Cruising in Style

Cruising the high seas has become an increasingly popular way to travel, with over 14 million Americans cruising in 2010. Cruise fans love the convenience of unpacking just once and letting a floating resort take them from one glamorous destination to another. Cruise critics cringe at the stereotypical cheesy Vegas-style shows, 'round-the-clock buffets, and abbreviated shore excursions to the same chain retailers they can visit at their local mall. But all of us were thoroughly disgusted by this month's sordid tale of the Carnival Triumph, the mega-ship that lost power in the middle of the Gulf of Mexico. Four-hour waits for onion sandwiches sound bad enough from a ship that prides itself on a reputation for all you can eat. But just imagine 4,200 passengers and crew lining up to use 12 working toilets, and you'll immediately understand why observers dubbed the ship a "floating petri dish."

Carnival's spin masters clearly recognize a PR disaster when they see a towboat dragging it past them at 5 knots. They've agreed to give passengers a full refund for cruise and transportation costs, plus $500 in cash, plus a credit for a free future cruise. (Wonder how many will take them up on that offer?) That didn't stop passengers from suing, however, with the first action filed mere hours after the boat finally docked in Mobile harbor.

But it turns out the Triumph's passengers aren't the only ones who are less-than-delighted with Carnival. Would it surprise you to learn that our friends at the IRS aren't fans either?

Carnival takes a lot of help from the government. As the New York Times reports, "The Carnival Corporation wouldn’t have much of a business without help from various branches of the government. The United States Coast Guard keeps the seas safe for Carnival's cruise ships. Customs officers make it possible for Carnival cruises to travel to other countries. State and local governments have built roads and bridges leading up to the ports where Carnival's ships dock."

Those government subsidies have helped Carnival become the biggest cruise line in the world, based on passengers carried, annual revenue, and total number of ships. The company's "fun ships" earned $11.3 billion in profit over the last five years. So, how much did the IRS get in exchange for all that government help? Well, Carnival's total "cash taxes paid," including federal, state, local, and even foreign taxes, add up to a miserly 1.1%.

How does Carnival do it? Mainly through "offshoring," a popular strategy for corporations in industries as diverse as technology, pharmaceuticals, and even online advertising. Carnival's executives work out of offices in Miami, and the holding company's stock trades on the New York Stock Exchange. But the operating company is incorporated in Panama, and the actual ships are "flagged" in Panama or the Bahamas.

Offshoring has been so successful that Carnival's founder Ted Arison offshored himself — he renounced his U.S. citizenship and moved back to his native Israel to avoid U.S. estate tax back in 1990. Arison was one of the world's richest men at his death, with an estimated net worth of $5.6 billion. Unfortunately, at least for his heirs, he died nine months before achieving the 10-year absence from the U.S. that was necessary to avoid the tax.

Carnival is hardly the only U.S. corporation to use perfectly legal strategies to cut its tax. The Times reports that over the last five years, Boeing has paid just 4.5% (in part by making out sized contributions to its pension fund and taking advantage of tax breaks for research and development on new planes); Southwest Airlines paid 6.3% (in part through accelerated and bonus depreciation on new plane purchases); and Yahoo paid 7% (in part through net operating losses the company racked up in previous years). But Carnival's planning just seems more shrewd than most.

We can't imagine anything much worse than spending five days in the open sea with no power for lights, air conditioning, or hot water. But paying more tax then you legally have to is no boatload of fun, either. Fortunately, you don't have to spend days adrift at sea to accomplish that. You just need a plan. And we're here to get you shipshape. So call us when you're ready to pay less!

Biggest. Crybabies. Ever

Here in America, we're used to people running to court every time life throws a curve ball. Spill hot coffee in your lap? Sue McDonald's! Get drunk, drive your car into a bay, and drown because you can't open your seat belt underwater? Mom and Dad can still sue Honda and win $65 million! Electrocute yourself trying to rob a bar? There's a lawyer for that!

Earlier this month, though, we saw some satisfying comeuppance in one of those cases that makes us roll our eyes in amazement.

