Press Baron Rupert Murdoch started with his father's newspaper in Adelaide, South Australia, and built it into the world's second-biggest media empire. Time magazine has ranked him three times in their annual list of the 100 most influential people in the world. Vanity Fair routinely lists him in their "New Establishment" ranking of the 100 most influential people of the information age. And Forbes ranks him as one of the wealthiest men in the world, with an estimated net worth of $7.6 billion.
But now Murdoch's News Corporation is in hot water because reporters at Britain's News of the World tabloid illegally hacked into telephone voicemails across Britain. Since the scandal came to a boil, several company officials have resigned, others have been arrested, and the News of the World — which began publishing in 1843 when Queen Victoria ruled Britannia — has shut down. Here on our side of "the pond," the FBI is investigating whether Murdoch's forces may have hacked into the phones of 9/11 victims and their families.
But enough of all that legal wrangling. What does the tax man think? More specifically, what do the tax men think — specifically, the Australian Tax Office, with a top corporate tax rate of 36%, our own IRS, with a top rate of 35%, and Britain's Inland Revenue, with a top rate of 30%?
Well, the answer appears to be "not much." Murdoch is known for his anti-tax position. So it's no surprise that Murdoch has, in the words of Judge Learned Hand, "arrange[d] his affairs that his taxes shall be as low as possible." A 1999 study by The Economist magazine found that, for the four years ending in 1988, News Corp paid an effective tax rate of just 6%. That compares with fully 31% for News Corp's rival Disney, the world's biggest media conglomerate.
How do Murdoch and News Corp do it? First, by slicing and dicing their income into a dizzying number of pieces. And second, by taking advantage of seemingly every international tax loophole on the books. News Corp includes a staggering 800 subsidiaries. That number includes over 60 in various sunny tax havens like the Cayman Islands, Bermuda, the Netherlands Antilles, and the British Virgin Islands. (Hey, if you were picking someplace to send your money to avoid taxes, would you pick someplace like Iceland?)
Here's today's tax quiz question. What would you guess is Murdoch's most profitable subsidiary? Fox News? The Wall Street Journal? Britain's Sunday Times? Nope, nope, and nope. Try "News Publishers" — a Bermuda corporation with no newspapers, no magazines, and no TV stations. Heck, News Publishers doesn't even have employees! Shifting profits across national boundaries lets Murdoch Corp take advantage of jurisdictions like Bermuda with near-zero tax rates.
Ironically, though, all that chicanery may have actually cost Murdoch. As The Economist reported, "The complexity of News Corporation’s structure baffles analysts and puts off institutional investors." The magazine suggests that this complexity accounts for News Corp's share price underperformance in the late 1990s and makes it more expensive for him to finance new acquisitions.
Choosing the right entity for your business is one of the most important decisions you'll make. And while you probably don't need 800 entities, you might profit from more than one. Let us help you with the right plan to make the most of your business — with no illegal phone hacking involved!
Monday, July 25, 2011
Tuesday, July 19, 2011
IRS Hits Homer, Too!
Last Saturday, New York Yankees shortstop Derek Jeter became the 28th major leaguer — and only the first Yankee — to achieve 3,000 career hits. Jeter's third inning solo home run to left field wound up in the hands of a 23-year-old fan named Christian Lopez. Souvenier baseballs are big business, so team officials immediately whisked Lopez out of the stands, escorted him into the president's office, and asked him what he planned to do with his windfall. (The fan who caught Barry Bonds's 715th home run ball sold it on Ebay for $220,100. And Mark McGwire's record-breaking 70th home run ball sold for $3 million in 2006. Nice timing, too — in 2010, McGwire admitted using steroids while he played, and that ball's estimated value dropped faster than a pop fly!)
Lopez showed a bit of class that some would say is surprising from a Yankees fan. He passed on the chance to auction the ball, which some experts estimate would have fetched as much as $250,000. Then he told reporters he thought the ball belonged to Jeter and gave it back to the legendary slugger. But he still walked off with some lovely parting gifts, including three Jeter-autographed balls (worth about $600 each), three autographed bats ($900 each), and two autographed jerseys (another $1,000 each). The Bronx Bombers also gave him four tickets to every remaining home game this season. In fact, for the game after Lopez's lucky grab, they gave him four front-row "Legends" seats, which sell for up to a whopping $1,358.90 each. Quite a haul!
Oh, and you know what else he's likely to catch? That's right . . . a tax bill from the IRS! And those opponents won't be happy with jerseys or tickets, even if the Yanks make the Series. They just want cash, thank you very much.
