Tuesday, November 24, 2015

Uncle Sam, Knowing When to Hold'em

Last month, millions of fans across America sat down in front of their televisions to watch the Kansas City Royals beat the New York Mets, 4 games to 1 in baseball's World Series. But few of those fans would ever dream they could suit up and join the players in the dugout. That's because, while many of us played as children or teens, America's national pastime is, for the most part, a spectator sport.
That's not the case with America's favorite indoor sport. Poker players across America look forward to the World Series of Poker, in part because, for just $10,000, they can buy in and join the action themselves. On July 8, a total of 6,420 players from 80 different countries gathered at Las Vegas's Rio Casino to compete in the no-limit hold'em Main Event. And on November 10, there was one clear winner: our friends at the Internal Revenue Service.
To be clear, no one from the Service actually appeared at the final table. And a 24-year-old pro named Joseph "Joey Ice Cube" McKeehen from North Wales, PA, walked away with the coveted gold and diamond bracelet. But the IRS walked away with a bigger chunk of the $24 million in prize money than anyone else!
Joe McKeehen sat down at the final table with three times as many chips as his nearest rival, and never let up. Three days and just 183 hands later, his pair of tens knocked out Joshua Beckley's pocket fours to end it all. McKeehen's share of the purse totaled $7,683,346. And sure, that sounds like real money. But assuming he pays tax on the full amount, he'll give back $3,073,240 of that in federal income tax, $292,000 in self-employment tax (because he's a professional), $235,879 in Pennsylvania income tax, and $76,833 in local Earned Income Tax. (He'll also owe tax on the $500,000 value of the bracelet.) That's sort of like taking a full house and chopping off the pair — it still leaves three of a kind, but it doesn't pack the same punch.
The story is much the same with the rest of the nine who sat down at the final table. Runner-up Beckley turned his $10,000 buy-in into $4,470,896, but gives back $2,081,719 in tax. (His tax rate as a New Jersey resident is a lot higher than McKeehen's.) Third-place winner Neil Blumenfield faces a 12% California tax on his winnings, while fourth-place finisher Max Steinberg of Las Vegas faces no state tax on his at all. Seventh-place finisher Pierre Neuville, of Belgium, actually finishes fifth after taxes. That's because the U.S.-Belgium tax treaty lets him keep all of his $1,203,293 prize. Ninth-place finisher Patrick Chan, who lives in New York City, played just two hands at the final table and gives back nearly half his $1,001,020 to taxes.
In the end, Uncle Sam should take home $8,467,081 of the total prize money. That's not bad considering he didn't even have to sit down to play! No tough decisions over going "all-in" before the flop, no sweating out gutshot draws on the turn or the river. On other continents, Israel's Tax Authority takes a shekel or two from fifth-place finisher Zvi Stern, and Italy's Agenzia delle Entrate takes half a million (dollars, not lire) from eighth-place finisher Federico Butteroni.
Here's the good news where it comes to taxes: Paying less is a lot easier than catching pocket aces at the final table. So if you want to pay less, and you can't take advantage of the U.S.-Belgium tax treaty, call us for a plan. Be sure to do it now, before the year runs out on you. We'll tell you which strategies to hold, and which to fold, and send you home a winner.

Monday, November 16, 2015

"Easily Satisfied with the Very Best"

