Back Taxes

April 30th, 2018

In March we reported on the curious tax filings of the Canadian Standards Association (“CSA”) in the US.  We noted that CSA’s operations internationally are mostly run out of a subsidiary called CSA America Inc., an outfit registered in the United States as a Business League.  We also noted that what CSA America is doing in the US precludes it’s status as a Business League. 

In other words, we reported on CSA’s US activities as tax fraud.

You see, to the IRS the CSA claims they’re just offering standards related to products and services, whereas in public CSA is offering actual products and services.  At the IRS, that’s the difference between legal and illegal.

The IRS boffins put it this way;

Reg. 1.501(c)(6)-1 provides that an organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit is not a business league. Whether an organization’s purpose is primarily to engage in business is thus a question of fact. In the past, the Courts have held that [testing] organizations were not exempt under IRC 501(c)(6).”

Indeed they have.  The precedents date back to 1943 and, ironically, were set by one of CSA’s competitors, Underwriters’ Laboratories (“UL”).  It turns out that UL was indeed registered as a not-for-profit but the US Government struck their tax exempt status in 1935 because, you know, they were doing what CSA’s doing right now.  Then UL took the Government’s revocation order to Court and lost because, you know, what they were doing wasn’t legal (See: 7th Cir. 1943 - 135 F.2d 371).

Alright, said our tipster, then an IRS investigation will expose CSA as “a for-profit enterprise that uses standards as a facade to establish credibility (and preferred tax status), for the ultimate purpose of promoting their certification business.” 

Naturally, we wrote to the IRS about it.  Well, actually, we wrote to the IRS and several other US Government Agencies, quite a few really.  We filled out forms.  And then some.

In these filings, we noted that in 2014, based on CSA America’s reported revenues, their Federal tax bill in that year should have been ~$11.75MM.  The average of projected taxes payable through the years 1993 - 2017 should be ~$7.91MM / yr.

In each of these years however, from 1993 - 2017, CSA America paid nothing in taxes.

That’s incredibly unfair to everyone else.  There are lots of testing companies in the US and these companies pay their taxes.  When CSA pays nothing in tax, they’re enjoying a financial advantage of about 33% over their competitors in an average, typical tax year.

Two quick points here;  First, a 33% advantage over every other competitor would make most companies really profitable, and;  Second, even with this massive advantage the CSA barely breaks even.  What does that tell you about how well they’re run?  But back to numbers….

As there is no IRS statute of limitations applicable when a registrant has filed a false return or has “willingly attempted to evade tax,” therefore the duration of CSA America’s tax fraud is the entire period of 24 years.  That’s a lot of back taxes.

The sum of revenues through that period is ~$599.48MM.  The sum of taxes payable is therefore about $197.83MM. 

That’s more than I’ve got in my glovebox.  But it gets worse.

The IRS automatically applies penalties in such cases.  The penalties are a bit steep, at 25% of taxes owing but, in CSA’s favour, the penalties cap at 25%.  So the penalty balance is carried without increases after the cap is reached.

Through the period 1993 - 2017, the average penalty amount is ~$1.98MM per year.  The sum of penalties through the period is ~$49.46M.

The CSA therefore, owes a sum of back taxes and penalties to the IRS totalling about $247.29MM.

Of course, that’s in USD.  Converting to C$ at today’s rate (1.2838), the CSA has an unpaid tax bill of C$317MM.

That’s an awful lot of money, and CSA’s usually complaining that they’re short of cash.  They’re always short of cash apparently, no matter how much they generate.  They’re a credit counsellor’s easiest client -can’t balance their books without taxpayer bailouts, yet the bailouts keep coming.

So how do you suppose CSA plans to pay?  Or do they plan for you to pay?