Tuesday, November 14, 2017

The Rock Star, The Nude Estates, and the Lithuanian Shopping Mall

We've all got an image in our minds of who uses "offshore tax havens" to host their business. Let's say you're a junior-varsity Russian oligarch. You've spent a lifetime looting your country's resources like an all-you-can-steal buffet, and now it's time to take some of your chipskis off the table. You buy a flat in London's posh Mayfair, or maybe a condo overlooking New York's Central Park. Then you stash the rest of your rubles in some sunny flyspeck of an island like Bermuda or the Caymans, where Putin's goons can't steal them back.

But most people who do business offshore aren't crooked billionaires. They're perfectly legitimate multinational corporations, business owners, and investors just like us. If you've worn shoes from Nike, made calls on an iPhone, or downloaded music from Sheryl Crow, you've even done business with them!

Last month, the investigative journalists who brought us 2016's Panama Papers dropped Season Two of their effort to expose how the global 1% use international entities to structure their wealth. The "Paradise Papers" include 13.4 million electronic documents, mostly gleaned through a "data security incident" from the Bermuda-based law firm of Appleby Spurling Hunter. And one of the names that those intrepid detectives uncovered was Paul David Hewson, originally from Dublin's middle-class Finglas suburb.

Of course, you probably know Hewson better by his stage name, Bono. (His U2 bandmates dubbed him Bono Vox, meaning "good voice," in high school.) Now, Bono's made hundreds of millions of dollars in his career. But he's also hobnobbed with the Dalai Lama and been nominated for a Nobel Peace Prize. He's hardly the sort of guy you'd expect to be moving money in mysterious ways. So what's the deal? Here's how the BBC lays it out:

"Bono owned a share in the Ausra shopping center located in the Lithuanian city of Utena via his stake in a company called Nude Estates, based in Malta. In 2007, Nude Estates bought the mall via a company they incorporated in Lithuania called UAB Nude Estates 2. In 2012, Nude Estates Malta Ltd. transferred the ownership of both Nude Estates 2 and the mall to a new offshore company, Nude Estates 1, based on the English island of Guernsey. Both Malta and Guernsey are low-tax jurisdictions, though foreign investors pay a five percent tax on company profits in Malta, while they pay no tax in Guernsey."

There you have it. Even paying 5% tax in Malta, they still hadn't found what they were looking for. So Nude Estates tripped through the waters with Bono's money for the rattle and hum of tax-free Guernsey. Bono himself seemed taken aback by the disclosure. He said he would be distressed if "anything less than exemplary" was done with his name anywhere near it. And he said, "I take this stuff very seriously. I have campaigned for the beneficial ownership of offshore companies to be made transparent. Indeed this is why my name is on documents rather than in a trust."

Here in the U.S, we're subject to tax on all our worldwide income, no matter where it's earned. That means that moving investments offshore doesn't convey any sort of automatic tax benefit, with or without you. Fortunately, the same internal revenue code that taxes us on foreign income offers countless strategies to minimize or avoid that tax. All you really need is a plan. So call us when you desire to save, and let's see if we can rescue enough wasted tax dollars to send you someplace where the streets have no name!