Few figures from recent history loom larger than British Prime Minister Winston Churchill, "the Last Lion." He spent "the wilderness years" of the 1930s fighting the Conservative Party's leadership, most notably Neville Chamberlain, to campaign for rearmament. As prime minister, he fought the Nazis to victory in World War II. Throughout his life, he fought the "black dog" of depression. But did you know how much he fought the Board of Inland Revenue — his country's equivalent of our own IRS?
The Right Honorable Sir Winston Leonard Spencer-Churchill was born into privilege. His grandfather was the seventh Duke of Marlborough and lorded over Blenheim Palace, one of England's stateliest homes. Maybe that's why Churchill picked up the sort of indulgent habits that led so many British aristocrats to lose their stately homes. Now David Lough, a former banker, has written No More Champagne: Churchill and His Money, to chronicle Churchill's precarious relationship with personal finance. And it includes a story to delight all of us who understand the value of smart tax planning.
Churchill loved to write. He loved to paint. He loved to drink champagne and smoke cigars. But most of all, it appears, he loved to spend. Take those infamous cigars, for example — by 1914, he was smoking a dozen a day, at a cost of about $1,600 per month in today's dollars. Yet he went five years without paying his bill to J. Grunebaum & Sons, his tobacconist.
"These filthy money matters are the curse of my life and my only worry," he wrote his mother when he was just 24 years old. Later, he told her: "It seems just as suicidal to me when you spend £200 on a ball dress as it does to me when I purchase a new polo pony for £100. And yet I feel that you ought to have the dress & I the polo pony. The pinch of the whole matter is that we are damned poor."
Lough's book recounts how Churchill even flirted with bankruptcy. Just one month after becoming PM, he ran out of money to pay his household bills, his taxes, and the interest on his loans. His assistant approached a prominent anti-Nazi banker for a £5,000 handout — equal to $250,000 in today's dollars.
Fortunately, Churchill had financial reinforcements outside his government salary: his income from writing. And that's where he conjured up a little tax-planning magic. In 1940, he cleverly persuaded his finance minister that since he was now "retired" from writing, any income he earned from that source should be treated as nontaxable capital gains rather than ordinary income. This would eventually mean no tax on the sale of film rights to his books, nor on advances for his memoirs. Of course, when he left office in 1945, he faced punishing 90% rates on any future works. (It's no wonder he turned to painting!)
Now it looks like clever planning is a Churchill family tradition. Last year, his daughter died at age 91, and Her Majesty's Revenue and Customs department agreed to accept 37 of his paintings in lieu of £9.4 million in inheritance taxes. The paintings will hang at the family's former home outside Kent.
If you're like most of our clients, when it comes to taxes, you want to fight them on the beaches, fight them on the landing grounds, and fight them in the fields and streams and hills and never surrender. The good news is you don't need to strongarm the Secretary of the Treasury into letting you pay less. You just need a plan. So call us, before December 31, to assure your finest hour!

Monday, November 9, 2015

Quantum Mechanics (or Something Equally Complicated)

How big a tax bill would you have to pay before it really hurt? Would sending the IRS $10,000 do it? What about $100,000? What about $1 million? Would you toast the good fortune that left you with enough income to owe that much tax, or would you stamp your foot and call for the peasants to storm Washington with pitchforks and torches?
Now imagine that you're hedge fund manager George Soros. You survived the Nazi occupation of Hungary and fled the communist regime that succeeded them. You made $1.8 billion shorting the British pound and earned the nickname "the man who broke the Bank of England." You've amassed a $24.5 billion fortune, enough to make number 24 on the Forbes 400 list. What's your reward? How about a tax bill of $6.7 billion.
Soros started his Quantum Endowment Fund back in 1973. Since then, he's grown that first fund into an entire family. Like most hedge fund managers, he charges a management fee based on a percentage of assets under management (typically 2%), along with an incentive fee equal to a percentage of profits (typically 20%). Ordinarily that would mean hefty taxes to accompany those hefty fees. But back then, the law gave hedge fund managers the opportunity to defer tax by reinvesting fees back into their funds.
The problem with deferring fees like that is that your investors — at least the ones who are taxed here in the U.S. — can't deduct your fees from their income. But that's no problem. Just set up offshore funds for clients like pension funds and endowments that aren't subject to U.S. taxes and keep deferring tax on their fees!
Of course, when Washington sees how taxpayers take advantage of the rules in the real world, it's easy enough to change them. In 2008, Congress closed that particular loophole and gave managers until 2017 to cough up the accumulated tax. Soros reports having $13 billion of his own money in the funds. He's subject to 39.6% ordinary income tax, 3.8% net investment income tax, and 12% New York state and city tax. Crunch the numbers and that's where we come up with that monster bill.
But that 2008 law also included a loophole for funds based outside the U.S. that pay local tax. So, just one week before President Bush signed the new law, Soros formed a company called Quantum Endowment in Ireland, where the top tax rate is just 25%, then transferred his accumulated gains into that new company. Of course, that doesn't mean he actually reports any profit. Instead, he issues investors something called "profit participation notes" and pays out most of the income as distributions on those notes. From 2008 through 2013, Quantum Endowment has paid just $962 in tax.
Ironically, back home in America, Soros has earned a reputation as a political liberal. Plenty of observers find it hypocritical ironic that a man who owes so much of his fortune to deferring his own taxes has chosen to dedicate part of it to causes like raising everyone else's.
George Soros has invested millions of dollars to assemble a team of world-class professionals to manage his fortune. This includes the traders who help him manage billions for himself and his clients, and the tax advisors who help them all keep as much as the law allows. You may not have as much at stake as Soros. But don't you deserve the same proactive attention to planning as he gets? You can have it . . . just give us a call!

