MICHEL MARTIN, HOST:
In the U.S., tax loopholes come and go. Our Planet Money podcast wanted to look into the life cycle of one of those loopholes and teamed up with the tax reporting nonprofit Tax Notes to do that. Here's Nick Fountain from Planet Money and Lauren Loricchio from Tax Notes.
NICK FOUNTAIN, BYLINE: Tax loopholes come in many forms. Some Congress writes into the tax code on purpose. Others, including the one we pick to tell the story of, are closer to mistakes. This loophole begins with an obscure tax treaty from 2008 between the Mediterranean Nation of Malta and the U.S., says Andrew Gradman.
LAUREN LORICCHIO: Andrew is a tax lawyer, and he's looked into the Malta loophole.
FOUNTAIN: And, boy, treaties are complicated. He says the gist is Malta's tax law treats retirement accounts very well. And this treaty, maybe, if you squinted, conferred those benefits to Americans. Some enterprising tax professionals started advising their wealthy clients that they could stash appreciated assets like Google stock into Maltese retirement accounts and then, starting when they turned 50, start taking them out entirely tax free. If it worked, it would be a pretty sweet deal and it would avoid a lot of U.S. taxes.
ANDREW GRADMAN: A tax loophole is a wasting asset. If you really believe that this was a mistake that was made, then you know it has a limited life. And so you have to figure out, how do I squeeze the juice out of it as much as possible?
FOUNTAIN: It's hard to know exactly how many people took advantage, but, Lauren, y'all at Tax Notes have some pretty good sourcing in the industry.
LORICCHIO: Yeah. My sources say hundreds of taxpayers used the loophole, and they estimate billions of dollars went into these accounts. One attorney told my colleague that his client had between $100 and $300 million stashed away in Malta.
FOUNTAIN: But in 2021, teams at the IRS started looking into this, including lawyer Carolyn Schenck, asking...
CAROLYN SCHENCK: What is the real purpose of this?
FOUNTAIN: Why are Americans opening Maltese retirement accounts?
LORICCHIO: There's a technical term for this that holds up in tax court - the economic substance doctrine.
FOUNTAIN: Like, is there a business reason a person or a company might need a Maltese account?
SCHENCK: Does this make economic sense other than the purpose of doing a turn and burn on the asset and then sheltering the gain? It does not.
FOUNTAIN: It did not. So Schenck's team added it to the IRS' big yearly release of tax schemes to avoid.
LORICCHIO: In late 2021, the IRS and Maltese officials met and clarified something.
FOUNTAIN: About the treaty. They said Americans can't put highly appreciated assets into these Maltese retirement accounts. In other words, knock it off.
SCHENCK: It was awesome. I mean, the flash to bang is pretty fast, right? I mean, there was a very short period of time that transpired here. Then all of a sudden, we're standing here with our treaty partner right next to us standing in a joint statement.
FOUNTAIN: Loophole closed. And for the type of loophole that is kind of a mistake and oversight that gets taken advantage of, that is kind of the life cycle. Enterprising tax professionals find a flaw, pitch it to their clients and wait until the IRS tells them, you're done. With Lauren Loricchio from Tax Notes, I'm Nick Fountain, NPR News.
MARTIN: The entire backstory on this loophole, which includes secret tapes and documents, can be found on the Planet Money podcast. Transcript provided by NPR, Copyright NPR.
NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.
