Do Skinny Cows Make Lowfat Cheese?

The California Milk Advisory Board is an agency of the California Department of Food and Agriculture dedicated to promoting California dairy products. You've probably never heard of the Board. But we'll bet you've seen their television spots, with their catchy slogan: "Great cheese comes from happy cows. Happy cows come from California."
Now, The Atlantic magazine reports that landowners on the other side of the country are saving millions in tax by taking advantage of "America's Dumbest Tax Loophole: The Florida Rent-a-Cow Scam." But are those Florida cows as happy as their cousins in California?
Here's how it works. Florida's "greenbelt law" aims to help preserve farmland by taxing it according to its agricultural-use value, rather than its (higher) potential development value. To qualify, you just have to file a four-page application and convince your county tax appraiser that you're using the land for "bona fide" agricultural purposes. You don't even have to make an actual income from your "farming" in order to lower the valuation on your property. Pretty sweet so far, right?

But what if you're not even really a farmer? What if you're a rich developer, with land just sitting idle that you're getting ready to build on, and you want to get in on the party? No problem! Lease your land to a nearby cattle rancher, plop a few cows in what's left of the grass, and start saving big! Some landowners let ranchers graze their cattle for free. But the tax breaks are so rich and creamy that some landowners actually pay the ranchers to graze their cows, justifying the "rent-a-cow" nickname.

At this point, you're probably scoffing this is . . . well, udderly ridiculous. Au contraire, my naive friend, au contraire!
The Miami Herald reported back in 2005 that over two-thirds of the greenbelt law's biggest beneficiaries aren't true farmers. Developer Armando Codina saved $250,273 in 2004 by grazing cattle on land he owned in northwest Miami-Dade County while he built industrial warehouses on it. Then he asked the county to declare his "ranch" to be an environmentally contaminated "brownfield," while he still had cows on the land! (That had to make the cows happy.) Developer Richard Bell saved $140,168 that same year by grazing 16 cows on a 49-acre tract where he planned to build million-dollar McMansions. Even U.S. Senator Bill Nelson got in on the act — he keeps "about six cows" on 55 acres of property near the Indian River and saves $43,000 per year. The Herald found "skinny" and "underfed" cows eating garbage and grazing on bare, rocky land throughout the state.
Developers confess that this may not have been exactly what the Florida Legislature intended when they passed the greenbelt law back in 1959. But they argue that vacant land shouldn't be taxed at full value if it's just aging till ripeness. And they point out that once the land is developed, new homes and offices generate plenty of tax revenue.
We have no clue if the Florida cows are as happy as the California cows. Nor can we tell you if their cheese is any good. But we can tell you that you don't have to go to such ridiculous lengths to save big on your income taxes. The tax code is full of legitmate deductions, credits, and opportunities that serve legitimate public goals. And it's our job to help put all those opportunities to work for you.

