency uncovered widespread use of abusive tax shelters by the rich. The discovery led to criminal charges, and settlements by major accounting firms. By the end of the decade, the IRS had determined that millions of Americans had secret bank accounts abroad. The agency managed to crack open Switzerland’s banking secrecy, and it recouped billions in lost tax revenue.

The IRS came to realize it was not properly auditing the ultrawealthy. Multimillionaires frequently don’t have easily visible income. They often have trusts, foundations, limited liability companies, complex partnerships and overseas operations, all woven together to lower their tax bills. When IRS auditors examined their finances, they typically looked narrowly. They might scrutinize just one return for one entity and examine, say, a year’s gifts or income.

Belatedly attempting to confront improper tax avoidance, the IRS formed what was officially called the Global High Wealth Industry Group in 2009. “The genesis was: If you think of an incredibly wealthy family, their web of entities somehow gives them a remarkably low effective tax rate,” said former IRS Commissioner Steven Miller, who was one of those responsible for creating the wealth squad. “We hadn’t really been looking at it all together, and shame on us.”

The IRS located the group within the division that audits the biggest companies in recognition of the fact that the finances of the 1 percent resemble those of multinational corporations more than those of the average rich person.

The vision was clear, as Doug Shulman, a George W. Bush appointee who remained to helm the agency under the Obama administration, explained in a 2009 speech: “We want to better understand the entire economic picture of the enterprise controlled by the wealthy individual.”

It’s particularly important to audit the wealthy well, and not simply because that’s where the money is. That’s where the cheating is, too. Studies show that the wealthiest are more likely to avoid paying taxes. The top 0.5 percent in income account for fully a fifth of all the underreported income, according to a 2010 study by the IRS’ Andrew Johns and the University of Michigan’s Joel Slemrod. Adjusted for inflation, that’s more than $50 billion each year in unpaid taxes.

The plans for the wealth squad seemed like a step forward. In a few years, the group would be staffed with several hundred auditors. A team of examiners would tackle each audit, not just one or two agents, as was more typical in the past. The new group would draw from the IRS’ best of the best.

That was crucial because IRS auditors have a long-standing reputation, at least among the practitioners who represent deep-pocketed taxpayers, as hapless and overmatched. The agents can fritter away years, tax lawyers say, auditing transactions they don’t grasp. “In private practice, we played whack-a-mole,” said Rosenthal, of the Tax Policy Center. “The IRS felt a transaction was suspect but couldn’t figure out why, so it would raise an issue and we’d whack it and they would raise another and we’d whack it. The IRS was ill-equipped.”

The Global High Wealth Group was supposed to change that. Indeed, with all the fanfare at the outset, tax practitioners began to worry on behalf of their clientele. “The impression was it was all going to be specialists in fields, highly trained. The IRS would assemble teams with the exact right expertise to target these issues,” Chicago-based tax attorney Jenny Johnson said.

The new group’s first moves spurred resistance. The team sent wide-ranging requests for information seeking details about their targets’ entire empires. Taxpayers with more than $10 million in income or assets received a dozen pages of initial requests, with the promise of many more to follow. The agency sought years of details on every entity it could tie to the subject of the audits.

In past audits, that initial overture had been limited to one or two pages, with narrowly tailored requests. Here, a typical request sought information on a vast array of issues. One example: a list of any U.S. or foreign entity in which the taxpayer held an “at least a 20 percent” interest, including any “hybrid instruments” that could be turned into a 20 percent or more ownership share. The taxpayer would then have to identify “each and every current and former officer, trustee, and manager” from the entity’s inception.

Taxpayers who received such requests recoiled. Attacking the core idea that Shulman had said would animate the audits, their attorneys and accountants argued the examinations sought too much information, creating an onerous burden. The audits “proceeded into a proctology exam, unearthing every aspect of their lives,” said Mark Allison, a prominent tax attorney for Caplin & Drysdale who has represented taxpayers undergoing Global High Wealth audits. “It was extraordinarily intrusive. Not surprisingly, these people tend to be private and are not used to sharing.”

