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Why The Pulitzer Jury Got It Wrong

What should a major newspaper do about a reporter whose coverage of taxes is typically one-sided and sometimes inaccurate, and who has become an advocate for the Internal Revenue Service?

If you are The New York Times, you celebrate when he wins the Pulitzer Prize.

David Cay Johnston of The Times this year was awarded the $7,500 prize for beat reporting (he was a runner-up in 2000) "for his penetrating and enterprising reporting that exposed loopholes and inequities in the U.S. tax code, which was instrumental in bringing about reforms," according to the Pulitzer jury. I do not know what "reforms" the panel alluded to. No significant tax law was enacted during last year’s deadlock between Congress and then-President Clinton.

The Pulitzer is the most prestigious award in American journalism. Winning one is the pinnacle of any writer’s career. But the prize serves another purpose besides bringing a little money and a lot of recognition to the winners. When seven senior editors award a Pulitzer, they are telling reporters everywhere, "Give us something this good."

In Johnston’s case, that is what I am afraid of. Johnston’s coverage of tax matters has seemed to flow from a presumption that corporations and wealthy individuals get away with paying too little, the rest of society pays too much, and the IRS lacks the wherewithal to do anything about it.

Maybe so, but the editorial page, not the news hole, is the proper venue to make this argument. What Johnston, his editors and the Pulitzer panel see as "loopholes and inequities" in the tax code that need to be "exposed" (though, as far as I know, no part of the Internal Revenue Code is secret), others see as unfair and disproportionate burdens imposed on select individuals, industries or even international commerce.

A newspaper as respected as The Times might get away with ignoring the latter viewpoint for a time, especially if the viewpoint is out of fashion. Indeed, it might even win awards for doing so. But in the long term, the newspaper sacrifices credibility and damages its role as a trusted source of information. If I know from personal experience that The Times’ coverage of taxation is incomplete and misleading, what am I to think of its handling of the Middle East, or education, or global warming?

Johnston denied that his tax coverage stems from the premises cited above. " ... I don't think what you think I think," he said in an e-mail response to a request for comment. "I do hope that my work has helped people understand the principal of tax and has prompted people to ponder real issues so they can decide what kind of tax system they want."

"What I have done," he said, "is shown how tax burdens are changing ... ." Further, he maintained, he has been "a severe and enterprising critic of the IRS," and has "quoted and written about just about every conceivable point of view on taxes." He declared that his work is set apart by its emphasis on "inequities among similarlry situated taxpayers."

He cited examples in his response, which may be read in its entirety on our website at "David Cay Johnston's Response".

Johnston joined The Times in 1995 and has been its main tax reporter most of the time since then. Much of what he writes is routine beat stuff: Extracts of IRS statistics, reports on significant court decisions, coverage of Congressional hearings. Important, but neither controversial nor prizeworthy.

He won the Pulitzer for his enterprise pieces on policy and enforcement matters. These seem to fit a pattern: Take an assertion or conclusion from the IRS or another source, assume that this assertion is an established fact, ignore the source’s own interest in the topic under debate, and make only brief and buried reference to an opposing viewpoint. Usually, the article includes a plug for a larger IRS enforcement staff, without any mention of the agency’s well-documented problems upgrading the computer systems that the staff would have to use.

Story Advances IRS Agenda

"To save on taxes, Americans routinely understate the value of what they give their heirs, particularly stock in family-owned businesses and real estate, new data from the Internal Revenue Service shows," Johnston wrote in a front-page story on April 2, 2000. "But the agency has almost no resources to stop the problem, and a recently passed law has only increased the chances of not getting caught."

The "new data" from the IRS was a summary of the agency’s own findings on audits of gift tax returns in which the IRS disagreed with the values reported by the taxpayer. What Johnston reported as fact — that additional gift tax was due on these returns, in the amount found by the IRS — was, of course, just the auditors’ opinion. The IRS frequently loses valuation cases in court and, even more often, compromises on valuation during the audit process. Many taxpayers agree to audit findings or accept compromises rather than face the cost and risks of litigation. So, while taxable gifts probably are understated because the law requires taxpayers to estimate the value of what they give away, the degree of understatement almost certainly is less than the IRS thinks.

To get even a hint of this perspective, the reader had to wade through three citations to IRS and Treasury officials, then an anonymous IRS lawyer, then another IRS official, then a professor, then a San Francisco lawyer who agreed with the IRS. Finally, in the 30th paragraph, Johnston’s reader was informed that well-known appraiser Shannon Pratt said that in valuing businesses and real estate, no one figure is correct. "There is a range of values," Johnston quoted Pratt as saying, but even then he added Pratt’s acknowledgement that disreputable firms offer unreasonably low values. The problem, of course, is that the story attacked all valuations with which the IRS disagreed, not just those of disreputable firms.