First, a little history. UBS is Switzerland's biggest bank — and, like most Swiss banks, it used strict Swiss secrecy laws to attract depositors. They solicited Americans to open accounts, knowing full well that many of them were using those accounts to cheat the IRS — and in some cases, even advising them how to do it. In 2007, a disgruntled employee blew the whistle (and earned a record $104 million reward in the process). Two years later, UBS paid $780 million and ratted out 4,700 clients to settle charges. The scandal scared 35,000 taxpayers into joining an IRS amnesty program, coughing up over $5 billion in back taxes to dodge criminal charges.

You would think that people 'fessing up to a pretty serious felony would just slink back home with their tails between their legs. Right? Well, you would be wrong . . . at least here in America. What do we do here? We sue the bank for not stopping us from cheating!

The three plaintiffs in Thomas V. UBS each hid money with the bank, in amounts ranging from $500,000 to $2 million. They didn't report the existence of the accounts on their tax returns, as the law requires. They didn't report the interest they earned on their accounts. And of course, they didn't pay tax on that interest. When the scandal broke, they scurried to the shelter of the amnesty program, paying taxes, interest, and a 20% penalty.

Then, what did they do? They hauled UBS into court to recover the penalties, interest, and other costs they incurred to come clean. Why? Because UBS profited from the fraud and other wrongful acts they committed when they induced depositors to bank with them in the first place!

Fortunately for those of us on the side of common sense, the case ended up before Appeals Court Judge Richard Posner. Posner is one of the judiciary's most colorful characters, author of nearly 40 books, and not afraid call B.S. when he sees it. His comments dismissing the plaintiffs' complaint are especially scornful — you can almost hear him literally laughing them out of court:

"Our plaintiffs do not argue that they (or other members of the class) received tax advice from UBS. They argue rather that the bank should have prevented them from violating the law. This is like suing one’s parents to recover tax penalties one has paid, on the ground that the parents had failed to bring one up to be an honest person who would not evade taxes and so would not subject himself to penalties. There is in general no common law duty to prevent another person from violating the law.

We needn’t discuss the plaintiffs’ remaining claims—of negligence and malpractice—as they are frivolous squared. This lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn’t asked for the imposition of sanctions on the plaintiffs and class counsel."

The irony here is that none of the plaintiffs who sent their money on alpine vacations had to cheat to pay less tax. They just needed a plan to take advantage of perfectly legal concepts and strategies. We give you that plan to pay less tax, legally. So now you can spend time in Switzerland visiting chocolate factories and cuckoo clocks — not your hidden bank accounts!

Sneaky Sneaker Tax

Today's tight economy is forcing governments at every level to stretch for new revenue, with varying degrees of success. In Washington, the dysfunctional family known as "Congress" just raised the top income tax rate to 39.6%, and there are new taxes on earned income and investment income as well. But when President Obama proposed cutting loopholes to raise even more money as an alternative to the budget sequester, his idea was met mostly with scorn.

Most state governments are in fiscal hot water, too. But Illinois may be worst off of all. Nearly $100 billion in unfunded pension liability is crushing the state budget. Last week, the bond ratings agency Standard & Poor's downgraded the Land of Lincoln's score to last in the nation. Ratings rival Moodys ranks Illinois at the same level as the African nation of Botswana. (Some observers might ask what else you could expect from a state that defines "bipartisanship" as having both Democratic and Republican ex-governors in jail at the same time.)

The cash crunch has left Illinois's discretionary spending programs gasping for funding. So it's no surprise that beleaguered lawmakers are looking for creative ways to protect favored programs. And one representative thinks he's found a solution. State Rep. Will Davis (D-Hazel Crest) has proposed a 25 cent tax on athletic shoes which would raise $3 million per year for Illinois YouthBuild, a nonprofit organization with 16 programs providing job training for disadvantaged youth.

Targeted taxes are nothing new, of course. The federal gasoline tax raises about $25 billion per year, with most of that dedicated to the Highway Trust Fund. Governments are especially fond of so-called "sin taxes" targeting irresponsible or undesirable behavior. That's why we see cigarette tax revenue going towards lung cancer research, soda taxes targeting obesity, and even a new 10% tax on tanning bed revenue.