A Dubious Privilege

The "Occupy Wall Street" movement argues that we live in a divided nation. First there's a gilded "1%" enjoying lives of ease and privilege. Then there's a downtrodden "99%" struggling just to stay in place. But here's a take on "the 1%" that you won't hear at your local tent city . . .
The IRS is struggling just like the rest of us to carry out its mission with limited resources. Back in 2003, they audited just one out of every 203 returns. By 2010, that number was up to one out of 90. To stretch that audit budget even further, they're auditing more and more taxpayers by mail. But one study shows that 10% of IRS mail never gets where it's supposed to go, and 27% of those who do get their mail don't even realize they're actually being audited! Naturally, that leads to more and more of the paperwork screwups that every taxpayer fears.
Enter Nina Olson. She's the IRS's first and only Taxpayer Advocate, a position created by the 1998 "Taxpayer Bill of Rights" act. She supervises the Taxpayer Advocate Service, a nationwide group of 2,000 caseworkers who specialize in cutting through red tape and greasing the wheels of the great gummy IRS machine. If the IRS sends your mail to the wrong address, slaps you with a lien after you've already paid your bill, or just makes a mistake they can't seem to fix, Olson's office is the one we'll call.
Last month, Olson delivered a presentation to the Federal Bar Association on how "the 99%" experience the tax system. And the picture she painted makes a tent in lower Manhattan Park look like a room at the Ritz. One in three taxpayers who call the Service don't get an answer. Only half of those who write hear back within six weeks. The IRS is relying on computers instead of people to audit all but the highest-income taxpayers. And perhaps most curious of all, she says, "we're getting to a situation where the only people who get face-to-face audits are the 1%"!
Now, correct us if we're wrong, but do you really consider face time with an IRS auditor a "privilege"? We all know that at least some level of government is necessary. But there are just some parts you don't want to see up close and in person. Like the "Level 4" Biolab at the Atlanta Centers for Disease Control, for example, where we store the Ebola virus, Crimean-Congo hemorrhagic fever, and other superbugs we can't risk having out on the loose. Or the "Supermax" penitentiary in Florence, Colorado, where we "store" the most dangerous felons we can't risk having out on the loose. Or the inside of any IRS Service Center!
Does Olson's "1%" comment conjure up images of plush IRS offices, with thick oriental carpets and rich leather upholstery, staffed by discreet, white-gloved concierges sitting at granite-topped desks? We can assure you that when it comes to getting audited, even the 1% have to settle for the same government-issue linoleum floors, metal chairs, and battleship gray desks as everyone else. (And really, in the unlikely event you are audited, we probably won't let you go with us anyway! Trust us — it's for your own protection.)
We talk in these emails about how proactive planning cuts your tax bill. But paying less tax isn't the only perk of a good tax plan. Did you know that smart tax planning can also cut your audit risk? In fact, some strategies — like choosing certain business entities — can cut that risk by as much as 90%. So call us if you think face time with an auditor is a "privilege" you can do without!

Mastering Tax Breaks

This weekend's Masters golf tournament featured the usual perfect weather, gorgeous scenery, and competitive play that fans have loved for so long. Tiger Woods came into the tournament as the betting favorite based on his win at last month's Arnold Palmer Invitational — his first tour victory in nearly three years. But Tiger's performance disappointed his fans yet again — in fact, he even hit a spectator on Saturday. And in the end, Bubba Watson became only the third leftie in history to don the coveted green jacket.

It turns out Tiger isn't the only one having trouble on the course. Our good friends at the IRS have also "sliced into the rough" over the question deducting conservation easements for golf courses. A "conservation easement" is a gift of a partial interest in real estate you make to a publicly-supported charity or government. If you own a historic townhouse, for example, you might donate the right to make changes to the facade, to ensure it keeps its historic character. If you own a farm at the edge of the city, you might donate development rights, to ensure it remains green space. You’ll need an appraisal to support the value of your gift, as the IRS is cracking down on inflated conservation easement deductions. If your gift exceeds 50% of that year’s adjusted gross income, you can carry forward the excess for up to 15 years (rather than the usual five year limit for all other charitable gifts).

The easement in question involves Kiva Dunes — a Jerry Pate-designed golf course nestled on Alabama's Fort Morgan Peninsula, which is tucked neatly between Mobile Bay and the Gulf of Mexico. The course is surrounded by 163 upscale homes, including 30 right on the beach. It's no Augusta National, of course, although Golf Digest has ranked it the best course in Alabama. Back in 2002, the partnership that owns Kiva Dunes placed a conservation easement on the course, limiting its use to a golf course, park, or farm. They appraised the easement at $30.6 million, donated it to the North American Land Trust, and happily deducted that amount on their partnership return. (Not bad, considering the owners paid just $1.05 million for the property encompassing both the course and the homesites back in 1992!)

Not surprisingly, the IRS ruled the deduction out of bounds — valuing the easement at just $10.0 million — and the case wound up in Tax Court. The Court started by noting that the partnership's appraiser lives and works in the immediate vicinity of the course and has decades of experience evaluating local properties, while the IRS's appraiser lives 250 miles away in Birmingham and has only visited the vicinity of the course twice. Then they estimated how much the owners could realize if they subdivided the property for the same sort of instant mansions already surrounding the course ($31.9 million). Next, they calculated the current value of the golf course (just shy of $3.0 million). Finally, they subtracted the current value from the potential value to settle on a $28.7 million value for the easement — really, just a chip shot away from the partnership's original appraisal.