The article appeared to me to have been spoon-fed to Johnston by the IRS as part of the Service’s ongoing effort to deter the use of family limited partnerships, through which many taxpayers claim substantial gift and estate tax valuation discounts. The agency has had little success fighting these discounts in court, and, when the article appeared, was in the midst of trying unsuccessfully to get Congress to change the law.

Johnston never mentioned family partnerships, nor did he quote any practitioner who had opposed the IRS in a major valuation case or argued that the agency’s positions are unsupported by law. Johnston did, however, mention that IRS gift tax auditors are woefully overworked, and that the agency was under pressure to do the audits because of a 1997 law providing a three-year statute of limitations for gift valuations. He noted that previously, the IRS could challenge gift tax values even after the donor had died — without explaining how the dead donor was supposed to defend his position.

Loophole, Or Protectionism?

A month earlier, Johnston reported that a half-dozen American companies "have begun exploiting a loophole" by moving their headquarters to Bermuda, or by being acquired by a Bermuda insurer.

I doubt whether any management has ever tried to get a tax benefit by having an unrelated party acquire its company, since the acquired management tends to become unemployed. That subtle problem was not reported. Instead, the article focused on the ability of Bermuda-based property and casualty insurers to escape American tax on investment income. Though this is the usual rule in international tax — foreign companies only pay American tax on income that is effectively connected with an American business — it has peculiar implications in this industry, because the property insurance business generally loses money aside from the earnings on invested premiums.

Long-established American insurers were upset because they could not cost-effectively relocate, and thus could not get the same tax benefit as newer upstarts. They cried loophole. Only at the very end of the 1,500-word story did the reader learn that this "loophole" might mean lower premiums for you and me. Johnston quoted Willliam Malchodi, a tax official of anti-"loophole" Hartford Insurance, "We’re concerned that companies could use this tax advantage to cut their prices." Heaven forbid!

Sometimes, sources that have a big ax to grind are portrayed as carrying nothing more than a pencil sharpener. On February 26 this year, Johnston reported that "The richest Americans are paying a declining share of their incomes in taxes, even as their incomes grow more rapidly than everyone else’s." Although this assertion was attributed to data the IRS gave a Republican congressman, the story actually was based on an analysis by the Center on Budget and Policy Priorities, which, according to Johnston, is "a nonprofit research organization in Washington that seeks to advance the interests of the poor."

Of course, nearly every organization in Washington aside from lobbyists and political consultants is a nonprofit. Although the CBPP casts itself as nonpartisan, its positions on tax matters have tended to coincide with those of more liberal Democrats.

That February 26 article also delivered a broadside at President Bush’s proposed tax cut, asserting that a CBPP study concluded that the top 1 percent of earners "would get 40 percent of the tax breaks, more than their 18.5 percent share of income taxes paid." Two days later The Times printed a correction noting that the top 1 percent of earners actually paid 34.5 percent of income taxes, while earning 18.5 percent of total income. A significant difference.

The correction was one of three that the newspaper has published for stories Johnston has written since last December.

Similarly, Johnston identified Citizens for Tax Justice as "a nonprofit group supported by labor unions" which "argues that the tax system favors the rich and politically connected." Reuters has used a more precise identification of CTJ, as a group that "favors progressive tax policies placing greater burdens on the wealthy." A CTJ study was Johnston’s primary source for an October 2000 story asserting that a dozen profitable corporations paid no U.S. tax on more than $12 billion in profits over three years.

In contrast, a 6,300-word 1996 opus on estate tax reduction strategies that Johnston co-wrote identified the pro-tax-cut Heritage Foundation as a "conservative research group in Washington." The Heritage Foundation openly describes itself as conservative, but Citizens for Tax Justice and other organizations on the other side of the debate tend to avoid the "liberal" label that is unpopular in many parts of the country.

I do not find much value in either the liberal or conservative tag in economic issues, but it seems that if a writer uses one, its counterpart ought to be used regardless of the political convenience of the other side.

Does The New York Times set out deliberately to promote one side or another of the tax debate in its news columns? I am sure it does not. Nor do I think the Pulitzer panel wanted to reward coverage that happened to fit some particular bias. From this distance, it seems that Johnston, his editors and the Pulitzer judges all have somehow come to believe that the "right" side of the tax debate is universally obvious, and that contrary points of view scarcely need telling.

That is a dangerous form of hubris for the press and the public. Taxes are a vital part of public life and will be at the top of the news for the rest of this year, and probably beyond. The press needs our trust, and we need to be able to trust that what we read truly is reported fairly and in good faith.

For David Cay Johnston's response click on the following article:

Johnston's Response

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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