And a sneaker tax sounds simple enough — especially compared to, say, the rules for Alternative Minimum Tax net operating loss carryforwards. (That's a real thing, by the way, and it's every bit as awful as it sounds.) But as is usually the case with taxes, the devil's in the details. Davis's tax would apply to any "shoe designed primarily for sports or other forms of physical activity." So, does "walking" count? What about hiking boots, ski boots, or snowshoes? Will there be refundable credits for sneaker-buying families earning less than the poverty level?

But the real problem is that Rep. Davis's sneaker tax might open the floodgates to imitators. Just consider what other targeted taxes might be next:
 •A tax on Valentine's Day flowers to support marriage counseling services?
•A tax on snowplows to support research into global climate change?
•A tax on footballs to keep replacement refs off the field?
•A tax on "reality TV" shows to support public broadcasting?
Nobody really wants to see new taxes, of course. But we all know we have to pay something. What sort of new tax could you support, and where would you spend the revenue it raises? Let us know what you think. And remember, no matter what gets taxed, we're here to help you pay less!

Laissez Les Bons Temps Roulez. And Pay Up

Last week's Super Bowl in New Orleans was a week-long "fais do do" featuring world-class food, drinks, and music. Advertisers rolled out their newest, shiniest campaigns and newest, shiniest products (Apparently, Anheuser-Busch thinks they need to remind viewers to drink something called "beer"). Sharp-eyed fans even saw a football game between the AFC champion Baltimore Ravens and NFC champion San Francisco 49ers.

The NFL estimated that the game would bring $434 million to the city. While some economists scoff that the real impact is just a fraction of the official estimate, there's no doubt that the Big Easy was thrilled to host their tenth "Big Game." Most of that revenue goes to the hotels, restaurants, and souvenir vendors who open their cash registers to affluent visitors. (While face value for game tickets was "just" $1,015, the average fan paid $3,000 for his seat.) Millions more goes to the bartenders, waiters, cabbies, and hotel staff that take care of those fans. But some of that money actually goes to the players, too. The NFL gave each of the winning Ravens a ring worth $20,000 plus another $88,000 in cash. The losing 49ers didn't get a ring, but still walked away with $44,000 for their valiant effort.

So . . . with numbers like those on the field, do you really think the tax man can resist throwing a penalty flag or two?

It turns out Super Bowl LXVII was pricier than usual to win. That's because Uncle Sam has drafted three rookie taxes for players to tackle. Last month's "fiscal cliff" bill raised the top tax rate from 35% to 39.6% on ordinary income topping $400,000 ($450,000 for joint filers). The fiscal cliff bill also phases out personal exemptions and itemized deductions for taxpayers earning over $250,000 ($300,000 for joint filers). Considering that the 2012 league minimum ranged from $390,000 for rookies to $925,000 for 10+ year veterans, those new taxes will hit every player on the field. And the 2010 Affordable Care Act adds a new 0.9% Medicare surtax on earned income topping $200,000 ($250,000 for joint filers). The 2012-level tax sacks each winning Raven for $41,000; the 2013 "extras" rough them up for another $4,860 or more.

And Uncle Sam wasn't the only one paying attention. Don't forget the Bayou State and the Crescent City! Much of the money that comes into New Orleans heads right back out to the national corporations that rent hotel rooms, serve those meals, and sell those tacky t-shirts — but at least it gets taxed locally. On January 30, the Louisiana Department of Revenue issued a helpful two-page bulletin alerting visitors that, "according to Louisiana Revised Statute 47:290, a tax is levied on all nonresident individuals who have income earned within or derived from sources in Louisiana." That "jock tax" reaches 6% on income over $50,000 ($100,000 for joint filers). Louisiana's tax compares with zero in Florida, which has also hosted the Super Bowl 15 times, and a whopping 12.3% in California, which has hosted it 11 times.

Of course, none of the players actually care how much tax they'll pay on their bonuses. They just want that ring! But there's still a lesson here for some of you. We've said before that how you earn your money makes a difference in how you're taxed. It turns out that where you earn it and when you earn it makes a difference, too. Our answer, as always, is proactive planning to help you make the smartest decision. If you don't already have a game plan, the play clock is ticking!