Tax Loophole Reported, Closed


August 23, 2002


BOB GARFIELD: We're back with On the Media. I'm Bob Garfield.

BROOKE GLADSTONE: And I'm Brooke Gladstone. This summer a couple of stunning journalism successes. Reporters from South Florida's Sun Sentinel tracked down 9 kids lost by the state's child welfare system. They said it really wasn't very hard. And then up north a New York Times reporters identified a tax loophole for the very rich and got it closed in a mere 18 days. So it seems that despite the budget cutters rampaging through the nation's newsrooms, investigative reporting is not dead -- yet. We thought we'd take a look at the tax loophole case, and so we invited Times reporter David Cay Johnston. Welcome to the show.

DAVID CAY JOHNSTON: Thank you.

BROOKE GLADSTONE: So this is a very ingenious loophole. Basically the very rich -- we mean people with more than 10 million bucks, usually much more -- were buying life insurance at inflated prices with the intention of passing that wealth on to their heirs and bypassing the 50 percent tax on inheritance at that level.

DAVID CAY JOHNSTON: You guy insurance at one price, and for the purposes of the gift tax, you declare a different price, and then you assign that portion of the gift to your spouse -- there's no gift tax between spouses -- and through this confidential mechanism the details of which we never were able to learn, the gift tax was made to go away. And this allowed you therefore to pass enormous amounts of wealth forward, completely going around the, the gift and estate tax system.

BROOKE GLADSTONE: Why was this loophole devised to begin with?

DAVID CAY JOHNSTON:When the income tax came into eff--into effect in 1913 there was an exemption for life insurance so that the widows and orphans of industrial workers killed in, in accidents wouldn't have to pay taxes on the one-time windfall they might get. But over the years, the life insurance loophole has been stretched and, and pushed out of all proportion so that today the primary beneficiaries are the very, very wealthiest Americans.

BROOKE GLADSTONE:Tell me how you came upon this story. First of all, how did you get the lawyers and tax mavens to talk to you about it and, and even seem rather pleased with themselves? Where did it start?

DAVID CAY JOHNSTON: Oh, it started with a tip, and that tip didn't particularly go anywhere, but then I got a second tipster who was outraged about this, and that tipster came back to me again and again when he wanted to with in--more information to help me understand this. And then I went from person to person. I looked up some government records, and eventually went to the, one of the creators of this plan, Jonathan G. Blattmachr who is an estate attorney in New York of great renown. He's a legend in his own time among his peers. And understandably he wasn't particularly eager to talk about this, but as other lawyers would fill me in on little details of this, there came a point when Mr. Blattmachr realized I had enough to do a story, and then he did something that was unusual but I, I would think very smart -- he decided that if we were going to write a story that he believed would result in his-- in this loophole being shut down, he was going to look smart! And he was somewhat more cooperative, and talked to us a number of times.

BROOKE GLADSTONE: How much money do you think was lost to the treasury because of this device?

DAVID CAY JOHNSTON:Every lawyer that I talked to said they believed there had been billions of dollars put into these policies. So we're talking tens of billions of dollars possibly. Certainly we're talking about billions of dollars.

BROOKE GLADSTONE: What did the IRS official say to you when you explained it to him?

DAVID CAY JOHNSTON:The lawyer who I talked to at the IRS was mystified by this. He, he didn't grasp it at all and it was clear that he was very familiar with insurance and tax avoidance devices but not this one at all. Now after our story ran, Pamela Olson who is the chief tax policy official in the Treasury Department put out a statement saying that any scheme -- any scheme -- to understate the value of benefits for income and gift tax purposes won't be respected.

BROOKE GLADSTONE:Does this happen to you a lot? Do you write stories and then suddenly boom, the government acts to correct whatever it is you've exposed?

DAVID CAY JOHNSTON: You know that's all over the ballpark. I, I've written stories where the government immediately stood up and did something and others where, where it did nothing, and there are a number of businessmen whom we've named in the New York Times who don't pay taxes, don't withhold taxes from their workers' paychecks. We've named a couple dozen of them. In one court filing the government's admitted there are 1500 of them. In another document there, it suggested there's 7500 of them -- and not one of these people has been prosecuted.

BROOKE GLADSTONE:And so-- I mean how do you feel standing on the sidelines when you see something like that? Do you think what does a person have to write before they get off the dime in Washington?

DAVID CAY JOHNSTON: Well I, I think I look at it a little more systemically. Why is the government treating enforcement of the tax laws differently than other laws? If I had written a story in the New York Times that said here are the names of a group of drug dealers and the street corners they operate on who say there's no law against selling drugs, I am sure the cops would have been on those guys in the morning the story appeared, before you'd finished your coffee, reading the story.

BROOKE GLADSTONE: Do you see this as your mission as a journalist to get these kinds of results on a regular basis?

DAVID CAY JOHNSTON:Well I see it as my job to bring things to public light. I think the, the system is: I bring it to people's attention -- things they don't know. Then it's up to either the government to act or people to say they want the government to act or for people to say nah, thanks a lot -- we're not interested and go on about their way.

BROOKE GLADSTONE:David Cay Johnston covers taxes and pensions for the New York Times. He won the Pulitzer Prize for beat reporting in 2001. Well thanks again.

DAVID CAY JOHNSTON: Take care.