Tuesday, September 19, 2017

Sink Your Teeth Into This One

    "You better cut the pizza in four pieces because I'm not hungry enough to eat six."
    Yogi Berra

The calendar is full of little-known commemorations that probably escape your attention, and this month is no exception. Some of them are just silly, like September 19's International Talk Like a Pirate Day. (Although, really, if you don't think pirates are cool, what's wrong with you?) Some are obscure, like September 23's Restless Leg Awareness Day. But some of those special days resonate with everyone. And that brings us to September 20: Pepperoni Pizza Day. Yes, it's really a thing, and yes, it's magnifico!

Just about everyone loves pepperoni pizza. Even vegans can enjoy it with dairy-free cheese and meatless pepperoni substitutes. (Don't mock it until you've tried it!) Americans eat over 100 acres of pizza per day, and 36% of those pies have pepperoni on top. We eat over 250 million pounds of pepperoni on our pizza every year. Naturally, tax collectors love it . . . so let's see how they take their slice or two of the pie.

Pizza is a $44 billion industry here in the U.S. The top 50 chains, led by Pizza Hut, Domino's, Little Caesars, and Papa John's, account for $24.75 billion in sales. Smaller chains and independents gross $19.75 billion more. That means billions in sales taxes going to state and local governments, billions in corporate income taxes from the companies that sell those pizzas, and billions in personal income taxes from the actual people who own those businesses.

There are 76,723 pizzerias in America. Every one of those parlors pays property tax on the location. It would be poetic if New York-style pizzerias everywhere paid tribute to New York and deep-dish pizzerias nationwide kicked up to Chicago, but cross-state tax compacts aren't quite so flexible.

Fortunately, taxes on pizza aren't all "takeout." Every one of those gooey delicious pies starts with raw ingredients like wheat flour, tomato sauce, cheese, and meat. Our tax code offers some savory tax breaks to the farmers who supply those ingredients. Pork producers, for example, get depreciation deductions for farm equipment and confinement facilities to turn three-pound piglets into 275-pound hogs in just six months. That's a lot of pepperoni!

Does all this pizza talk have you thinking about opening your own place? Watch out for audits! Pizzerias are largely cash businesses, which makes it easy to skim off profits. In the early 1990s, the IRS conducted an in-depth study of mom-and-pop pizzerias in the Providence, RI area and wrote an entire guide for auditors examining them. If you're under audit, and the examiner suspects you're underreporting your sales, he might contact your meat supplier to see how much pepperoni you bought, then compare it to the pizza sales you report. If the numbers don't add up, you'll have some 'splainin to do!

Finally, don't be fooled by places serving "flatbreads." It's pizza. They just call it flatbread to charge more.

We realize there's no easy way to transition from pepperoni pizza to tax planning. But there is a connection. The less you pay in tax, the more dough you'll have to enjoy America's favorite comfort food! So come to us before you get hungry, and let's see how much more of your income "pie" you can actually eat!

Monday, September 11, 2017

Help With Help

Ordinarily we use this space for lighthearted stories that poke fun at the tax system and some of the clever ways that people endeavor to make it work for them, successfully or not. But the recent stories coming out of Harvey-ravaged Texas and Irma-ravaged Florida suggest a more serious tone for a change. Today we're going to walk through some tax-related opportunities when it comes to reaching out to storm victims. You might be surprised to see how our friends at the IRS are jumping in to help, too:

    If you want to deduct your contributions, make sure you're giving to a properly registered 501(c)(3) nonprofit. There are more than 1.5 million of them, and many are making extra efforts to help storm victims. These include local groups in affected areas, faith-based groups, and even animal-welfare groups dedicated to rescuing pets displaced by the storms. Many national groups have established special funds for Hurricanes Harvey and Irma, which let you earmark your contributions.

Be careful before you join crowdfunding efforts on sites like GoFundMe. While you can certainly find links to registered 501(c)(3) organizations, most individual campaigns won't qualify for tax deductions.

Don't be afraid to do some homework on a charity before you give. Check out rating sites like Charity Navigator and Charity Watch, which can tell you how much of your donation your chosen group gobbles up in administrative expenses, and whether they submit their financials to an independent accountant for audit.

There's no deduction for the value of time you volunteer for cleanup efforts and other relief. However, you can deduct any expenses you pay, such as for travel to an affected area. You can deduct 14 cents/mile driven in service of a charitable organization.
If you don't itemize deductions, consider asking your employer to donate the cash value of your unused vacation time, personal days, or sick leave to charitable organizations. Your tax break will take the form of not recognizing that income in the first place. (Your employer gets the same deduction they would have taken if they had paid it out in compensation.) IRS Notice 2017-48 sets out the rules for you and your employer.
The IRS has a web page discussing help for victims of Hurricane Harvey, and we can assume it won't be long before they update it for Irma (and possibly Jose, which at this writing could still hit somewhere on the east coast.) You'll find extended due dates for business returns, penalty waivers, and special provisions letting retirement plans expedite loans and hardship distributions to hurricane victims and their families.