Tax practitioners took their concerns directly to the agency, at American Bar Association conferences and during the ABA’s regular private meetings with top IRS officials. “Part of our approach was to have private sit-downs to raise issues and concerns,” said Allison, who has served in top roles in the ABA’s tax division for years. We were “telling them this was too much, unwieldy and therefore unfair.” Allison said he told high-ranking IRS officials, “You need to rein in these audit teams.”

For years, politicians have hammered the IRS for its supposed abuse of taxpayers. Congress created a “Taxpayer Bill of Rights” in the mid-1990s. Today, the IRS often refers to its work as “customer service.” One result of constant congressional scrutiny is that senior IRS officials are willing to meet with top tax lawyers and address their concerns. “There was help there. They stuck their necks out for me,” Allison said.

The IRS publicly retreated. Speaking at a Washington, D.C., Bar Association event in February 2013, a top IRS official, James Fee, conceded the demands were too detailed and long, telling the gathering that the agency has “taken strides to make sure it doesn’t happen again.” The Global High Wealth group began to limit its initial document requests.

The lobbying campaign, combined with the lack of funding for the group, took its toll. One report estimated that the wealth team had audited only around a dozen wealthy taxpayers in its first two and a half years. In a September 2015 report, the IRS’ inspector general said the agency had failed to establish the team as a “standalone” group “capable of conducting all of its own examinations.” The group didn’t have steady leadership, with three directors in its first five years. When it did audit the ultrawealthy, more than 40 percent of the reviews resulted in no additional taxes.

The inspector general also criticized the IRS broadly — not just its high-wealth team — for not focusing enough on the richest taxpayers. In 2010, the IRS as a whole audited over 32,000 millionaires. By 2018, that number had fallen to just over 16,000, according to data compiled by Syracuse University. Audits of the wealthiest Americans have collapsed 52 percent since 2011, falling more substantially than audits of the middle class and the poor. Almost half of audits of the wealthy were of taxpayers making $200,000 to $399,000. Those audits brought in $605 per audit hour worked. Exams of those making over $5 million, by contrast, brought in more than $4,500 an hour.

The IRS didn’t even have the resources to pursue millionaires who had been hit with a hefty tax bill and simply stiffed Uncle Sam. It “appeared to no longer emphasize the collection of delinquent accounts of global high wealth taxpayers,” a 2017 inspector general report said.

In recent years, the number of Global High Wealth audits has been higher — it closed 149 audits in the last year — but tax lawyers and former IRS officials say even that improvement is deceptive. A major reason is that the audits are much less ambitious. “They were longer at the beginning and shorter as the process moved on,” Johnson, the tax attorney, said.

Inside the IRS, agents seethed. “The whole organization was very frustrated,” Gardner said. “They were just really not sure what the hell their mission was, what they were supposed to be accomplishing.”

Georg Schaeffler, 54, has flowing salt-and-pepper hair that makes him look like he could’ve been an actor on the 1980s TV show “Dynasty.” The impression is offset by the wire rim glasses he wears and by the bookish disposition of a person who, as a teenager, once asked for a copy of the German Constitution as a present.

As a younger man, Schaeffler tried to escape his legacy. He left Germany and the family company at a young age and lit out for the American West. He was trying to make it on his own “where people don’t know who you are,” as he would tell a reporter for a magazine profile years later. Some might escape to Texas to live a bit wild. Schaeffler became a corporate lawyer.

Schaeffler’s law firm colleagues didn’t know much more than that he spoke with an accent, and certainly not that he was vastly wealthy. That is, until he landed on the Forbes list of global billionaires. Rueful at the loss of his privacy, Schaeffler once declared: “I hate Forbes.”