Monday, November 2, 2015

Who Lives, Who Dies, Who Tells Your Story

Every so often a new show hits Broadway with lights that shine brighter than the rest. In 1996, Rent celebrated a group of impoverished East Village artists struggling to thrive in the shadow of AIDS. In 2003, Wicked imagined the lives of the witches of Oz before Dorothy's unexpected arrival. But who would have thought today's hottest ticket would be a rap-driven bio of the Founding Father responsible for the financial system that collects those taxes we all hate? This week's story is a bit different from our usual perspective. But stick with it . . . how often do you see taxes and finance starring in popular culture?
Hamilton began by chance when the show's creator, Tony award-winner Lin-Manuel Miranda, picked up Ron Chernow's landmark biography of Alexander Hamilton to read on vacation. Miranda saw "the $10 founding father/without a father" as the embodiment of hip-hop: a penniless immigrant who rose to power through the power of his words. The show began life as a concept album before morphing into a full-blown musical which debuted on Broadway in August. The show sold $30 million worth of tickets before it even opened, and prime seats currently commandover $1,300.
The story follows Hamilton's journey from his birth in illegitimate squalor "dropped in a forgotten spot in the Caribbean," through his appointment as George Washington's right-hand man and service as the nation's first Treasury Secretary, to his disgrace in the nation's first sex scandal and his death at the hands of rival Aaron Burr. Thomas Jefferson, James Madison, and Lafayette are all there to challenge him along the way. Even King George III saunters onstage to warn his unfaithful subjects: "And when push/Comes to shove/I will kill your friends and family/To remind you of my love."
Miranda's propulsive score will satisfy everyone who's waited for hip-hop to meet harpsichords and fall in love. It combines traditional Broadway influences from Gilbert & Sullivan and Stephen Sondheim to contemporary sounds like the rapper Notorious B.I.G.
The show has reduced sober critics to drooling fanboys. The New York Times' Ben Brantley gushed "it really is that good," and confessed, "I am loath to tell people to mortgage their houses and lease their children to acquire tickets to a Broadway show. But Hamilton . . . might just about be worth it." Even the Wall Street Journal's Terry Teachout calls it "the most exciting and significant musical of the decade," and says, "Do whatever you have to do short of grand larceny to score a ticket."
As it turns out, there are only a couple of direct references to taxes. At one point Thomas Jefferson snarls, "Look, when Britain taxed our tea, we got frisky/Imagine what gon' happen when you try to tax our whiskey." But that line appears in a song titled "Cabinet Battle #1" that turns Hamilton's plan to finance the U.S. government into a rap battle. (It's not the sort of thing you expect to hear on Broadway, right?) Hamilton championed a strong federal government, with implied powers to assume states' debts, and establish a national bank. His forceful advocacy is arguably why the bulk our taxes today go to Uncle Sam and not your state or local government.
We realize that when the curtain rises on April 15, you probably aren't humming show tunes. But it's worth remembering, at least occasionally, that taxes really are the price we pay for civilization. And while our current tax code may seem as illegitimately-conceived as the Founding Father who paved its way, it's the product of a uniquely American experiment in self-government that seems to still be working 200 years later.