Friday, November 10, 2017

Stranger Taxes

The streaming video service Netflix has earned a reputation for providing quality content like Narcos, Orange is the New Black, and The Queen. But Netflix has also upended how millions of people consume television. How have they done that? By dropping an entire season's worth of a series all at once, letting you "Netflix and chill" with a single episode or binge for an entire weekend. (What kind of savage network would make viewers wait an entire week between episodes of their favorite show? HBO, that's who.)
Netflix's latest hit, which dropped its second season last month, is Stranger Things, a love letter to the classic horror, sci-fi, and fantasy films of the 1980s. The show features a pack of bike-riding preteen friends from sleepy Hawkins, Indiana, who team up with the local sheriff and a mysterious paranormal girl named Eleven. Together, the motley crew fights to save the world from a parallel universe that connects through the super-secret "Hawkins National Laboratory."
Most Stranger Things viewers love the show's music and movie references. Naturally, it makes us nostalgic for 1980s taxes. (Have we told you we need to get out more often?) So, for all you "Upside Down" fans, let's take a walk down memory lane and see what taxes looked like when it was "morning in America":
  • The '80s opened with 15 tax brackets topping out at 70% for joint filers reporting $215,400+ in taxable income (roughly $683,000 in today's dollars). In 1981, Washington dropped the top rate down to 50%, and the Tax Reform Act of 1986 condensed the whole shebang into just two brackets topping out at 28%.
  • Tax shelters were big business! If you didn't feel like giving Uncle Sam 70% of your last dollar of income, you could buy limited partnership interests in all sorts of activities, including oil and gas programs, real estate syndications, cattle feeding schemes, aircraft and equipment leasing deals, and "master recording disks," whatever those were. Nobody "invested" in these boondoggles because they made business sense; they were all about the tax losses.
  • You could report your dependent children on the honor system, without supplying Social Security numbers. This led to millions of people fraudulently claiming deductions for nonexistent children and even household pets. (Don't just love them like family . . . deduct them like family!)
  • You could disappear from the office like Don Draper for a three-martini lunch and write off 100% of the cost, versus 50% today. (As former President Gerald Ford put it in a 1978 speech, "Where else can you get an earful, a bellyful, and a snootful at the same time?")
  • You could deduct interest you paid to buy almost anything except tax-free bonds. Want one of those little Japanese cars that were just hitting the market? How about your first "personal computer"? What about a microwave oven or VCR? You could deduct interest you paid to buy all of them. Here's something to think about as you sit down for season two of Stranger Things. The shadow monster, demogorgons, and The Upside Down are all just make-believe — but the risk of overpaying your taxes is very real. So don't fight your way out of a creepy government lab — or scary IRS tax code — all by yourself! Call us for a plan and we'll guide you to safety!
  • Monday, October 30, 2017

    Talk About "Prime" Real Estate!

    Former President Jimmy Carter once called our tax code "a disgrace to the human race," and there's really not a lot to like about it. There's at least some consolation, though, in the fact that we're all stuck with the same maddening rules. If you and your spouse file jointly, and your ordinary taxable income is $100,000, you'll pay the same amount as any other joint filers reporting the same $100,000 in ordinary taxable income.
    That's not always the case with state and local taxes, though. If you're big enough, and you're willing to flex a little muscle, you can find someplace willing to court you like royalty. Most cities are more than happy to trade away a bit of property tax on a corporate headquarters in exchange for the payroll taxes, income taxes, and sales taxes they can levy on the people who work there, along with the economic development that comes with new jobs. Other places are willing to offer flat-out bribes in the form of tax credits.
    And that brings us to this week's story . . . Amazon.com started life in 1994 as an online bookseller. Since then, though, it's grown to become the largest online retailer in the world. For four glorious hours this July 29, founder Jeff Bezos was the richest man on the planet. (The company reported disappointing earnings at the end of that day's trading, and Bezos's stock tanked $6 billion overnight. Must have been nice while it lasted!) If you're reading these words, you've bought something from Amazon, and you're probably one of its 80+ million Prime members.
    In September, Amazon announced plans to drop $5 billion on a second headquarters equal to their current home in Seattle, code-named HQ2. They want to locate the new facility in a metropolitan area of at least a million people, within 45 minutes of an international airport, with a highly educated workforce.
    The lucky winner will get up to 8 million square feet of new space and up to 50,000 new jobs paying an average of $100,000 per year. But the benefit of the new headquarters will ripple throughout the winning town's economy. Those 50,000 employees will all need places to live — pushing property values up an estimated 2%. They'll need places to eat, drink, and shop. Amazon reports that every dollar they currently invest in their current headquarters generates $1.40 for Seattle's economy overall.
    Naturally, every city in America wants in. By October 18, 238 municipalities had submitted their bribes bids, from 54 states, provinces, districts, and territories across North America. Seriously, winning HQ2 is the closest thing any city will ever come to winning the Powerball.
    New Jersey has offered $7 billion in tax rebates if Amazon picks Newark. Pennsylvania has offered up to $1 billion in breaks, with Philadelphia throwing in $2 billion more over the next 10 years. (That's a lot of cheese steaks!) Several cities went even further to stand out from the crowd. Tucson, AZ sent a 21-foot-tall cactus. The Mayor of Charlotte, NC declared October 18 to be "#CLTisPrimeDay." And the town of Stonecrest Georgia offered to rename itself Amazon.
    We realize you don't have enough muscle to negotiate your own tax rate. The good news is, you may not have to. Remember that tax code that Jimmy Carter called a disgrace to the human race? It's got 70,000 pages full of deductions, credits, loopholes, and strategies that you can use to pay less. So call us for a plan, and see how much we can deliver!

