How Major Corporations Use Deductions and Credits : Study Lists Firms Not Paying Taxes

WASHINGTON — More than three dozen of the nation’s leading corporations legally used deductions and credits to eliminate their federal income tax liability and claim a tax refund in each of the last four years, a study group said Thursday.

Citizens for Tax Justice, a Washington-based organization financed in part by labor unions, said 42 of 250 companies surveyed had four-year profits totaling $59 billion and paid zero income tax. During the period, the report said, the companies actually received refunds of more than $2 billion from taxes paid in previous years.

The report, third in an annual series compiled by the organization, said 130 of the 250 companies were able to legally avoid federal income taxes during at least one of the last five years.

Average Tax Rate: 14.9%

The 250 companies paid an average tax rate of 14.9% on profits that totaled $388 billion during the 1982-85 period. That is only slightly higher than the rate paid by an average family with annual income of $45,000. More than 100 of the 250 paid less than 10% during the period.

The report was made public as negotiators from the Senate and House began work on a tax overhaul plan whose features are likely to include a strict crackdown on the ability of profitable companies to escape taxation.

“Nothing makes the case for tax reform better than this scandalous, ongoing tax avoidance by money-making companies,” said Robert S. McIntyre, director of federal tax policy for Citizens for Tax Justice. “Only by making these big corporations pay their fair share will middle-income taxpayers get a fair shake from the tax reform bill.”

At the top of the list of “corporate freeloaders,” the group said, was AT&T.;

Singles Out AT&T;

“The leader at making money off the tax system over the past four years has been none other than the company with the largest domestic profits: AT&T;,” the report said.

With reported profits of almost $25 billion between 1982 and 1985, AT&T;, the group charged, “paid not one penny in federal income taxes,” while receiving $636 million in federal refunds.

Herb Linnen, a spokesman for AT&T;, said the Citizens for Tax Justice reports are flawed because “they misread financial statements and fail to take into account deferred taxes.”

Linnen said that over the four-year period, the company incurred $750 million in tax liabilities. He declined to say how much AT&T; paid, but said that only in 1984, due to breakup of the Bell System, did the company have a net loss for tax purposes.

Draws From Public Records

However, the report points out that the figures do not take into account taxes that are deferred until some future year. Most figures in the report are based on documents the companies prepare for stockholders and file with the Securities and Exchange Commission.

The report said other companies with more than $50 million in net tax refunds from 1982 to 1985 were: DuPont, $179 million in refunds; Boeing, $121 million; General Dynamics, $91 million; Pepsico, $89 million; General Mills, $79 million; Transamerica Corp., $73 million; Texaco, $68 million; International Paper, $60 million, and Greyhound and IC Industries, $54 million each.

“Altogether, this ‘top 10’ list of corporate freeloaders earned $39.7 billion before federal income taxes and another $1.5 billion after tax,” the report said.

The study determined a company’s effective federal tax rate by dividing profits into the amount of taxes currently payable. The figures cover federal income taxes only; they do not take into account any taxes paid to foreign governments or to state and local governments in this country.

Depreciation Deductions

In most cases, profitable companies that pay no federal tax in a given year are able to do so by taking advantage of depreciation deductions and investment credits in the tax law. A company that buys an expensive piece of machinery, for example, can reduce or even wipe out any current liability by using depreciation and the investment credit, which were enacted as incentives for such purchases.

If depreciation, the investment credit and other special provisions exceed current tax liabilities, a company may “carry back” the excess--use it to offset tax paid in a previous year. That results in the government mailing a tax refund to the company.

Other findings in the report include:

--If the 250 profitable companies surveyed had been taxed at the full 46% maximum corporate rate, their taxes in 1982-85 would have been $178.5 billion, or $120.5 billion more than they actually paid. Because of deductions and credits, few companies pay the full tax rate.

--The six largest defense contractors paid taxes averaging 3.5% of their $21.7 billion in profits. The biggest, General Electric, had $10.9 billion profits during the four years and paid 2.4% in tax. But, Rockwell International netted $2.77 billion and paid a 24.6% rate.

--Seven of the 250 companies paid tax rates above 40%. They included Raytheon, with an effective 52.8% (a figure swollen because the company previously had taken advantage of a big tax-saving accounting procedure); VF Corp., 44.4%; McGraw-Hill, 43.2%; Ralston Purina 43.1%; Interco, 43%; Paccar, 42.1%, and R.J. Reynolds Industries, 41%.