The law allowing deductions for conservation easements expired at the end of 2011. That's not necessarily the end of the story, though — lots of popular tax breaks expire, then come back from the dead. But this one may be more dead than usual. That's because President Obama's 2013 budget proposes to eliminate deductions for golf course conservation easements entirely, arguing that they do more to benefit the people living in the McMansions surrounding the courses than the general public. Thus, Kiva Dunes's owners may be the last to benefit from this hole-in-one of a deduction.

Minimizing your taxes may look hard, but it's a lot easier than driving straight down the fairway. Proactive planning is the key to staying out of the sand and water. Remember, we're here for you — and the rest of your foursome, too!

Mad at Taxes

Fans of AMC's Mad Men rejoiced last week when Don Draper and his colleagues at Sterling Cooper Draper Pryce returned after a 17-month absence. The year is 1966, and change is in the air. Protestors oppose the war in Vietnam, and riots break out in Los Angeles, Cleveland, and Atlanta. The "kids" are listening to Dusty Springfield and the Rolling Stones. And the "grownups" are struggling to make sense of it all.

Mad Men creator Matthew Weiner is famed for his obsessive attention to period detail. (One episode featured junior executive Pete Campbell displaying a spectacularly ugly "chip and dip" platter he received as a wedding present — the very same chip and dip that Weiner's own parents received for their wedding back in 1959.) So, fashion mavens predictably ooh'ed and ahh'ed over the period costumes, which have inspired today's Banana Republic to introduce an entire Mad Men collection. Interior design aficianados ooh'ed and ahh'ed over Don and his new bride Megan's stylish Upper East Side penthouse, with its white carpeting, sunken living room, and broad terrace. But tax professionals cheered loudest of all when partner Roger Sterling bribed media buyer Harry Crane $1,100 to give up his office for rising star Campbell. "That's more than you make in a month," Sterling whee dled, "after tax!"

And really, who cares about Don's suits, Megan's dresses, or Roger's cocktails, when we can spy on their money and their taxes?

Prices from 1966 seem comically quaint today. A gallon of gas cost just 32 cents. A dozen eggs cost 60 cents. Postage stamps cost a nickel. But there was nothing comical or quaint about taxes. Rates in 1966 started at 14% on income over $1,000 (roughly $7,000 in today's economy), and rose to 70% on income over $200,000. 70% is a lot compared to today's 35% maximum — but 70% was actually a big step down from the 91% top rate that Don and his colleagues faced just three years earlier in 1963. One small consolation — Don's Form 1040 was quite a bit simpler. However, the "Expense Account Information" section at the bottom of page two includes an intimidating box to check — and separate instructions to follow — "if you had an expense account or charged expenses to your employer."

And what about those three-martini lunches that play such a central role in lubricating Mad Men's ensemble? Well, for starters, they sure cost less back then. In one scene from Season One, Don flips a waitress at a beatnik bar $5 to cover three martinis, plus tip. Today, those same martinis cost $14 each at The Roosevelt Hotel, where Don stays after separating from first wife Betty. As for tax breaks, under today's rules, meals and entertainment are 50% deductible. That means, if you're in the top 35% bracket, a dollar's worth of martini saves 17.5 cents in tax. But back in 1966 — when doctors appeared in cigarette commercials and seatbelts were still optional in most cars — meals and entertainment were 100% deductible. That means that same dollar's worth of martini saved up to 70 cents in tax. No wonder the partners spent more time getting soused than they did talking business!

If we had been practicing back in 1966, we would have looked just as good wearing the silhouettes of 1960s style. But Don Draper would have appreciated us more for the way we cut his taxes. There's no need to get mad at the IRS if you have a proactive plan. And there's no pesky two-drink minimum, either!