How did concern about abusive tax shelters emerge?
Under U.S. law, corporations are allowed to keep two sets of books — a bullish book income report released publicly to shareholders and a lowball tax income report provided to the IRS. Schedule M on the corporate tax return is where companies reconcile differences between what is reported to Wall Street and what is reported to the IRS. In the late 1990’s, officials at the Treasury Department noticed that the gap between book and tax income — known as “Schedule M gap” — was widening. “There’s always been a gap, but the gap gapped,” says former Treasury Secretary Lawrence Summers. “There was discontinuity. The income to shareholders went up rapidly. The taxable income reported to the IRS stayed the same, and in some years, actually declined. It was pretty obvious that the reason had to be more shelter[s] and activity of various kinds.
