Monday, September 19, 2016

Do They Or Don't They?

Matt Bissonnette grew up in a dinky flyspeck of a town off the Alaskan coast that you can't get to without a boat or a plane. He ultimately escaped to join SEAL Team Six, the Navy's most elite counter terrorism force. He took part in the 2009 mission to rescue Captain Mark Phillips from Somali pirates, a story which was told in the movie Captain Phillips. But that was just a warmup for his biggest mission: "Project Neptune Spear," the 2011 raid that killed Osama Bin Laden.

In 2012, Bissonnette wrote a memoir called No Easy Day: The Firsthand Account of the Mission That Killed Osama Bin Laden. It earned him $6.7 million in royalties, which he planned to donate to the families of fallen SEALs. It also launched a lucrative second career as a public speaker. Unfortunately, Bissonnette broke the Pentagon rule requiring him to submit it for vetting before publishing. The day after the book landed on shelves, officials said it revealed classified information, a breach that could subject him to years in prison.

Last month, Bissonnette settled the dispute and agreed to pay back every dime of royalties, plus another $100,000 in speaking fees he earned before they approved the slides he uses in his presentations. Question: can he now deduct that payment from his taxes going forward?

Code Section 162(f) seems to shoot down any tax benefit. "No deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law." But what about payments made to settle a dispute before a fine or penalty is imposed? Treasury regulations state that payments made to settle that sort of potential liability aren't deductible. But the regulations also state that compensatory damages do not qualify as fines or penalties.

So, that's the $6.7 million question. Does Bissonnette's payment serve to compensate the government for the damage his book caused? If so, then he gets his deduction. Or does it merely settle his potential liability for civil or criminal fines or penalties — in a way that benefits both the government and him by avoiding the time, expense, and potential public disclosures involved in a trial? In that case, no dice.

Bissonnette isn't the only celebrity who may miss out on a fat tax deduction for a big gesture. Actress Amber Heard recently finalized her divorce from Johnny Depp with a $7 million lump sum payment, then announced she's giving it all to charity. But she probably won't get the deduction you'd expect. That's because you can only deduct up to 50% of your adjusted gross income in any year (and carry any remaining balance forward five years). Ouch! Bet she didn't see that coming!

Now, there are two ways Depp and Heard might be treating that $7 million. It could be a transfer between spouses, incident to the divorce. In that case, it's nondeductible to Depp and tax-free to Heard. (Too bad her financial disclosures show she doesn't have nearly enough income to take advantage of the full deduction.) Or it might be alimony, deductible to him and taxable to her. In that case, she'll still owe tax on the 50% of her donation that she can't deduct this year.

Here's the lesson. Sometimes pricey things happen, and we console ourselves by saying "at least I get a tax deduction." But that's not always true, and it's rare that value of the tax deduction is enough to compensate for the loss that creates it. So call us before your next big transaction and make sure it serves you best!

Monday, September 12, 2016

Ahoy, Maties!