The family’s riches stemmed from ball bearings and other automobile parts manufactured by the Schaeffler Group, which was founded by Schaeffler’s father and then passed to his mother after his father died. By 2006, Georg (pronounced GAY-org) owned 80 percent of the enterprise and his mother the remaining 20 percent. (As a Texas resident at that time, Schaeffler was required to pay U.S. income taxes.)

He very nearly lost it all. In 2008, Schaeffler Group made a big mistake. It offered to buy Continental AG, a tiremaker, just days before the stock and credit markets experienced their worst crisis since the Great Depression. Even as Continental’s stock price crashed, Schaeffler was legally obligated to go through with its purchase at the much higher pre-crash price.

Schaeffler Group flirted with bankruptcy and pleaded for aid from the German government. The media began to pay closer attention to the private company and the low-profile family that ran it. German press accounts dismissed Schaeffler’s mother as the “billionaire beggar” for seeking a bailout and pilloried her for wearing a fur coat at a ski race while seeking government help.

No German government aid came. The Schaeffler Group teetered, and the family’s fortune plummeted from $9 billion to almost zero. Amid the crisis over Continental, Georg accepted his fate and took up a more prominent role at the company; he’s now the chairman of its supervisory board.

To pay for Continental, Schaeffler Group borrowed about 11 billion euros from a consortium of banks. At the time, Schaeffler’s lenders, including Royal Bank of Scotland, were desperate, too, having suffered enormous losses on home mortgages. They wanted to avoid any more write-downs that might result if the company defaulted on the loans. So in 2009 and 2010, Schaeffler’s lenders restructured the debt in a devilishly complex series of transactions.

By 2012, these maneuvers had caught the eye of the Global High Wealth group. Paul Doerr, an experienced revenue agent, would head the audit. Eventually, the IRS discerned what it came to believe was the transaction’s essence: The banks had effectively forgiven nearly half of Schaeffler’s debt.

To the IRS, that had significant tax implications. In the wealth team’s view, Georg Schaeffler had received billions of dollars of income — on which he owed taxes.

The auditors’ view reflects a core aspect of the U.S. tax system. Under American law, companies and individuals are liable for taxes on the forgiven portion of any loan.

This frequently comes up in the housing market. A homeowner borrows $100,000 from a bank to buy a house. Prices fall and the homeowner, under financial duress, unloads it for $80,000. If the bank forgives the $20,000 still owed on the original mortgage, the owner pays taxes on that amount as if it were ordinary income.

This levy can seem unfair since it often hits borrowers who have run into trouble paying back their debts. The problem was particularly acute during the housing crisis, so in late 2007, Congress passed a bill that protected most homeowners from being hit with a tax bill after foreclosure or otherwise getting a principal reduction from their lender.

Tax experts say the principle of taxing forgiven loans is crucial to preventing chicanery. Without it, people could arrange with their employers to borrow their salaries through the entire year interest-free and then have the employer forgive the loan at the very end. Voila, no taxable income.

The notion that forgiven debt is taxable applies to corporate transactions, too. That means concern about such a tax bill is rarely far from a distressed corporate debtor’s mind. “Any time you have a troubled situation, it’s a typical tax issue you have to address and the banks certainly understand it, too,” said Les Samuels, an attorney who spent decades advising corporations and wealthy individuals on tax matters.

But the efforts to avoid tax, in the case of Schaeffler and his lenders, took a particularly convoluted form. It involved several different instruments, each with multiple moving parts. The refinancing was “complicated and unusual,” said Samuels, who was not involved in the transaction. “If you were sitting in the government’s chair and reading press reports on the situation, your reaction might be that the company was on the verge of being insolvent. And when the refinancing was completed, the government might think that banks didn’t know whether they would be repaid.”

This account of the audit was drawn from conversations with people familiar with it, who were not authorized to speak on the record, as well as court and German securities filings. The IRS declined to comment for this story. Doerr did not respond to repeated calls and emails.