Catching collectible baseballs presents all sorts of tricky tax questions that most fans won't think of when they suit up for a big game:
•When does the lucky fan who catches the ball fan "recognize" the income? Now, when he catches it? Or someday down the road, when he sells it?
•If tax is due immediately, before the fan sells, how does he determine what it's worth?
•If the proceeds qualify as capital gain, taxed at the special 28% rate for collectibles, what will the fan's "cost basis" be? Zero? The price of the ticket to the game? The price of his season-ticket package?
And what if the lucky fan gives the ball back to the hitter, like Lopez did with Jeter? Back in 1998, just before Mark McGwire beat Babe Ruth's single-season record, a reporter asked an IRS spokesman what would happen if the fan who caught that ball handed it back to McGwire. The spokesman replied that the fan might actually owe gift tax — and sparked howls of protest! Then-Commissioner Charles Rossoti quickly changed course, confessing that the Tax Code could be as hard to understand as the Infield Fly Rule.
Tax experts predict Lopez won't owe tax on the value of the ball he caught, but will owe it on the value of his memorabilia and tickets. What do you think? Is that fair? Or should the IRS "intentionally walk" the fans who catch souvenir balls and let them enjoy a little tax-free history?
Lopez showed a bit of class that some would say is surprising from a Yankees fan. He passed on the chance to auction the ball, which some experts estimate would have fetched as much as $250,000. Then he told reporters he thought the ball belonged to Jeter and gave it back to the legendary slugger. But he still walked off with some lovely parting gifts, including three Jeter-autographed balls (worth about $600 each), three autographed bats ($900 each), and two autographed jerseys (another $1,000 each). The Bronx Bombers also gave him four tickets to every remaining home game this season. In fact, for the game after Lopez's lucky grab, they gave him four front-row "Legends" seats, which sell for up to a whopping $1,358.90 each. Quite a haul!
Oh, and you know what else he's likely to catch? That's right . . . a tax bill from the IRS! And those opponents won't be happy with jerseys or tickets, even if the Yanks make the Series. They just want cash, thank you very much.
Catching collectible baseballs presents all sorts of tricky tax questions that most fans won't think of when they suit up for a big game:
•When does the lucky fan who catches the ball fan "recognize" the income? Now, when he catches it? Or someday down the road, when he sells it?
•If tax is due immediately, before the fan sells, how does he determine what it's worth?
•If the proceeds qualify as capital gain, taxed at the special 28% rate for collectibles, what will the fan's "cost basis" be? Zero? The price of the ticket to the game? The price of his season-ticket package?
And what if the lucky fan gives the ball back to the hitter, like Lopez did with Jeter? Back in 1998, just before Mark McGwire beat Babe Ruth's single-season record, a reporter asked an IRS spokesman what would happen if the fan who caught that ball handed it back to McGwire. The spokesman replied that the fan might actually owe gift tax — and sparked howls of protest! Then-Commissioner Charles Rossoti quickly changed course, confessing that the Tax Code could be as hard to understand as the Infield Fly Rule.
Tax experts predict Lopez won't owe tax on the value of the ball he caught, but will owe it on the value of his memorabilia and tickets. What do you think? Is that fair? Or should the IRS "intentionally walk" the fans who catch souvenir balls and let them enjoy a little tax-free history?
Monday, July 11, 2011
The Tax Man and the "Electric Amish
We've talked before about how the internet is changing so much of how we live our lives. The internet is changing how we shop, how we book travel, and even how some of us find romance.
It's no surprise, then, that the internet is changing how we file and pay our taxes. Just 10 years ago, online filing was a novelty. Now it's become the norm. Last year, two out of three Americans e-filed their income tax returns. Those who also opted for electronically deposited refunds saved the government mailing costs, saved themselves a trip to the bank, and even got their refunds a week faster than waiting for paper checks.
State and local governments are getting into the e-filing act, too. In fact, some state and local governments are mandating e-filing for certain returns. For example, New York has made e-filing mandatory for sales tax returns. They also want taxpayers' phone numbers and Social Security numbers. That's not really too much to ask, is it?
But what if your business isn't part of the internet revolution? What if you still take your goods to market in a black horse-drawn buggy? What if your store doesn't even have electricity?
That's the dilemma that many Amish are facing right now. The New York Department of Taxation and Finance wants them to file sales taxes electronically, like any other business. The Department has even sent Amish business owners — mainly furniture makers and shopkeepers — letters threatening a $50 penalty for every return not electronically filed!