    Tuesday, October 24, 2017

    For the Love of Art

    In today's new Gilded Age, Americans are constantly vying to one-up each other. You show up at your high-school reunion in a new Mercedes E-Class; then your classmate pulls up in a Maserati Quattroporte. (Some would call it a $50,000 car with a $50,000 hood ornament, but still, it's a Maserati.) You show off a picture of your 42-foot sloop; your neighbor whips out his phone to show off his 62-foot schooner. You show up in Davos in your new GII; your business rival flies in on a GIV. When will it all end?

    The IRS isn't generally interested in financing your conspicuous consumption. (Not unless you drive that Maserati to work, in which case, trust us, you'll want to choose the "actual expense" method for calculating your deduction.) But there's a new toy that some of capitalism's winners are showing off, and this one comes with some beautiful tax breaks. We're talking, of course, about a private art museum.

    Rich art collectors have always taken fat tax breaks for donating art. The Association of Art Museum Directors estimates that 90% of the collections held by major museums were gifted by individual donors. This is an especially good way to avoid tax on capital gains. Let's say you bought a minor Cezanne or an early de Kooning 30 years ago for $100,000. Now the painting is worth $3 million. If you give it to your local art museum, you can deduct the full $3 million fair market value!

    Of course, there are rules in place to frame the deduction to make sure you don't abuse the privilege. If the value is more than $5,000, you'll need a qualified appraisal. Your deduction is limited to 50% of your adjusted gross income, although you can carry forward any excess for up to five years if you can't use it all in a single brushstroke. And the IRS maintains an Art Advisory Board to review appraisals.

    But museums can't always give your donation the same care and attention you would give it. New York's Metropolitan Museum of Art includes over two million pieces. It's easy to imagine your donation winding up somewhere back in storage, like the Ark of the Covenant in the last scene of Raiders of the Lost Ark. That's where the private museum comes in. There's really not much to it. Just set up a private foundation to hold the collection and operate the facility, then stuff it full with your art. Now you've got your deduction and control over your collection.

    Who sets up one of these private museums? Peter Brant Jr. is the son of a billionaire paper magnate who married supermodel Stephanie Seymour. In 2010, he opened the Brant Foundation Art Center, conveniently down the street from his Greenwich estate and next door to his polo club. In Potomac, MD, Mitchell Rales, founder of the Danaher Corporation, opened the Glenstone Museum across the duck pond from his house.

    Plenty of public museums, including New York's Frick Museum, Philadelphia's Barnes Foundation, and Washington's Phillips Museum all started life as private collections. But critics have argued that, while the new breed of private museum meets the letter of the law, it may not always meet the spirit.

    We realize your art collection might not include more than the dogs playing poker hiding in your basement rec room. But that doesn't mean you can't canvass the tax code for the same tax-planning strategies that major collectors use to structure their private museums. Just call us for a plan, and we'll see if we can make beautiful art with your finances.