We realize that saving a few bucks on taxes may be the last thing on your mind when you see the devastation Mother Nature has wrought. But those tax breaks serve a purpose, to encourage giving and to help you give more. So don't overlook these opportunities to save. And call us with your questions — coming together as communities is how Americans support each other in times of need, like now.

Wednesday, September 6, 2017

$50 Million, Hut!

The 2017 college football season kicked off this week, and for most people that means talk of pre-season polls, Heisman trophy hopefuls, and BCS championship prospects. But we're not "most people," are we? So today we're going to ignore all that boring on-field action and see how one coach's financial advisors lined up the X's and O's to outwit the defensive line at the IRS.

Here's a little-known fact that might offend your sense of priorities. Seven-figure salaries are almost unheard of in academia. But the average major university's football coach makes $1.81 million per year. In fact, in 39 states, the highest-paid academic or public employee is a college football or basketball coach. (And how many of them do you think have performance bonuses tied to graduation rates?)

Alabama's Nick Saban would seem to top that list with over $7 million per year. And why not? He's rolled his Crimson Tide to four national championships in 10 years. But here's the problem, at least as far as his salary and performance bonuses are concerned. The linebackers at the IRS are out for their share, too. And they're not satisfied with a pick-six — they're looking to intercept over 40%.

It turns out that Saban's cross-country coaching rival, Michigan's Jim Harbaugh, found a clever pattern to weave around those defenders and come out on top where it really counts — after taxes. Here's how it works:

    The university established a nonqualified deferred compensation plan with Harbaugh that took the form of "split-dollar" life insurance. (Split-dollar is simply a life insurance policy where the costs and benefits are shared by more than one party — typically, it's an employer and employee.)

The university agreed to make seven annual nontaxable loan advances of $2 million each for Harbaugh to use to buy a cash-value life insurance policy. Those premiums will grow to build a tax-free pool of assets while Harbaugh continues to coach the Wolverines.

Harbaugh can take nontaxable loans from the life insurance policy for supplemental retirement income so long as the remaining cash value in the policy is enough to repay the loan advances.

When Harbaugh dies, the university gets $14 million to cover the loan advances and Harbaugh's beneficiaries get the remaining death benefit. Harbaugh is a healthy 53 years old, which should leave a long time for that cash value to grow. Some experts estimate Harbaugh can run up that score to as much as $50 million.

Harbaugh won't pay any interest on the $14 million in loan advances. However, he will have to pay tax on the value of the foregone interest he would have paid, as calculated by IRS tables. But since that tax shouldn't top much more than $100,000 per year at current rates, that's an easy call to make!

Football teams have all sorts of ways to put points on the board: running plays, passing plays, options, sneaks, and even the time-tested fumblerooskie. The best coaches put together game plans to harness all those opportunities. It works the same way with taxes. So call us before you get to the red zone, and let us come up with your best game plan!

Monday, August 28, 2017

A Match Made in Dallas

Where is "home"? Home is where the heart is. Home is wherever you make it. Home is wherever I'm with you. And, of course, I'll be home for Christmas. But what does the tax man think of all of this?

In 2009, Greg Blatt was Executive Vice-President, General Counsel & Secretary of InterActive Corp (IAC), which ran 150+ web sites including About.com, Vimeo, and The Daily Beast. Blatt's title sounded impressive, but IAC had reorganized him out of much of his responsibility, and he started looking for a new position. IAC didn't want to lose him, so they made him CEO of Match, a collection of dating sites including Match.com, OKCupid, Tinder, and PlentyofFish.

There was just one problem with the new gig — it was headquartered in Dallas. That held no appeal for the New York-based Blatt. So he worked out a deal to manage Match from New York. (Just another long-distance relationship, really.) He would keep his corporate position with IAC, spend most of his working time in New York, and keep his West Village loft and his boat in the Hamptons.

They say no battle plan survives initial contact with the enemy, and Blatt's was no exception. He got to Dallas and discovered, much to his surprise, that he loved it. The people were friendly! The city was cosmopolitan! (We realize that may be hard for the bi-coastal elites to accept, but there really is life in flyover country.)

Blatt loved the work, where he got to be "the decider." He loved his apartment in a swanky Uptown hi-rise, where 1-bedroom units start at $2,230 per month. He started dating, which makes sense for a guy running an online dating empire. (We're pretty sure Warren Buffett gets his insurance from GEICO, too.) He even moved his dog, who he had rescued from the SPCA, telling a friend, "Dog is the final step that I haven't been able to come to grips with until now. So Big D is my new home."