Monday, October 26, 2015

No Extra Credit Here

Paying your taxes is one of those responsibilities that most of us accept when the time comes. Sure, we grumble about it. But we pay, then get on with the day. We don't expect to get brownie points just for doing our duty. In fact, if you give yourself too much credit for doing it, you might get yourself in trouble, as one tone-deaf tech company recently found out.
Airbnb (shortened from "AirBed & Breakfast") is an online marketplace for short-term rentals that lets people list and find acommodations across the world. Are you visiting the company's hometown of San Francisco and don't feel like checking into a hotel? Check out www.airbnb.com, where you can find everything from a spare guest room in someone's house to a fully furnished three-bedroom condo overlooking the Golden Gate Bridge. The concept has definitely caught on — the company currently offers over 1,500,000 listings in 34,000 cities and 190 countries, and boasts a $25.5 billion valuation.
However, many of the temporary innkeepers who list their homes on the site don't know they should be paying local hotel or occupancy taxes, which typically range from 5-15%. Airbnb has stepped in to help their users comply with these rules, reaching agreements with cities including Portland, San Jose, Chicago, and even Amsterdam to collect the taxes and pay them over to the right places.
In San Francisco, the company collects and then pays pays about a million dollars a month in tax. But city residents are about to vote on a ballot initiative that would limit short-term rentals to 75 nights per year. At a time when rents in the city have shot insanely high (the average studio apartment rents for over $2,800 per month), the goal of the initiative is to discourage landlords from reserving properties for tourists, which limits the housing stock and puts even more upward pressure on rents. Airbnb has committed $8 million to defeat the initiative, which is more than all 14 mayoral candidates together spent in the last election.
But here's where Airbnb took things a little far. Last week, the company irritated the City by the Bay with a snarky series of ads on billboards and city bus kiosks. "Dear Public Library System," read one. "We hope you use some of the $12 million in hotel taxes to keep the library open later. Love, Airbnb." Others urged the city to build more bike lanes, plant more trees, put escalators up the hills, keep parks clean, and keep art in schools. The company also told tax collectors not to spend the $12 million all in one place (unless they spend it on burritos).
Good stuff stuff, right? Well, maybe not so much. One resident crunched the numbers on the library ad and calculated the hotel tax might contribute as much as 78 cents per employee per day — hardly enough to keep the libraries open longer! Others commented that the ads were good at going viral, but not much else. Airbnb has already admitted the ads took the wrong tone, apologized to anyone they might have offended, and pledged to take the ads down.
So here's the moral of the story. You don't get brownie points for paying your taxes — so why pay more than you have to? Companies like Airbnb spend millions on plans to keep their tax burden as low as possible. But you can do the same thing for a far smaller investment — and with December 31 fast approaching, now is the time of year to plan. So call us, and see how much extra you might save!

Tuesday, October 20, 2015

Tax Man Turns $1 = $10,001

Here in the United States, Uncle Sam imposes a "progressive" income tax. As your income goes up, so does your tax rate. However, those rates go up incrementally. If you're married, filing jointly with your spouse, the 39.6% top rate kicks in at $413,201. (We use the term "kicks" deliberately because that's how it feels when you're giving Uncle Sam nearly 40 cents on the dollar.)
The good news, if there really is any, is that the higher tax applies only on the amount of income above the new threshold. If your income is $413,201, you'll pay the higher rate on that 413,201st dollar of income, but no higher on the first $413,200. Paying the higher tax on that last dollar hurts a little more, but not as much as if it meant paying more on every dollar.
But not all taxes are progressive in the same way. Sometimes governments impose taxes on certain transactions that kick in at a certain level but are based on the entire amount. Naturally, those sorts of taxes get buyers and sellers to sit up and take notice before they act. And we may be about to see that effect in one of the country's frothiest housing markets — the "Big Apple."
In 1989, New York Governor Mario Cuomo signed the "mansion tax" into law. It's a flat 1% surcharge you pay to close on property costing $1 million or more. Last year, it raised $362 million. That's a drop in the Empire State's $72 billion bucket. But it's a big deal for the buyers! If you pay "just" $999,999 for your new home, your mansion tax is zilch. But pay one dollar more, and you owe the tax on the entire $1 million. That single extra dollar of price just took $10,001 out of your pocket!
Back in 1989, $1 million really bought you a mansion. But today in Manhattan, the median sale price is a record-high $999,999, according to the Corcoran Group real estate brokers. You can drop $1 million just for a one-room studio. At the high end hedge fund manager Bill Ackman just paid $91.5 million for a condo at the One57 building in the heart of 57th Street's new "Billionaire's Row." (He's not actually going to live there, mind you — he'll just host an occasional party and watch his equity climb ever higher.)
Drive two hours east to the Hamptons (or better yet, fly 45 minutes on a helicopter) and the story is much the same. A million bucks buys you something the real estate agent might describe as "shabby chic," but that anyone without a vested interest in the sale price would just call "shabby." You've really got to make it rain to get something most of us would consider a "mansion."
Governments aren't the only ones to hustle some extra cash cash when a property changes hands. Many of the city's finer cooperative apartments impose a so-called "flip tax" to buy or sell. Want to join New York Jets owner Woody Johnson, fashion designer Vera Wang, and the rest of the billionaires hanging their bespoke hats at 740 Park Avenue? You'll pay the building an extra 3%. That might not sound like so much — but considering the last apartment sold there went for $71 million (do the math), it adds up fast!
Here's the lesson for the week. Buying big-ticket items like a house, an apartment, or business equipment can involve much more than just running down to the store and whipping out your American Express card. And selling those sorts of assets the wrong way can cost you even more. So don't make those decisions alone. Call us for the plan you need to buy and sell right!

