RPII: Murphy’s desperate attack and the media’s failed fact check

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Pat Murphy, the Democrat’s nominee for Congress in Iowa’s First Congressional District, recently released a whopper-filled attack ad on the business background of Rod Blum, the Republican seeking to represent Northeastern Iowans.

“State Rep. Pat Murphy was one of the worst Speakers of the Iowa House in modern history,” said David Chung, a Cedar Rapids-based technology consultant and member of the Republican Party of Iowa State Central Committee.

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David Chung

“Pat Murphy kicked Iowans out of the State Capitol during a debate on tax issues, and he retaliated against his hometown hospital on behalf of labor union allies. Incredibly, Murphy—who has never created a private sector job—has the audacity to distort facts and falsely attack Rod Blum for growing a business and creating opportunities for hundreds of Iowans to achieve the American Dream.”

The Gazette published a story Sept. 25 analyzing Murphy’s claims in a recent ad 30-second ad produced by Murphy’s Washington, D.C. consultants. The ad, “Last to Leave,” claimed that Blum failed to pay correct overtime, “moved [his] company out of Iowa to dodge taxes,” and laid off more than 70 workers. The story is misleading for several reasons detailed below.

BACKGROUND

Blum served as a director of Eagle Point Software, a developer of architecture, landscape and civil engineering software, starting in Jan. 1990. He served as Chairman of Eagle Point’s Board of Directors from Jan. 1990 through Oct. 2000 and as Eagle Point’s President and Chief Executive Officer from Jan. 1990 through Nov. 2000.

60905_RWD_11-8_RPII-LOGO_500x500rev2_RPII_onlyMURPHY CLAIM: “[Rod Blum] cheated his workers out of overtime.”

RPII RESEARCH: False. As initially explained by the Blum campaign, the claims stemmed from salaried sales employees who did not want to track their hourly time—”punch a time clock.” The settlement occurred because the company essentially had to guess at past hours for those employees, as a Blum representative told The Gazette. The newspaper noted that settlements aren’t an admission of guilt, as even vindicating a company in court can cost more than the money at stake. The fact check also questioned Murphy’s distortion of the issue: “Murphy’s ad uses the word ‘cheated,’ which implies a bad intent. The Fact Checker could not verify that.”

MURPHY CLAIM: “[Rod Blum] moved his business to dodge Iowa taxes.”

RPII RESEARCH: The facts at issue are not easily distilled into a 30-second television ad (or, apparently, a newspaper “fact check”). Murphy alleges that Blum dodged taxes in Iowa by reincorporating Eagle Point in Delaware. This is simply false.

The Gazette, while noting that Eagle Point—and all of its employees—remained in Dubuque, spoke with only one law professor, who said that a company’s Delaware incorporation could allow it to deduct royalties earned from other states on its Iowa income tax. Nonetheless, The Gazette’s conclusion—that “the home state can lose out on corporate taxes”—is baseless.

The prime factor for Eagle Point’s reincorporation to Delaware was its court system, particularly regarding quickly resolving any intellectual property-related disputes about its software. Income taxes were not avoided by this reincorporation. In fact, the firm’s effective tax rate increased to 48.8% from 34.6% the prior fiscal year.

As Priceonomics explains, Delaware’s legal system is structured so cases involving business law are resolved quickly and efficiently—and that reason, not taxes, is why most companies incorporate there.

Delaware maintains a unique court called the Court of Chancery to rule on legal issues for corporations. In most states, corporate cases get mired in the backlog of America’s civil courts. They are also delayed and potentially unpredictable due to the need to educate judges and lawyers on corporate law in each trial. In contrast, judges well versed in corporate law rule on cases before the Court of Chancery, without the need for juries. The average American civil trial takes around 2-3 years to resolve. But in the words of the Court of Chancery’s former head judge, “The court also works fast in real speed. If you need an answer in four days, you’ll get an answer in four days. [Delaware’s] Supreme Court will turn heaven and earth itself to give you an appellate answer.”