    Tuesday, October 17, 2017

    Tax Strategies for Trick or Treats

    Halloween is almost here, and if it seems like things have changed since you were a kid, you're right! Halloween has become big business, with the National Retail Federation predicting Americans will spend $9.1 billion on the festivities. That includes $3.4 billion on costumes, with top choices being superheroes, animals, princesses, witches, vampires, and zombies. And, "pets will not be left behind, with 10 percent of consumers dressing their pet as a pumpkin." (If you've got a dachshund, of course, you have to dress it up as a hot dog. Rule of law.)

    Naturally, when the trick-or-treaters at the IRS hear the word "billions," they reach out for a "fun sized" treat, too. (Why do they call those dinky little candy bars "fun sized," anyway? What's fun about a bite-sized Snickers or Milky Way when you can score a full-size bar in the rich kids' neighborhoods?) Let's take a quick look at how the IRS taxes our favorite Halloween dopplegangers:

    Superheroes who emigrate from other planets, like Superman (planet Krypton) and Thor (planet Asgard) are subject to U.S. tax on their domestic-source income. ("Resident alien" status doesn't distinguish between aliens from other countries and aliens from other planets.) Superheroes who meet the "green card" test or "substantial presence" test are taxed just like citizens on Form 1040. Those who don't meet either test file Form 1040NR.

    Animals don't pay taxes. (Neither do princesses.) Come on, that's just silly.

    Witches generally operate as sole proprietors, which means reporting income and expenses on Schedule C. If they sell potions along with casting spells, they'll include their eye of newt and toe of frog in "Cost of Goods Sold" in Part I, Line 4. IRS auditors understand that witches' travel expenses can be high because they live so deep in the forest. The good news is, witches can claim the same 53.5 cents/per mile allowance for travel by broom as the rest of us can claim for a full-size truck or SUV.
    Vampires generally live for hundreds of years, which lets them really harness the power of tax-deferred compounding. At the same time, careful planning is required to manage drawdown strategies once required minimum distributions become a factor after age 70½.
    Zombies pose especially frightening tax problems because they're not dead — they're undead. If Dad can't outrun a brain-eating horde and gets zombified, is he "deceased" for estate-tax purposes? If your spouse is zombified, can you still file jointly?

    While we're on the topic of costumes, why don't kids ever dress up as IRS auditors? That would be scarier than anything else they can come up with. As for the grownups, can you imagine "sexy IRS auditor" costumes sitting on the shelf next to "sexy nurse," "sexy firefighter," and "sexy cop" outfits?

    You probably never realized tax professionals could be so busy at Halloween! Fortunately, you don't have to work quite so hard yourself. Call us for a plan, and we'll teach you the tricks to keep as much of your treats as the law allows!

    Tuesday, October 10, 2017

    The Long and Short of It

    Consumer surveys consistently show that CPAs are the most trusted financial advisors of all. But what happens in the rare instance when you can't trust your CPA? Nothing good, that's for sure!

    Back in 2001, John Baldwin helped engineer a deal to sell Louisiana's Delta Downs racetrack for a $74 million profit. Baldwin took a $10 million fee for his work, along with some hefty interest payments on a $17 million loan his company had extended to finance it.

    But Baldwin didn't want to share those hard-earned gains with the IRS. So he went to the "Big Four" global accounting firm of KPMG for ways to pay less tax. KPMG dug into their bag of tricks and pulled out a doozy — a "one-time fix" called SOS, or Short Options Strategy. Without getting too technical, here's how this little sleight-of-hand worked. (If you're thinking "sleight-of-hand" is an unfortunate term to use in the tax-planning context, you're right.)

        First, Baldwin put up $1.5 million to buy $22 million worth of "long" options on Mexican and Brazilian currency, betting the value of the currency would go up.

    Simultaneously, he sold $22 million worth of "short" options on the same currencies, betting the price would go down.

    Next, he transferred the offsetting positions into a partnership and, relying on an old Tax Court opinion, calculated his "basis" in the partnership solely on the "long" position.
    Finally, the partnership sold all the options for roughly what Baldwin paid for them and reported a tax loss in the vicinity of that long position — even though Baldwin was never at risk for losing anywhere near that much money.