The Watertown Daily Times, which publishes in an area that's home to the conservative Swartzentruber and Heuvelten Amish clans, reports that the Department really wants to help. Spokeswoman Susan Burns said in an email that "our expectation was that businesses with concerns about complying would call the Taxpayer Contact Center." Unfortunately, most Amish don't have a telephone to make the call in the first place! (The spokeswoman said they could write or have someone else call on their behalf.)
Oh, and the Department would love to have taxpayers' Social Security numbers, too. But the Amish have been exempt from Social Security since 1965. So they generally don't have Social Security numbers, either!
Electronic filing is just one of many conflicts the Amish are facing with government. Amish have fought to avoid putting orange reflective triangles on their buggies. Patriot Act requirements making photo identification more important have made banking and travel harder. And some New York Amish are in federal court, fighting requirements over home smoke detectors.
In the end, the NY Department of Taxation and Finance appears to be showing a little common sense, honoring the Amish sense of devotion and letting them snail-mail their returns the old-fashioned way. What do you think? Do we lose anything by letting Amish taxpayers kick it old school? Or should we find a way to drag them online with the rest of us
It's no surprise, then, that the internet is changing how we file and pay our taxes. Just 10 years ago, online filing was a novelty. Now it's become the norm. Last year, two out of three Americans e-filed their income tax returns. Those who also opted for electronically deposited refunds saved the government mailing costs, saved themselves a trip to the bank, and even got their refunds a week faster than waiting for paper checks.
State and local governments are getting into the e-filing act, too. In fact, some state and local governments are mandating e-filing for certain returns. For example, New York has made e-filing mandatory for sales tax returns. They also want taxpayers' phone numbers and Social Security numbers. That's not really too much to ask, is it?
But what if your business isn't part of the internet revolution? What if you still take your goods to market in a black horse-drawn buggy? What if your store doesn't even have electricity?
That's the dilemma that many Amish are facing right now. The New York Department of Taxation and Finance wants them to file sales taxes electronically, like any other business. The Department has even sent Amish business owners — mainly furniture makers and shopkeepers — letters threatening a $50 penalty for every return not electronically filed!
The Watertown Daily Times, which publishes in an area that's home to the conservative Swartzentruber and Heuvelten Amish clans, reports that the Department really wants to help. Spokeswoman Susan Burns said in an email that "our expectation was that businesses with concerns about complying would call the Taxpayer Contact Center." Unfortunately, most Amish don't have a telephone to make the call in the first place! (The spokeswoman said they could write or have someone else call on their behalf.)
Oh, and the Department would love to have taxpayers' Social Security numbers, too. But the Amish have been exempt from Social Security since 1965. So they generally don't have Social Security numbers, either!
Electronic filing is just one of many conflicts the Amish are facing with government. Amish have fought to avoid putting orange reflective triangles on their buggies. Patriot Act requirements making photo identification more important have made banking and travel harder. And some New York Amish are in federal court, fighting requirements over home smoke detectors.
In the end, the NY Department of Taxation and Finance appears to be showing a little common sense, honoring the Amish sense of devotion and letting them snail-mail their returns the old-fashioned way. What do you think? Do we lose anything by letting Amish taxpayers kick it old school? Or should we find a way to drag them online with the rest of us
Tuesday, July 5, 2011
IRS Strikes OUT!
Next week marks Major League Baseball's 2011 "Midsummer Classic" — the All-Star Game between fan favorites from the rival National and American leagues. Baseball is making the usual headlines on the field this year, with tight races in most divisions. And it's making headlines off the field, too — especially in Los Angeles, where Dodgers owners Frank McCourt and his wife Jamie are contesting an especially bitter divorce.
Frank McCourt is decidedly behind the count in this at-bat. He's accused of borrowing more than he could afford to buy the team in the first place, then using the team as a personal ATM to finance an extravagant lifestyle. That lifestyle included seven homes costing just over $99 million — two houses on Cape Cod, two houses next door to each other on Malibu's famed "Millionaire's Beach," two more houses next door to each other in LA's affluent Holmby Hills neighborhood (right down the street from the Playboy Mansion), and a $6 million condo in Vail. It also included $225,000 per month for a private jet, $10,000 per month for Jamie's hair stylist, and $386 per month for her makeup for Dodgers events. (Just weeks ago, the pair signed an agreement awarding Jamie $650,000 per month in spousal support plus ownership of the homes — one of which she uses just for swimming laps and another just for storing furniture.)