Labor Day has faded into memory, and before you know it, the holidays will be here. Halloween, Thanksgiving, and the year-end Christmas/Hanukkah/Kwanzaa cavalcade of commercialism are the obvious "Big Three." But in all the holiday season hype, it's easy to overlook a newer celebration that grows more popular every year. We're talking, of course, about International Talk Like a Pirate Day — observed this year on Monday, September 19.
Have you heard about the new pirate movie? It's rated ARRRRRGH!
When you think of pirates, you probably picture swashbuckling "Golden Age" captains like Edward "Blackbeard" Teach or "Calico Jack" Rackham. Maybe your tastes lean towards the fictional Jack Sparrow or Long John Silver. Either way, you'd probably be surprised to learn that the real pirates of history could be a sophisticated lot, organizing themselves into democratic societies, with checks and balances to enforce discipline — and even "taxing" themselves to pay expenses.
What has two eyes, two arms, and two legs? Two pirates!
Some captains went so far as establishing written codes to maintain law and order. (No one walks the plank without due process!) Bartholomew "Black Bart" Roberts, who captured over 470 ships before dying in a broadside of British grapeshot, ruled according to 11 articles. Number ten on his list provided that, "The captain and the quartermaster shall each receive two shares of a prize, the master gunner and boatswain, one and one half shares, all other officers one and one quarter, and private gentlemen of fortune one share each." Even Bernie Sanders could approve of such equal distribution!
What do you call a pirate that skips class? Captain Hooky!
Today's pirates face a whole new set of challenges, including how to handle their ill-gotten gains. If you decide to deep-six your desk job for an eyepatch and life on the sea, you'll find your income subject to the same tax as any other business, legal or not. "Booty" is taxed at fair-market value under the rules of Code Section 83(b).
What was the pirate's golf score? Parrrrrrrrrr!
Fortunately, you'll get the same deductions as any other business. Ships and equipment you buy to conduct raids are considered capital equipment, depreciable over the applicable period. Guns, grappling hooks, and smaller items qualify for first-year expensing. And if the Indian navy sinks your ship, you can claim a capital loss. It's good to know that if an IRS auditor says "I'm the captain now," you won't be completely hornswoggled.
How much does it cost a pirate to get a piercing? A buck an ear!
Yo ho ho mateys, pay attention here. The end of the year isn't just holiday season, it's planning season. And planning is the key to keeping your treasure and making it grow. So call us to help keep the scallywags at the IRS from getting too many of your pieces of eight!

Monday, September 5, 2016

Red Tax Rising

Novelist Tom Clancy shot to the top of the best seller lists when former president Ronald Reagan called his debut, The Hunt for Red October, "the best yarn." His stories featuring CIA analyst-turned-president Jack Ryan redefined the "techno-thriller" genre, with hyper-realistic plots that foreshadowed real-world developments. Clancy earned special praise for his obsessive attention to detail, especially with military hardware. But that attention to detail didn't quite extend to his finances — and a Maryland court just ruled that it would cost his children millions in estate tax.
Clancy made a fortune from his books and invested his royalties into an impressive collection of toys: six penthouse condominiums totaling 17,000 square feet at Baltimore's Ritz-Carlton, a 535-acre estate on Maryland's Chesapeake Bay, a Sherman tank (!), and a 12% stake in his beloved Baltimore Orioles. When he died suddenly in 2013, his estate was worth $86 million — not bad for a guy who started writing part-time while selling insurance.
But Clancy faced a dilemma common to divorced men with children who later remarry. Leave as much of his estate as he wants to his second wife Alexandra, where it escapes tax until her death? Or leave it to his kids from his first marriage, where the IRS grabs 40%, without remorse, immediately upon his death? The usual solution is something called a "qualified terminable interest property" trust, or Q-TIP. Without getting into the weeds of Treasury Regulation §20-2056(b)-7(b)(2)(ii) here (which, trust us, you do not want to get into), this gives Wife #2 (or #3 or #4 or #5, as the case may be) the income from the trust while she's alive and defers tax on the principal until the kids get it at her death.
Clancy's will left the real estate to Alexandra and divided the rest of his estate into three parts: a marital trust for Alexandra, a family trust for Alexandra and their young daughter, and a children's trust for the four kids from his first marriage. Under the usual rules, the marital trust would escape tax and the family trust and children's trust would pay. But after he drafted the original will, Clancy added a Q-TIP provision to the family trust and a "savings clause" to protect the marital deduction to the maximum amount possible.
When Clancy died, the will directed that taxes be paid out of the residuary estate — the family trust and the children's trust. That would have meant a $15.7 million bill, split between the two trusts. But that creates a problem: if Clancy's executor uses money from the tax-exempt family trust to pay tax, that amount becomes subject to tax itself. Clancy's widow objected, pressing to take advantage of the Q-TIP provision and savings clause. That would lower the tax bill to just $11.8 million but stick it all to the children. (Holiday dinners at the Clancy house must be a hoot.)
Naturally, the dispute wound up in court. Last year, a Baltimore probate judge ruled that the savings clause trumped the directions to pay tax from the residuary. Last month, an appeals court agreed. (Don't feel too sorry for the kids — they'll probably inherit plenty more from their mother Wanda, who made out just fine when she and Clancy split in 1999.)
Here's the lesson from today's story, and you don't have to work for the CIA to see it: poor planning poses a clear and present danger to your finances! So call us before you die, and keep Uncle Sam from playing patriot games with your tax dollars!