Tuesday, October 13, 2015


Every once in awhile, some knucklehead in a position of power at one of the world's biggest businesses does something so incredibly stupid, you wonder how they can remember to put their shoes on before they head to work in the morning. Bernie Madoff did it for decades by running a classic Ponzi scheme out of his New York office. The folks who ran Enron did it for years when they lied about their earnings. And right now in West Virginia, the former CEO of Massey Energy is on trial for covering up safety violations that led to the deaths of 29 coal miners. Stupid, stupid, stupid.
Volkswagen became the latest corporate villain when they came clean about selling 11 million cars with a secret feature they didn't advertise on the window sticker. Along with leather-trimmed seats, German-engineered sport suspensions, and fancy navigation systems, buyers who chose a "Type EA 189" diesel engine also took delivery of a "defeat device," buried deep in the car's software, designed explicitly to cheat emissions tests. Researchers from the International Council on Clean Transportation discovered that the cars were emitting up to 40 times more nitrogen oxide than allowed.
Naturally, environmental regulators are up in arms. VW's CEO has resigned, the company's stock has tanked, and the carmaker is looking at up to $18 billion in fines in the United States alone. But the devices apparently did more than just cheat pollution monitors. It looks like they also cheated the IRS. Uh oh.
Here's how it worked. The Energy Policy Act of 2005 gave taxpayers credits for buying certain alternative fuel vehicles, including lean-burn vehicles running on diesel fuel. Manufacturers have to swear on a stack of bibles that their cars meet the standards to earn the credits, which naturally make them more attractive to buyers. For 2009, VW pinky-swore that their Jetta 2.0L TDI sedan and Jetta 2.0L TDI SportWagen models qualified for a $1,300 credit. 39,500 people bought those cars, making the total tax fraud $51 million.
On October 6, Senate Finance Committee Chair Orrin Hatch and Ranking Member Ron Wyden sent VW a letter posing a blunt question: "Did Volkswagen make false or misleading assertions in any of the materials submitted to, or communications made to, the U.S. government regarding eligibility of Volkswagen vehicles for the lean-burn technology motor vehicle credit?" They letter also requested any marketing material alerting buyers to possible tax credits for their cars.
VW has until October 30 to reply. It's unlikely that buyers will have to repay credits — they didn't do anything wrong, and VW's pockets are deeper anyway. Sure, VW will recall as many of the vehicles as they can. (Of course, some of those buyers will prefer the performance they get from the dishonest engines.) So the tax offense will probably get rolled up in whatever settlement VW winds up negotiating with the government. The company has put aside $7 billion to handle the fallout. Sure hope that's enough!
You'd like to think the boneheads who decided to cheat the emissions tests at least worried about the civil and criminal risks they were taking. But smart money would bet they didn't consider the tax consequences, either. While that wasn't their biggest mistake, it's still likely to push the ultimate cost of the scandal even higher. That's why it's so important to have a plan that helps you anticipate the tax costs of everything you do. So call us for your plan and avoid running off the road!