A spokesman for Schaeffler declined to make him available for an interview. “Mr. Schaeffler always strives to comply with the complex U.S. tax code,” the spokesman wrote in a statement, saying “the fact that the refinancing was with six independent, international banks in itself demonstrates that these were arm’s length, commercially driven transactions. The IRS professionally concluded the audit in 2018 without making adjustments to those transactions, and there is no continuing dispute — either administratively or in litigation — related to these matters.”

Schaeffler’s lenders never explicitly canceled the loan. The banks and Schaeffler maintained to the IRS that the loan was real and no debt had been forgiven.

The IRS came not to buy that. After years of trying to unravel the refinancing, the IRS homed in on what the agency contended was a disguise. The banks and Schaeffler “had a mutual interest in maintaining the appearance that the debt hadn’t gone away,” a person familiar with the transaction said. But the IRS believed the debt had, in fact, been canceled.

In the refinancing, the banks and Schaeffler had agreed to split the company’s debt, which had grown to 12 billion euros at that point, into two pieces: A senior loan, to be paid back first, worth about 7 billion euros and a junior piece worth about 5 billion euros.

Schaeffler’s income-producing assets were placed into the entity that held the senior debt. Schaeffler was required to repay the debt according to a schedule and to pay a meaningful interest rate: 4.25 percentage points above the rate his lenders charge each other to borrow money. In short, it appeared to be a relatively straightforward debt transaction.

The junior debt was another matter — and its provisions would raise the hackles of the IRS. To begin with, the entity that held the junior debt did not directly hold income-producing assets. There was no schedule of payments that Schaeffler had to make on the junior debt. He wasn’t obligated to make principal payments until the end of the loan’s term. And it carried a nearly nonexistent annual interest rate of 0.1 percentage points above prevailing interbank lending rates, plus an additional 7 percent per year, which Schaeffler could choose to defer and pay at the end of the term.

The banks attached two other provisions to the refinancing: A “Contingent Remuneration Payment” and a “Contingent Upside Instrument,” according to German securities filings. The two additions called for Schaeffler to make payments to the future performance of the company.

The IRS and Schaeffler’s team fought especially over the Contingent Upside Instrument. Its value was tied to the Schaeffler Group’s future profitability, just like a share of stock would be. The IRS argued that not only was this an equitylike sweetener to the banks, but that it tainted the entire junior portion of the debt. To the IRS, it looked like the banks had a claim on future payments from Schaeffler, but they didn’t know when they’d receive it — or even if they would ever get anything.

To the IRS, these steps all added up to the effective cancellation of about $5 billion worth of debt, for which the banks had received something in return. That something looked and acted very much like equity.

The Schaeffler audit was one of the biggest for the Global High Wealth group. The IRS assigned a larger than normal team to the exam. The agency would send 86 separate document requests to Schaeffler through July 2013.

But there were problems almost from the beginning, according to people familiar with the audit, who provided this account and chronology. The IRS examiners disagreed with one another over strategy. The debates sometimes spilled into the view of Schaeffler’s team. “I remember a tremendous amount of turnover from the exam team and infighting. They were not presenting a coherent message,” a person in the Schaeffler camp said.

By contrast, Schaeffler’s team of lawyers and accountants was large and unified. “These taxpayers aren’t exactly represented by H&R Block,” Gardner, the retired IRS official, said.

Schaeffler’s advisers threw as much as they could back at the agency. Document requests are typically voluntary at the outset. But at one point, an IRS auditor was frustrated at what the team saw as the Schaeffler team’s resistance and delays and demanded, “Would a summons help?” according to a person familiar with the exam. Schaeffler’s team complained about the perceived threat. The IRS scolded its employee, and Doerr, the lead auditor, apologized to the Schaeffler side, according to the person.

In another instance, the IRS could not get information it sought from Ernst & Young, the accounting firm, related to its advice to Schaeffler. So it sued the accounting firm in early 2014. Ernst & Young contended the material was privileged because it was prepared in anticipation of litigation. The IRS won in the U.S. District Court for the Southern District of New York, but Ernst & Young appealed.