Tuesday, August 30, 2016

Back to School Tax Time

Now's the time of year when kids across America start heading back to school. New kindergartners eagerly don their snazziest big-kid outfits to pose for smiles and pictures. (The tears come after they get dropped off. We're talking the mom and dad, of course.) New high-schoolers hit the snooze button and look forward to sleeping through morning classes. (Why yank teens out of bed so early when their younger siblings are up before sunrise without alarms?) And new college students can't wait for the independence of campus life, because = beer. (Their empty-nester parents wonder if it's finally time to treat themselves to that divorce they've always wanted, then look at the tuition bills and sigh in disappointment.)

You know who else is busy this time of year? That's right, the tax man! Here are some random musings on some of the things that happen when back-to-school time meets tax time:
  • Many states offer sales tax holidays for back-to-school shopping. Ohio is typical: from Friday, August 5 through Sunday, August 7 (2016 only), there was no tax on clothing priced at $75 or less, school supplies priced at $20 or less, and school instructional materials priced at $20 or less. Of course, those back-to-school sales tax holidays are just like your old homework assignments — you can't get credit if you miss the deadline!
  • Teachers are naturally on the front lines of shrinking school budgets, and they often chip in with their own money to fill the gaps. (Ironic, right, considering how generously they get paid!) The Educator Expense Deduction lets teachers who work full-time at any accredited school deduct up to $250 they pay for books, school supplies, computer equipment and software, and even athletic equipment they buy on behalf of their students. For years, this has been one of those deductions Congress scrambled to extend every December — last year, Congress finally gave our kids' long-suffering teachers a break and made it permanent.
  • Student loan debt has topped a trillion dollars, and loan forgiveness programs have sprung up to help borrowers who go on to work for qualifying employers like governments and 501(c)(3) not-for-profits. But those service-minded borrowers may face an unexpected surprise: sometimes the amount forgiven is considered taxable income! Sure, eliminating, say, $40,000 would be welcome relief for a hardworking teacher or social worker. But what about the $10,000 tax bill that comes with it?
  • You probably wouldn't think a college degree would be tax-deductible. And there's no deduction for training that prepares you for a new job. But if your graduate program is intended to improve or enhance your skills for your current job — or if your employer requires you to get an advanced degree — you may be able to deduct your tuition and other expenses. Let's say you're a tax lawyer, and you want to brush up on your skills. That $40,000 you drop on a Master of Laws degree may get you a raise and a deduction. (Now you know why tax lawyers drive Jaguars!) Here's today's lesson — pay attention, because there will be a quiz. When it comes to taxes, school is never out! The more you know and the more you plan, the less you'll waste on taxes you don't have to pay. So call us before exams and let us help with the tutoring you need!
  • Monday, August 22, 2016

