Decoding the Code

The Imitation Game is the critically acclaimed story of Alan Turing, a British mathematician who is widely credited as being the father of computer science and artificial intelligence. Benedict Cumberbatch plays Turing, whose work in cracking Nazi Germany's "ENIGMA" code helped lift the Allies to victory in World War II.

Seventy years later, retiring Senator Tom Coburn (R-OK) has picked up the code-breaking bug. But Coburn has decided to take on something even more twisted and fiendish than Nazi ciphers. That's right — he's just issued a 312-page "Tax Decoder" taking on our tax system. (Read it at your peril — if decoding takes 312 pages, just imagine what encrypting looks like!)

Coburn's goal is to give us "an educational reference guide designed to equip taxpayers and lawmakers with the details needed to thoughtfully reconsider many aspects of the existing tax code." We're not sure why Coburn thought he needed 312 pages to make his case — anyone who's ever seen their first paycheck and wondered "what's FICA?" knows the system is a mess. Still, here are some highlights:

• Our tax system has metastasized like a glioblastoma. "In 2012, the Internal Revenue Code contained over 4 million words, enough to fill 9,000 pages. By way of comparison, a pamphlet with the original 1913 income tax required only 27 pages for the full text of the statute."
• Our friends at the IRS really do want to help, but they're just under financed, understaffed, and underfed. “From FY 2004 to FY 2012, the number of calls the IRS received from taxpayers on its Accounts Management phone lines increased from 71 million to 108 million, yet the number of calls answered by telephone assistors declined from 36 million to 31 million."
• The law is full of inappropriate and wasteful giveaways benefiting taxpayers who would do just fine without them. "There is no shortage of tax subsidies for the rich and famous, such as credits to renovate vacation homes and purchase luxury cars and deductions for yachts. McDonald’s even received tax breaks to sell Chicken McNuggets overseas."
• Too many "not-for-profit" groups serve their own interests instead of the public interest. "Lady Gaga’s 501(c)(3) Born This Way Foundation is advertised as an organization that connects youth with antibullying, mental health, and other community resources, but its main activity appears to be throwing free pre-concert tailgate parties for fans."

Coburn's solution probably won't surprise you. Ideally, throw it all out and start over. At the very least, make it simpler, flatter, and fairer. "The tax code should be simple enough that everyone — including members of Congress — is capable of filling out their own tax return." (We'll let you decide if that means an easier tax system or smarter members of Congress!)

Still, there is some good news that we can help you put to work — and you'll find it on the very first page. "Due to the code’s complexity, your taxes are not a simple calculation of earnings and obligations. Instead, taxes are determined by how well you can take advantage of the hundreds of tax credits, deductions, exclusions, and carve-outs tucked into the code." In other words, all that complexity creates opportunity — and the more complicated your taxes are, the more likely we can help. So, if you're looking for a New Year's resolution to kick off 2015, call us and resolve not to waste any more money on taxes you don't have to pay!

Our Twelve Days of Christmas

Every year, PNC Bank publishes their "Christmas Wealth Index" to track the cost of the Twelve Days of Christmas. For 2014, it's $116,273.06, up 1.4% from 2013. (And you thought your holiday spending was out of control!)

The index may not be completely accurate — for example, the ten lords-a-leaping are valued using the cost of male ballet dancers, rather than actual lords, and the eight maids-a-milking don't come with eight actual cows. But still, it got us to thinking . . . what sort of taxes are we looking at on the whole affair?

• Twelve drummers drumming and eleven pipers piping make quite a racket every holiday season. Hiring all that help will stir up a cacophony of payroll taxes!
• Ten lords may look perfectly happy while they're leaping. But surely they must pay a king's ransom in income taxes — after all, they are lords!
• Nine ladies dancing make a lovely sight at Christmas time — especially if they're Rockettes. They also pay a cabaret tax for the privilege of displaying their talent.
• Eight maids-a-milking help make sure we have plenty of eggnog to drink. Good thing so many states offer dairy tax credits to spur the cows on to higher holiday production!
• Seven swans-a-swimming? Six geese-a-laying? If we accept the rule of thumb that two birds per acre of pond is a manageable number, then we're looking at some serious property taxes to host our holiday flock!
• Who doesn't want five gold rings under the tree? But selling those rings can be an expensive proposition. Remember, jewelry held for personal use is still subject to 20% tax on long-term capital gains, plus an extra 3.8% "net investment income tax"!
• Four calling birds use a lot of cell phone minutes over twelve days. (They're calling birds, so unlimited texting won't help.) Naturally, that means a 5.82% federal excise tax, plus state and local sales tax too.
• Three French hens add a sophisticated "continental" touch to any one's holiday festivities. But don't forget the import duties you pay to bring foreign livestock into the country!
• Two turtle doves are known among bird watchers for forming strong "pair bonds," which makes them a symbol of devoted love. (That's why they're in the song!) Too bad that means they pay that pesky marriage penalty that hits high-income couples who file jointly! (Okay, we know this this one's a stretch. But we've got twelve days of taxes to file here, so what can we do?)
• Nothing says "Christmas" like a partridge in a pear tree. And our tax code is full of juicy incentives for growing pear trees. You can deduct operating expenses associated with your crop; you can depreciate equipment and land improvements you use to manage your groves; and you can even take generous charitable deductions for rights you give up for conservation easements. Why, the tax savings alone should be more than enough to pay for the partridge!