In early November 2015, with the Ernst & Young appeal unresolved, top IRS officials gave the Schaeffler audit team the permission it was looking for. They allowed the auditors to notify Schaeffler that they believed he’d failed to disclose about $5 billion in income and that he could expect a $1.2 billion tax bill. That included some $200 million in penalties because the agency viewed the transaction as abusive.

Only days later, the IRS was dealt a defeat that would further hamstring its ability to press its case. On Nov. 10, the 2nd U.S. Circuit Court of Appeals reversed the district judge, slapping down the IRS’ efforts to get the Ernst & Young documents, ruling they were in fact protected by privilege. The IRS had no choice. It would have to proceed without the documents.

The IRS took solace that despite the adverse ruling on the documents, the appeals court appeared to bolster the IRS’ view of the transaction. Describing it as a “complex and novel refinancing,” the court said the consortium of banks “essentially insured” Schaeffler “by extending credit and subordinating its debt.” The opinion found that Schaeffler’s team had known that litigation over the transaction was “virtually inevitable,” underscoring the sense that the billionaire’s lawyers and accountants knew they were pushing legal limits.

The two sides wrangled even over routine procedural matters. The statute of limitations was about to run out. Usually the taxpayer voluntarily agrees to extend the time limit rather than antagonize the agents doing an audit. But Schaeffler’s team raised the prospect of refusing an extension. They ultimately relented, but succeeded in amping up the pressure on the auditors.

Even as the antagonism built between the two sides, the IRS showed deference to the Schaeffler camp. Doerr gave Schaeffler’s attorneys a heads-up that the agency was going to deliver bad news, an action that was viewed as overly solicitous, according to one person. It gave an opening for Schaeffler’s lawyers to raise their concerns with the audit team’s bosses. They expressed how wrongheaded they thought the IRS’ position was and how inappropriate its actions had been.

In June 2016, the IRS sent Schaeffler the official notice that the agency would seek unpaid tax and penalties.

Schaeffler’s attorneys continued to argue, often above the heads of the audit team, that the auditors’ interpretation was incorrect. They held conference calls with top IRS officials, saying the audit team had given the Schaeffler side mixed messages. Some on the team had assured Schaeffler’s attorneys that he would not face a large tax bill or be subject to a penalty. Top officials then met with the Global High Wealth team to discuss the issues. “The pushback is incredible,” one knowledgeable person recalled.

The pushback worked — and here’s where an audit is radically different from a court case. Court cases are typically accompanied by publicly available decisions and rulings that explain them in detail. By contrast, audits are shielded by the secrecy of the IRS’ process. They can end with no scrap of publicly available paper to memorialize key decisions. In August 2016, in Schaeffler’s case, officials several rungs up the IRS hierarchy told the Global High Wealth team to withdraw the penalty from its request.

Even without a penalty portion, Schaeffler would still owe the original $1 billion in taxes if the IRS maintained its contention that the banks had cancelled his debt. Schaeffler’s team then went to work on that, too. It succeeded. By 2017, the IRS had abandoned its assertion that debt had been transformed into equity. After six years on a hard-fought case, the agency had effectively given up.

The IRS had a few stray quibbles, so the agency said it required a payment in the “tens of millions,” according to two people familiar with the audit. There the trail goes dark. Tax experts say Schaeffler’s team would likely have appealed even that offer, which in many instances leads to further reductions in money owed, but ProPublica could not ascertain that that occurred.

Thanks in part to the U.S. government’s bailout of the auto industry and the global economic recovery, the Schaeffler Group’s business rebounded. Despite a recent dip in the car market, things have turned out OK for Georg Schaeffler. Today, Forbes estimates his fortune at over $13 billion.