And so, McCourt's mountain of debt has finally loaded the bases against him. Earlier this year, Baseball Commissioner Bud Selig balked at McCourt's plans to make payroll and appointed a trustee to take over the team's finances. And last month, McCourt threw a beanball of his own, defying MLB rules and filing bankruptcy while he works to sign a television deal which he says will let him pay all his creditors. In the meantime, season ticket sales are down, and some say he's the worst owner since Red Sox skipper Harry Frazee sold Babe Ruth to the Yankees for $125,000.
But there's one opponent who's batting zero against the McCourt's, and that's the tax man. Court papers filed last February show that from 2004-2009, the McCourts drew $108 million from their various businesses — and paid zero taxes to the IRS or State of California. Zip. Zilch. Nada. How the heck does a family make $108 million and pay zero taxes?
McCourt began his career developing commercial real estate. Real estate developers frequently fund their lifestyles primarily from tax-free loans secured by the equity in their properties. In fact, McCourt used a loan secured by a 24-acre parking facility in Boston to finance his original purchase of the team. And he continued that strategy even after taking over the team, borrowing $390 million against future revenues, in part to finance tax-free distributions for himself and his family.
McCourt also benefits from generous depreciation deductions against his properties. Depreciation is a "paper" deduction representing wear and tear on a property; however, in the right circumstances, it's available to offset ordinary income. Court papers reveal that the McCourts arrived in California with over $100 million in net operating loss carryforwards; thus, they can expect to continue paying little or no taxes for quite some time.
There's nothing illegal about the McCourts' strategy. The loan proceeds represent advances against future income that will be taxable, even if they're offset by the real estate losses. And those real estate losses are part of a long-established tax rules designed to spur real estate development that drives economic growth. The legislators who write the tax laws probably never imagined anyone woud be living quite so well while paying quite so little tax. But we use some of the same strategies ourselves — for the right clients. So call us when you need a strong closer to save your game!
Frank McCourt is decidedly behind the count in this at-bat. He's accused of borrowing more than he could afford to buy the team in the first place, then using the team as a personal ATM to finance an extravagant lifestyle. That lifestyle included seven homes costing just over $99 million — two houses on Cape Cod, two houses next door to each other on Malibu's famed "Millionaire's Beach," two more houses next door to each other in LA's affluent Holmby Hills neighborhood (right down the street from the Playboy Mansion), and a $6 million condo in Vail. It also included $225,000 per month for a private jet, $10,000 per month for Jamie's hair stylist, and $386 per month for her makeup for Dodgers events. (Just weeks ago, the pair signed an agreement awarding Jamie $650,000 per month in spousal support plus ownership of the homes — one of which she uses just for swimming laps and another just for storing furniture.)
And so, McCourt's mountain of debt has finally loaded the bases against him. Earlier this year, Baseball Commissioner Bud Selig balked at McCourt's plans to make payroll and appointed a trustee to take over the team's finances. And last month, McCourt threw a beanball of his own, defying MLB rules and filing bankruptcy while he works to sign a television deal which he says will let him pay all his creditors. In the meantime, season ticket sales are down, and some say he's the worst owner since Red Sox skipper Harry Frazee sold Babe Ruth to the Yankees for $125,000.
But there's one opponent who's batting zero against the McCourt's, and that's the tax man. Court papers filed last February show that from 2004-2009, the McCourts drew $108 million from their various businesses — and paid zero taxes to the IRS or State of California. Zip. Zilch. Nada. How the heck does a family make $108 million and pay zero taxes?
McCourt began his career developing commercial real estate. Real estate developers frequently fund their lifestyles primarily from tax-free loans secured by the equity in their properties. In fact, McCourt used a loan secured by a 24-acre parking facility in Boston to finance his original purchase of the team. And he continued that strategy even after taking over the team, borrowing $390 million against future revenues, in part to finance tax-free distributions for himself and his family.
McCourt also benefits from generous depreciation deductions against his properties. Depreciation is a "paper" deduction representing wear and tear on a property; however, in the right circumstances, it's available to offset ordinary income. Court papers reveal that the McCourts arrived in California with over $100 million in net operating loss carryforwards; thus, they can expect to continue paying little or no taxes for quite some time.
There's nothing illegal about the McCourts' strategy. The loan proceeds represent advances against future income that will be taxable, even if they're offset by the real estate losses. And those real estate losses are part of a long-established tax rules designed to spur real estate development that drives economic growth. The legislators who write the tax laws probably never imagined anyone woud be living quite so well while paying quite so little tax. But we use some of the same strategies ourselves — for the right clients. So call us when you need a strong closer to save your game!
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