Unfortunately for Blatt, his Lone Star adventure was short-lived. He did so well at Match that he got promoted to CEO of IAC. While he tried to run the corporate parent from Dallas, he quickly realized he couldn't do it, and he moseyed on back to the Big Apple in 2011.

Everyone was happy except the romantics at the New York Division of Taxation, who didn't love the idea of losing taxes on Blatt's salary. In 2011, they audited him and hit him with $430,065 in taxes plus interest and penalties. Blatt paid the tax, then filed a petition for a refund. (Did we mention that New York's top tax rate of 8.82% is 8.82% higher than Texas's top rate of zero?)

Administrative Law Judge Diane Gardiner issued a 23-page opinion walking through Blatt's story. She noted mundane factors like changing his driver's license and voter registration. But the real clincher? "As borne out by the evidence in this case, petitioner's dog was his near and dear item which reflected his ultimate change in domicile to Dallas . . . . As demonstrated by a contemporaneous email regarding his move, petitioner stated that his change in domicile to Dallas was complete once his dog was moved there."

So, boys and girls, what have we learned today? Well, we've learned that home is where the dog is. More important, we've learned that home is where the tax savings are — in this case, $430,000 worth. So call us when you're ready to save, and let's see if we can help feather your nest!

Tuesday, August 22, 2017

TurboTax Made Me Do It

One of the highlights of living in our technologically-advanced age is the ability to buy tools to do almost anything. If your kid fractures his arm playing baseball, you can hop on over to Amazon and order an orthopedic bone saw for less than the cost of a tank of gas. Then you can (probably) head over to YouTube and watch a video explaining how to smooth off the rough edges and set it for best results. You might not want to do that all yourself. But the tools are there if you want them.

Here in the tax business, there's no shortage of similar tools you can use to help satisfy your obligations with your friends at the IRS. TurboTax, TaxCut, and similar programs give you much the same power as professional tax-prep systems. If your circumstances are simple enough, and you're familiar with the process, you might be able to do a perfectly serviceable job of preparing your own return. You might not want to write off an entire weekend wrestling with the various questions, forms, and procedures — but the tool is there if you want to.

But sometimes, doing it yourself really isn't the best idea. Barry Bulakites just learned that the hard way, to the tune of a trip to Tax Court (where he represented himself, of course). Bulakites is a San Diego-based insurance consultant who works with accountants, but who didn't see the value in hiring a professional to prepare a pretty complicated return. Here's how his DIY tax prep worked out:

    He deducted $79,000 in mortgage interest in 2011 and 2012, for a loan that was due to be paid off in 2008. The court could see that Bulatikes had paid something, but he couldn't cough up the paperwork to show the amount of interest or even why he was obligated to pay. The court disallowed it all.

He deducted $100,000 in alimony he paid over the same period. His separation agreement specified $2,000 per month, but he and his ex- orally agreed to bump it to $5,000. Unfortunately, the law specifies oral agreements aren't enough to qualify, so the court disallowed the excess.

He deducted $185,673 for "other expenses" in 2011, which he claimed was a net operating loss carryforward from a previous year that he put on the wrong line of his return. Too bad he failed to file the required "concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the net operating loss deduction." The court allowed just $142.

Bulakites admitted that he deducted things he shouldn't have and overstated things that he could. But then he threw TurboTax under the bus for "luring him into" claiming them! We can just imagine what that would have looked like. Did it dare him to stretch that alimony deduction by an extra $3,000 per month? Did it challenge him: "are you man enough to deduct this net operating loss?" In the end, the court concluded that "[t]ax preparation software is only as good as the information one inputs into it."

Here's the real irony, at least as far as we're concerned. Preparing your taxes, on your own or with a professional, is important. But all that really does is record history. The real value comes from planning your taxes to pay less in the first place. So call us when you're ready for planning, and don't let cheap office-supply store software bully you into paying more than you have to!