    Go for the Gold

    For awhile there, it looked like the just-concluded Rio Olympics would be a carnival of chaos. Golfers boycotting to avoid the Zika virus? Check. Swimmers making their way through raw sewage? Check. And those were just the disasters we anticipated before the opening ceremonies! Who could have predicted divers splashing into a pool of green water, or Ryan Lochte "over-exaggerating" making up a whopper about a drunken robbery?
    In the end, it all worked out, and we got to witness the usual quadrennial spectacle of sport, livened with a dose of Latin color. Swimmer Katie Ledecky earned five gold medals and, in one race, beat a woman on a jet ski. Gymnast Simone Biles is headed for the cover of Sports Illustrated and has gone viral with her quote, "I'm not the next Usain Bolt or Michael Phelps. I'm the first Simone Biles." And none of Rio's projected shortfalls disrupted the spirit of competition.
    Olympic games are full of upsets, disappointments, and uncertainty. But there's one team that's always guaranteed to win, and that's the team at the IRS. They're not taxing winners on the value of their medals, at least not yet. But the U.S. Olympic Committee awards cash prizes to U.S. medalists: $25,000 for bringing home the gold, $15,000 for the silver, and $10,000 for the bronze. Uncle Sam's teams finished #1 in the medal race, combining for 46 golds, 37 silvers, and 38 bronzes. That means over $2 million in new income to tax!
    How do those cash awards compare with our competitors across the globe? Well, we're nowhere near #1 in that race, for sure. If you live in Azerbaijan, bringing home the gold puts the Azerbaijani equivalent of 510,000 pretax dollars in your pocket. (We're not sure where you can actually spend $510,000 in Azerbaijan, but men's taekwando champ Radik Isaev probably can't wait for the challenge.) If you live in Russia, and you aren't disqualified for doping, bringing home the gold means an extra $135,000. Thailand's Sopita Tanasan, who dominated the women's 48kg weightlifting competition, will enjoy a $314,000 annuity to be paid out over the next 20 years.
    Of course, the keepsie money isn't in the prizes, it's in the endorsements. Swimmer Michael Phelps cemented his Olympic legend by breaking a 2,168-year-old record for most individual medals. (Leoniodis of Rhodes, the previous record holder, had to win a footrace while carrying a 50 pound shield and wearing a complete suit of armor.) Phelps has won "just" $1.9 million from his actual swimming. But he's parlayed his fame into $94 million of taxable endorsements and a $55 million net worth. Maybe there's really something to that "cupping" nonsense?
    Winning at the Olympics can open doors we can't even imagine yet. Consider this theory. In 1976, a young Bruce Jenner packed up his hopes and dreams and headed to Montreal. What if he gave it his all in the decathlon and finished . . . fourth? No medal, no Wheaties box, no Playgirl cover. Would we be keeping up with those krazy Kardashians today? (And for that matter, which of today's stars will be headlining a reality-TV train-wreck while we're watching the 2056 games?)
    Here's the final result. Planning for one-time windfalls (like Olympic gold) can be just as important as planning for periodic income (like endorsements). The IRS wants a piece of it all. So call us before you earn your medals and we'll help you make the most of your gold!

    Wednesday, August 17, 2016

    Up in Smoke

    The Mafia. The Mob. La Cosa Nostra. Call it what you will, this "certain Italian-American subculture" has a long and storied history. Mobsters like Al Capone, Henry Hill, and John Gotti have become folk heroes of a certain sociopathic sort. Fictional mobsters make special guest appearances alongside pop culture icons — witness The Simpsons' "Fat Tony" D'Amico, crime boss of Springfield.
    Organized crime also has a long history of tangling with tax authorities. Try as they might, Elliot Ness and his fellow "Untouchables" couldn't jail Al Capone for bootlegging, bribery, or the St. Valentine's Day Massacre. It took IRS agent Frank Wilson three years of dogged investigation to finally put Capone behind bars for the pedestrian offense of failing to pay his taxes. Even Tony Soprano knew enough to report a salary from his waste management business to keep the IRS off his back.
    Earlier this month, the Mob was back in the news as the FBI unsealed an indictment and arrested 46 members of various New York and Philadelphia-area crime families. The suspects sported the usual collection of colorful nicknames like "Tony the Wig," "Anthony the Kid," "Tony the Cripple," and "Mustache Pat." But their actual crimes seemed a far cry from the wars that defined the Mob's glory days. While the indictment included old-school staples like gunrunning, loansharking, and bookmaking, it also featured "participation trophy" offenses like health care fraud, credit card fraud, and selling untaxed cigarettes.
    Cigarette smuggling might sound like a penny-ante crime, especially compared to the whacking, kneecapping, and "protection" rackets of mob legend. ("Nice business ya got here. Be a real shame if anything happened to it.") But the Bureau of Alcohol, Tobacco, Firearms, and Explosives estimates that black-market smokes cost governments $5 billion per year. In New York, where the tax is $4.35 per pack, an estimated 57% of all sales involve smuggled cigarettes. And every time the tax goes up, so do the incentives to smuggle.
    How does the scheme actually work? Simple arbitrage. Buy your cigarettes someplace cheap like Virginia, where the tax is just 30 cents per pack. Truck them up I-95 to New York City. Sell them at a discount to bodegas and other independent retailers. Then conveniently "forget" to tell the tax man about it. Smugglers generally make between $4 and $6 per pack. That means a single truckload, which contains 48,000 cartons, can light up nearly $3 million in profit.
    Numbers like that make "bootlegging" so attractive that terrorists have fired up their own efforts. The 1993 World Trade Center bombing, in fact, was financed by cigarette smuggling. In 2002, a federal jury convicted a Lebanon native of smuggling cigarettes from North Carolina to Michigan to funnel profits for Hezbollah. And investigators believe that European cigarette smugglers help pay for ISIS's reign of terror, too, both in the Middle East and throughout Europe.
    Here's the lesson from today's sad story of Mob decline. Every financial move you make involves at least some tax consideration. Now, snuffing out those taxes shouldn't be your sole priority. But once you've made the right financial choice, your next step should be to find the most tax-efficient way to do it. That's where we come in. So call us for the plan you need, and watch those unwanted taxes go up in smoke!