Jerry Nadler Was Born to Battle Trump

On April 7, 2019 By admin

• Breaking News

Jerry Nadler and Donald Trump have a history. As Michael Daly has recounted in The Daily Beast, Trump approached Nadler in the 1980s, when Nadler was still a state assemblyman, and asked to build a skyscraper in his district. At 150 stories, it would have been the tallest building in the world, housing NBC’s new headquarters and some 5,700 apartments. Nadler said no. He wanted the city to use the site, which was on Manhattan’s Upper West Side, for a new affordable housing complex. Trump was furious. Not long after, he gave Nadler one of his typical derisive nicknames—“Fat Jerry.”

Trump, of course, did not know that three decades later, Nadler would be heading up a congressional committee with perhaps the most sweeping mandate—not to mention the clout and resources—to check his corrupt and inept administration. In March, as one of his first acts as chairman of the House Judiciary Committee, Nadler launched an expansive probe into Trump’s behavior as candidate and president. He has already sent more than 80 letters to individuals and entities, demanding documents that outline years of dealings with Trump. And in the days after Robert Mueller sent his report to the Department of Justice, Nadler made it clear that he would do everything in his power to ensure that his committee, the House, and ultimately the American people could see the full report and judge its implications and findings for themselves.

Nadler might seem like an unusual political leader to take on the role of presidential nemesis; he is thoughtful, thorough, and cerebral, a man of ideas—the opposite of Trump. But he knows the terrain better than most. He has sat on the Judiciary Committee for more than a quarter century, and spent most of that tenure on the subcommittee that oversees constitutional questions. He has watched Bill Clinton get impeached—and had a hand in not impeaching George W. Bush. But even for someone with Nadler’s wide range of experience, the House Judiciary Committee will be a tough battleground.

Because it deals with the most divisive issues, from abortion to gun rights to immigration to prison reform, Judiciary attracts the most conservative Republicans and the most liberal Democrats. The current Republican contingent is almost a rogues’ gallery of the more extreme Freedom Caucus bomb-throwers; Louie Gohmert, Jim Jordan, and Matt Gaetz are only the start. There are no thoughtful, moderate conservatives, as there were when Chairman Peter Rodino held hearings on the impeachment of Richard Nixon—no Tom Railsbacks, M. Caldwell Butlers, or William Cohens. The Democrats have some of their most liberal members on the committee, too, and some of their brightest stars—from Zoe Lofgren to Ted Deutch to Karen Bass and Caucus Chair Hakeem Jeffries, to Eric Swalwell, Ted Lieu, and Jamie Raskin. Nadler, however, stands out—not only for his keen legal mind, but because he understands the magnitude of what he is now required to do, and the man he is going up against.

Jerrold “Jerry” Nadler was born in Brooklyn, on June 13, 1947, almost a year to the day after Donald Trump, who was born, just one borough over, in Queens, on June 14, 1946. But while Trump’s family was wealthy, Nadler had a far more modest upbringing. His father, Emanuel, was an office manager for a gasoline distribution business. After Stuyvesant High, he went to Columbia on a Pulitzer scholarship, and to law school at night at Fordham while serving in the New York State Assembly. (They didn’t overlap, but Trump also spent time at Fordham before transferring to Wharton.) In 1992, after 16 years in the State Assembly, and two unsuccessful bids for higher office, the congressman representing Manhattan’s West Side, Ted Weiss, died days before the primary, and Nadler was chosen to replace him.

I met Nadler soon after he arrived in Congress in 1992. He was clearly smart and politically savvy, and very serious, but I am not sure I would have forecast his eventual rise to prominence. His congressman growing up was Emanuel Celler, a legendary champion of civil rights and liberties who chaired the Judiciary Committee for 22 years. Nadler idolized him and became interested in civil liberties himself, so when he entered Congress, he gravitated to Judiciary’s Subcommittee on the Constitution, Civil Rights, and Civil Liberties, which he chaired, or served on as ranking member, for 13 years, compiling a reliably liberal record to match his district, which snakes along Manhattan’s West Side and into Brooklyn.