    If the whole thing smells like something that comes out of the south end of a north-facing horse, that's because it was. KPMG knew it was. The IRS caught on, of course. They audited everyone in sight, and socked Baldwin with over $10 million in tax, interest, and penalties. Prosecutors indicted KPMG and 19 individuals for helping Baldwin and 600 more clients evade $2.5 billion in taxes — and the firm paid $465 million in to make it all go away. Years later, some of those 600 customers are still battling KPMG in court.

    And that brings us back to Baldwin, who sued KPMG for all sorts of nefarious-sounding offenses, like fraud, negligent representation, breach of fiduciary duty, and racketeering. Last month, the Third Circuit ruled that he really just should have known better: "the fact that a prearranged, 'turnkey' transaction could generate just the right amount of losses — for an 'investment' and fee orders of magnitude smaller — should have also seemed a serendipitous coincidence indeed." To add insult to injury, even KPMG says that Baldwin never should have trusted them in the first place!

    Here's the good news. The tax code offers 70,000 pages of green lights to pay less tax legitimately. So don't be afraid to ask us to show our work, and cite those green lights — book, chapter, and verse. And call us before your big scores, so we can help you make the most of them!

    Tuesday, October 3, 2017

    They Hate Him at the IRS, Too

    We live in an unfortunate era of disunity. Cultural divides, racial divides, religious divides, and political divides are threatening to tear America apart. Every so often, though, someone comes along to unite us all in a great primal scream of rage. Remember "Pharma bro" Martin Shkreli, who bought the company that manufactures the prescription Daraprim, then jacked the price from $13.50 to $750 per pill? We really do need more people like him to unite us against a common enemy.

    Rick Smith probably never imagined his company would become one of those uniters. But up until last month, he was CEO of Equifax, the credit-reporting bureau that got hacked and waited six weeks to reveal it. By that time, intruders had made off with critically sensitive information on 143 million Americans. Was the hacker just some pimply Russian teenager living in his babushka's basement? An international gang of cyber-thieves? We may never know. But that 143 million figure certainly includes thousands of our friends at the IRS, who may not look kindly on the millions of dollars Smith earned leading up to the leak.

    Smith's abrupt resignation means he'll walk away with only a pro-rated portion of his $1.45 million salary for 2017. He'll also lose his performance bonus, which could have been another $3 million. Of course, he would have paid the IRS 43.4% of those amounts anyway. But Smith can afford to shrug off losing the cash comp. That's because, like with most top executives at publicly-traded companies, the real action is in the stock. In fact, Smith has taken home 633,427 shares of Equifax stock, worth roughly $60 million, just since the start of 2016. Here's how it works:

        203,427 of those shares came at no cost in the form of restricted stock awards or outright grants. Smith pays ordinary income tax on the fair market value at the time it's awarded.

    He acquired the rest by exercising options at cost to him of about $15.4 million. He pays regular tax on the difference between that amount and fair market value at the time he exercises the options.

    Because Smith "retired," rather than getting canned, he keeps his unvested options to buy millions more worth of shares over the next few years, just as if he were still working for the company.

    No matter how Smith acquires his stock, he recognizes capital gain or loss when he sells. And he's not shy about selling — since 2016, he's unloaded 679,286 shares for a net gain of $68.9 million. That's nice timing, considering the stock has dropped by more than a third since the hack was revealed. It's cost Smith $13 million of his own fortune (sorry not sorry), and the rest of the company's shareholders, billions more.

    Usually when CEOs leave unexpectedly, they put out a lame excuse like "leaving to spend more time with family." In Smith's case, that might actually be true — his family is going to need a lot of help recovering their stolen identities following the breach! But hey, let's be fair here — it's not like everyone in America hates him. The class-action lawyers must be drooling at the thought of suing his company into the ground.

    Smith's story illustrates one of the most important lessons in tax planning. How you make your money is just as important as how much you make. So let us help you with a plan for making the most of your income — and hopefully you aren't hacking into anyone else's server to make it!