Wednesday, August 16, 2017


Mark Twain once said, "Never put off till tomorrow what may be done the day after tomorrow just as well." But Twain's advice doesn't always pay when it comes to taxes. The calendar watchers at the IRS charge a 5% per month failure to file penalty, up to 25% of the amount due, along with a ½% per month failure to pay penalty, also up to 25% of the total amount due. And the IRS isn't the only tax man to pay attention to deadlines, even if they don't loom as large in our minds as April 15.
Presidio Terrace is a private block-long oval of a street in San Francisco's pricey Presidio Heights neighborhood, lined with 35 multimillion-dollar mansions. Residents have included Senator Dianne Feinstein, Representative Nancy Pelosi, and former San Francisco Mayor Joseph Alioto. There's a stone-gate entrance to the street, a rent-a-cop stationed at the gate to keep out snoopy mcsnoopfaces, and a manicured island inside the oval for residents to enjoy.
The street and sidewalks are owned by a homeowners association made up of surrounding residents. Because it's private, the association pays tax on the property — in this case, a whopping $14 per year. Now, $14 may not sound like it can power a lot of local government. But the city still wants their money. So, every year, the Treasurer-Tax Collector dutifully mails the bill to the association's accountant on nearby Kearny Street.
There's just one teensie-weensie, tiny little problem. That accountant hasn't worked for the HOA since the 1980s. (Oops.) That means the bill hasn't been paid since MTV still played music videos and Madonna was a doe-eyed ingenue. Suddenly, $14 per year snowballed into $994 in taxes, penalties, and interest. Most of the street's residents could have covered it with spare change from their couch cushions. But the city went ahead and put the street up for auction!
Enter Michael Cheng and his wife Tina Lam, real estate investors from nearby South Bay. Cheng spotted the listing for the auction and smelled money. He wasn't the only bidder looking to pick up this particular opportunity. But he outlasted the rest and, for $90,100 — sight unseen — the street was theirs!
So how can a couple of scrappy young real estate investors monetize their ownership of a block-long street surrounded by card-carrying 1%-ers? Start with parking. The street has 120 spots, which make it a potential gold mine in a city where a single parking space recently sold for $80,000. (And if the folks on the street don't want to pay to park in front of their own houses, maybe the Chengs could rent spots to the peasants living outside the gates?)
Needless to say, the people who actually live on Presidio Terrace aren't nearly as excited about paying to park on their own street as the investors who just bought it. The residents have hired an attorney, of course. (Funny how many of these weekly stories involve hiring an attorney.) They've petitioned the city to void the sale, and scheduled a hearing for October. And they've sued the city to stop the Chengs from flipping the street to anyone else until after they're done with that fight.
Twenty years ago, an author named Richard Carlson made a fortune selling a book called Don't Sweat the Small Stuff: and It's All Small Stuff. Unfortunately, sometimes you really do have to sweat the small stuff. Fortunately, you've got us. So let us sweat it for you, and save you a buck or two in the process!

Tuesday, August 1, 2017

Making More By Paying Less

When affluent clients want to pay less tax, they turn to accountants, attorneys, and financial advisors, among other advisors. And we can make a nice living helping clients accomplish that goal. (At the risk of sounding self-serving, it's because we're worth it.) But you won't find any tax professionals populating the Forbes 400, or your hometown paper's list of richest local residents.
Having said that, there are a few people who have made legitimate fortunes helping people pay less tax. They just aren't working where you think they are.
Most of us don't give much thought to tariffs, simply because we don't directly pay them. When we do pay them any mind, we typically think of international trade policy and raw materials like steel. But governments impose import taxes on consumer goods, too, including luxury favorites like perfume and cologne, watches and jewelry, high-end spirits, and the like. And while those duties don't add up like income taxes, buyers don't want to pay any more of them than they have to.
Robert Miller grew up in Massachusetts and attended Cornell University's prestigious School of Hotel Administration. But he took a different direction than most of his classmates, and five years after graduating, he launched the first Duty-Free Shop in Hong Kong. In 1962, Miller secured the rights to operate the first duty-free shop in America, in the Honolulu airport. This opened his doors to servicemen returning from Asia and wealthy Japanese travelers.
Miller and his partners eventually expanded the chain to over 420 locations in airports and high-end retail locations across the globe. In 1997, his partners sold their interests to the Paris-based luxury-goods conglomerate LVMH. But Miller kept 38% of the company, and today his net worth stands at about $2.8 billion.
And how does a guy who made billions helping his customers sidestep taxes live? Pretty much exactly how you'd expect. Miller, now 84, is a champion yachtsman — he sailed his 42-meter monohull Mari-Cha IV to a world record Atlantic crossing in six days, 17 hours, and 52 minutes. He owns a 36,000-acre sporting estate in Yorkshire, along with houses in New York, Paris, and Gstaad. (It's pronounced g-schtad, for those of you don't regularly ski the Swiss alps.)
Miller's three daughters have earned their own fame as socialites, and for marrying spectacularly well. Pia, the oldest, married a grandson of oil baron J. Paul Getty. Marie-Chantal, the middle, married Crown Prince Alexander of Greece. (We know the Greeks may not be the most prestigious royals these days, but their blood is more blue than ours!) And Alexandra, the baby, married the son of Prince Egon von Furstenberg.
Miller's success in helping customers avoid import duties may not hold any direct lessons for us. But he's obviously done some sophisticated income tax planning, too. And that's where we come in. So call us when you're ready to save, and let's see if we can help you afford more luxury goods on your next international flight!