by Linda Beale
Going Dark–not just an SEC issue, when companies keep their tax classification secret
Today’s Times includes an interesting piece by Floyd Norris about the problem of companies that are neither private nor public but have (or claim to have) few enough public investors that the SEC allows them to “go dark”–quit reporting their financial statements, or anything else for that matter, to the public at large or even their few public investors–even though at least some of their shares continue to be publicly traded. See Floyd Norris, Going Dark, and Putting Blindfolds on Investors, New York Times (July 13, 2013), at B1.
Norris is focused on the way that allows companies to take advantage of those (purportedly) few public investors by activities that “smell like insider trading.” Id. He reports on Equity Inns, a hotel owner acquired by Goldman in 2007, which had (and has) publicly traded preferred shares outstanding, apparently amounting to about 1% of the assets. They’d been issued with par value of $25 and paid a dividend of 8.75% or 9%–now they are trading at less than $10 and Goldman has halted the dividend payments. Norris notes that Goldman was the purchaser and the lender on the deal, so “it could restructure the debt in ways that would essentially give the debt holders–Goldman, that is–the ability to get everything, leaving the preferred shareholdes with nothing.” Id. The preferred share price declined, and then started to rise, and then Goldman announced that an affiliate had acquired 35% of the outstanding preferred. Preferred shareholders, perhaps feeling cheated, are trying to get the SEC to require public accounting, since the company has more than 300 shareholders of record. The company is trying to get the SEC to give it an exemption, with its lawyer claiming that “the issuer of the preferred shares … was simply a real estate investment trust [REIT, in tax parlance] with a small economic interest in 130 hotels and no employees.” The SEC asked for public comment. Norris adds that “public filings would make it easier to see what was going on, but Boldman would still have all the cards and might find ways to assure that the preferred holders received little or nothing from their investment.” Norris also points out the oddity that the company’s Web site seems to discuss its status as a REIT, but Goldman claims that it “gave up its REIT status years ago and disclosed that in financial statements that are not public.”
So here’s my thought. What reason can there be for not requiring publicly available information on federal income tax classification for all businesses that operate in this country?
I’ve never found the justifications offered for confidentiality of business tax returns convincing in the first place: they usually claim that “trade secrets” would be revealed, but one suspects that the secrets they don’t want revealed and perused over by journalists, tax practitioners (especially academics) and just plain citizens are those showing just how much they are taking advantage of tax expenditures/subsidies to make huge profits for their owners/managers while starving their workers.
Those proffered rationales about trade secrets certainly don’t support allowing any company to have one of the tax-privileged classifications such as partnership or S corporation or REIT or RIC status without having that status be public information. Certainly the investors in those preferred shares of the Goldman affiliate at least have a right to know its tax status. Beyond that, the public has a right to know just who is using what tax status (and how they are using it). How can people reasonably participate in public dialogues about tax policy if they are so ill-informed about major players in the system? As it is, in the case of the Goldman-purchased company, there is no way for any lay person to substantiate or disprove Goldman’s claim about REIT status. And there are very large privately held companies, like Mars, Inc., that do not reveal their tax status–and won’t even if you send them an inquiry asking them about it.
In this post-Citizens United period, when corporations can spend money to directly influence election campaigns under the Supreme Court’s absurd “first amendment” holding that corporations are persons, too, there is even less justification for secrecy about tax status than there might have been before. This is one thing that could be easily legislated–a bill that creates a public registry of all businesses by federal income tax classification. It seems to me that sustaining democracy is much more important than sustaining tax-status secrecy.
cross posted with ataxingmatter/