    Monday, August 8, 2016

    The Darker Side of Reality TV

    Americans can't seem to get enough of reality television. Most critics think that's because reality TV presents us as we all aspire to be. Something about the camera seems to bring out the best in people, whether they're bachelorettes, drag queens, or cake chefs. Reality TV is where we go to restore our faith in the simple human dignity in everyone, from hoarders to pawn stars to ice-road truckers. (Right?) Besides, what kind of masochist would voluntarily waste an hour of their precious life watching a gaggle of "real housewives" fighting like a sack full of drunken cats?
    That's why it was so disappointing to hear that Abby Lee Miller, star of Lifetime's Dance Moms, has pled guilty to federal tax fraud and money laundering charges. It's a bit like finding out the mighty Wizard of Oz is just a little man behind a curtain. (Think of the children!)
    If the Kardashians are the bright shining sun of the reality TV solar system, Abby Lee Miller is a minor outlying planet, or maybe a famous comet. Dance Moms has spent six seasons following Miller, her Pittsburgh studio, her dance team, and of course the dancers' moms. (We don't have to actually watch this stuff to write about it; the show even has its own Wikipedia page.)
    Miller may be a whiz at choreographing routines like the one highlighted in "Topless Showgirls," featuring her preteen troupe performing a burlesque routine in flesh-toned bra tops and tights. (The show's producers mercifully pulled that episode from the season's DVD compilation.) But when it comes to business, she's got two left feet. In 2010, she filed for bankruptcy, claiming $325,000 in assets and $400,000 in debt. As part of that process, the court ordered her to do all her banking out of a single central account and file monthly operating reports disclosing her finances.
    But Miller failed to disclose she would be profiting once her show debuted on July 14, 2011. In 2013, the judge supervising her affairs found himself channel-surfing one night and clicked onto Dance Moms. Naturally, he wondered why he wasn't seeing that income.
    Miller could have cleaned up her act. Instead, she choreographed more scheming. She held on to checks to deposit them after her case was discharged, deposited money into hidden accounts, and asked customers to pay her mother instead of herself. And of course she didn't show that little pirouette to the IRS. How much are we talking? According to prosecutors, $755,492.85. That's a lot of sequined leotards!
    Last October, a federal grand jury indicted Miller on 20 counts of fraud. For an encore, prosecutors added a money-laundering charge after discovering she and her employees had smuggled $120,000 in cash from Australia in Ziploc bags hidden in their suitcases. A week later, she pled guilty to one count of bankruptcy fraud and one count of not reporting an international currency transaction. Now she's looking at 24 to 30 months in a place where sequined leotards are in very short supply.
    Ironically, Miller's cheating didn't save her anything — once the judge found her television gold mine, she wound up using it to pay her creditors in full! And that's the lesson of our story. Cutting corners and breaking the rules may seem to offer short-term relief. But survivors know that long-term planning is the key to financial success. So call us for help with your planning and enjoy some real world savings!