The Gazette cites a 10-K annual financial statement of Eagle Point Software to buttress Murphy’s false claim. However, the facts within that financial statement undermine his claims. Title 30 of Delaware State Code mentions a provision in the corporate tax code that does not include royalties on patents or copyrights as taxable income. An academic paper analyzing Delaware tax issues determined that Delaware’s tax code could be used to reduce a firm’s tax liability in regard to intangible assets, such as royalties on patents or copyrights.

However, Eagle Point held no intangible assets at that time. (“Consolidated Balance Sheet,” pg. 25). Therefore, it would have been impossible for the firm to reduce its tax liability in this fashion. The firm paid royalties on software it licensed, but did not receive royalties for its own, as the firm did not hold any patents or copyrights on its products (“Proprietary Rights,” pg. 7).

As Joe Kristan, a Roth & Company, P.C. CPA who writes the Tax Update Blog, explains:

While Delaware is tax-friendly, the royalty maneuver casually referred to in the story only works if an intellectual property corporation has been set up in Delaware to own the IP; the IP company collects the royalties in Delaware, and the operating company deducts the payments to lower its income in high-tax states. There appears to have been no such entity.

The 1999 10-K filing with financial statements for Eagle Point Software would detail related parties and subsidiaries included in the financial statements. Any Delaware IP subsidiary would be included in the consolidated financial information, because while investors like it when their companies reduce state taxes, they don’t like it if it means real cash leaves the company covered by the financial statements…

Corporations apportion their income to Iowa based on the destination of the sale. As a public company, we can assume over 90% of their sales were to non-Iowa customers. That means almost all of its income would not be taxed in Iowa to begin with. And that would have been just as true if the company were incorporated in Iowa, rather than Delaware.

So, apparently without looking at publicly available information on Eagle Point, and with only a general statement by a law-school prof claiming no direct knowledge of the transaction, the Gazette’s “fact checker” called the assertion that the company incorporated in Delaware to dodge Iowa taxes “mostly true.” In fact, there appears to be no royalty agreement to funnel income out of Iowa. And, as most of Eagle Point Software’s sales would have been to non-Iowa customers, there would be little state tax to reduce in the first place.

Does Pat Murphy—and The Gazette—think John Deere, Lee Enterprises and Rockwell Collins moved their businesses to dodge Iowa taxes?

Murphy’s attempted character assassination is especially flawed when considering where other prominent Iowa-related firms are incorporated. John Deere, a well-known business that employs thousands of Iowans, is incorporated in Delaware.

Furthermore, at least five major Iowa-based companies are incorporated in Delaware, including Davenport-based Lee Enterprises, a media company that has a content sharing agreement with The Gazette and KCRG-TV.

Others, according to SEC data, include Ralston-based Renewable Energy Group, the nation’s biggest producer of biodesel; Des Moines-based Principal Financial Group, the city’s largest employer and the state’s largest publicly traded company; Newton-based Maytag, an iconic appliance manufacturer; and Cedar Rapids-based Rockwell Collins, an aerospace and defense company.

MURPHY CLAIM: “[Rod Blum] laid off 70 workers”

RPII RESEARCH: False.

“Murphy’s ad claim that Rod ‘laid off over 70 workers’ is false,” said Dennis George, the Chief Financial Officer of Eagle Point Software from 1989-2001.

First, our company never had layoffs. From time to time, as dictated by market forces, we didn’t replace workers when they left the company— the workforce organically grew and occasionally contracted via attrition.”

Second, Murphy cherry-picked an employment level from when the company went public and compared it to the employment level when the company went private five years later. This is very misleading. When Rod Blum came to the company, we employed 7 people. When he left, Eagle Point employed 210 people, a tremendous success story of remarkable small business growth that provided hundreds of good paying jobs for Eastern Iowans. During this timeframe, the annual payroll grew from just under $150,000 to over $9,000,000. In fact the average employee salary during the last year the company was run by Rod was approximately $46,000—$62,000 in today’s dollars.”