In 1998, not long after Nadler was elected to his fourth term, the committee voted out articles of impeachment on President Clinton. Its chairman at the time, Illinois Republican Henry Hyde, had hoped to make the process careful, constrained, and serious—and bipartisan enough to generate public support. (“You don’t impeach him for a peccadillo,” he said.) Of course, the process was anything but. The Judiciary Committee became a snake pit of partisan acrimony, led by a highly aggressive and virulently anti-Clinton chief counsel whom Hyde had chosen. At the time, Nadler—who became a liberal hero for his tough defense of Clinton and attacks on Hyde’s process—referred to it as “a partisan railroad job” and to Ken Starr as a “jerk.” He told The New York Times he wanted either to change the law that allows an independent counsel to look into the president’s misdeeds, or to abolish it altogether.

Nadler later resisted calls for hearings to impeach George W. Bush and Dick Cheney, saying that even if Bush had committed impeachable offenses, the partisan atmosphere—and the timing, just before a presidential election—would make it unfeasible.

Today, he is weighing many of the same factors, and facing down a Congress more bitterly divided than any he has ever seen. When Trump was first elected, Republican Bob Goodlatte chaired the Judiciary Committee and wasted no time in making it as fiercely partisan and Trump-friendly as possible. As Nadler told me when we talked in March, the day before Mueller concluded his investigation, “[Goodlatte] and his colleagues did anything they could to hinder any attempts to hold Trump accountable.” Nadler sought out bipartisan compromise and action where he could—he worked with ranking Republican Doug Collins of Georgia on criminal justice reform and music licensing, for example—but sharp partisan and tribal differences carry the day on this as on all other congressional committees.

Attorney General William Barr’s summary of the Mueller report was far from a “total exoneration,” as Trump and his loyalists have proclaimed. We do not know whether additional evidence will unearth connections between Trump campaign staff and Russia (or WikiLeaks), nor do we know what precisely Mueller told Barr about whether Trump had obstructed justice. We are still waiting for action from the Southern District of New York and for conclusions from the multiple other investigations still underway. As a result, we do not know if or when the Judiciary Committee will initiate some kind of impeachment inquiry. (One can imagine Nadler initiating one, if only to provide the appropriate leverage he and his colleagues would need to access the full report.) What we do know, however, is what Nadler has said about the man in the White House. “We are faced with a president who poses the most significant threat to our values since the Civil War,” he told me—threats to the rule of law, the free press, an independent judiciary, and the panoply of democratic institutions.

It will not be easy for Nadler or for his counterparts on other House Committees—including Adam Schiff at Intelligence, Elijah Cummings at Oversight, Maxine Waters at Banking, Richard Neal at Ways and Means, and Eliot Engel at Foreign Affairs—to hold this administration accountable. So far, it has stonewalled requests for documents and testimony, and we will soon see a flurry of subpoenas and, undoubtedly, duels about separation of powers going to the courts.

To help, Nadler has staffed up, with many heavy hitters who have left lucrative legal posts to join the committee, and two special counsels, Norm Eisen, former Obama White House ethics czar, and Barry Berke, a noted New York lawyer who has specialized in white-collar crime. They will help navigate the issues flowing from Mueller and the other investigations into Trump, along with the many other questions on Judiciary’s docket in the coming months: daca, antitrust, and the Voting Rights Act are only a few. There have already been hearings on the president’s power to issue pardons and to declare states of emergency. For Nadler, these are no less important than his mandate to counter the momentum toward autocracy and to shore up democratic institutions and practices under siege.

Trump and his acolytes are sure to launch attacks more vicious than “Fat Jerry.” Nadler has not had to deal much with such personal scrutiny before. But like Peter Rodino before him, this chairman of the Judiciary Committee seems ready to rise to the occasion when the times demand it.