Yes, even Twelve Days of Christmas just means twelve more opportunities for the tax man!

We wish you and your family the best this holiday season. We'll be back in 2015 to make sure you pay as little tax as possible, not just during the holidays, but all year long!

#1 On the Naughty List?

"Christmas comes this time each year," as the Beach Boys astutely observed in "Little Saint Nick." That means Santa Claus will be making his annual "list," checking it twice, and letting us know who's naughty or nice. (That's right, Santa "audits" himself by checking it twice.) This year, one San Diego resident will be somewhere near #1 on the "Naughty" list.

Lloyd Irving Taylor graduated from San Diego State University and Loyola Law School. As a CPA, he's authorized to prepare tax returns and represent clients before the IRS. And as an attorney, he's authorized to prepare tax returns, represent clients before the IRS, and represent them in court. He's well aware of what the law says he and his clients can do to pay less tax, and what will land him a big lump of coal in his stocking.

But Taylor apparently hates paying taxes with a Grinch-like grinchiness. No Burgermeister Meisterburger could tell him he can't have his toys!

So, he started off by stealing the identities of at least nine deceased children, some of whom had died as far back as the 1950s. He used those identities to finagle fraudulent passports from U.S. embassies in Europe. Then he used those passports to open financial accounts to hide his income and assets, including $1.6 million in gold coins.

Maybe stealing those identities made Taylor feel guilty. Why else would he have gone and made up over a dozen phony churches, too? He opened 31 more bank and investment accounts in the names of those churches. Then he argued that the churches' tax-exempt status meant he didn't owe tax on their income.

Things might not have been quite so bad if he had at least reported the income from his schemes. But Taylor, who's now 71, has filed tax returns just seven times since he finished school. That works out to once every six years. Those un-filed returns add up to $5 million in unreported income and $1.6 million in unpaid taxes.

Let's be honest here. It doesn't say much for the elves at the IRS that Taylor flew under their radar for so long! But he eventually did wind up in the cross hairs of the San Diego Regional Fraud Task Force, an alphabet soup of agents from the IRS, Secret Service, San Diego Police Department, and State Department Bureau of Diplomatic Security. (Bet you didn't know those last guys even existed!)

Taylor has been in custody since April, 2013 — the judge at his bond hearing noted his international travel on false passports, the millions in cash he controlled through his network of bank accounts, and his history of lying to banks as reason to rule him a flight risk. Last month, the jury at his trial took just 30 minutes to convict him on 19 felony counts. (They probably voted him guilty in the first two minutes, then had a cup of coffee or two just to make it look like they actually "deliberated.") The judge sentenced Taylor to 57 months with his fellow naughty-listers in an institution not noted for the cheerfulness of its holiday decorations. Taylor also owes $2.2 million in restitution.

What makes Taylor's case so outrageous, of course, is that he knows you don't need to steal a dead child's identity or establish a bogus church to pay less tax. You just need a plan to take advantage of all the IRS-approved deductions, credits, and strategies the law allows. You don't even have to wait for Santa to leave them in your stocking — just call us, and see what holiday savings we can deliver!

Battery-Powered Tax Savings

We know something that's on your holiday shopping list. And we don't even have to read your mind to know it. You're buying batteries — and you're buying lots of 'em. If you have kids, you're buying batteries for their electronic games and toys. If you have grandchildren, you're buying batteries for their stuff. (You may not have a clue what you're actually getting them, but you still know it needs batteries.) No kid wants to work hard all year to make the "nice list" and wake up on Christmas morning without the batteries they need to power the presents they earned!

Billionaire investor Warren Buffett, America's second-richest man, is buying batteries too. But he's doing it a little different from you and me. He isn't just buying batteries. He's buying the company that makes the batteries. And he's saving a billion dollars in taxes along the way! Just try doing that the next time you stop at Radio Shack for a pack of AAs (if they're still open by the time you read this, that is).

Last month, Buffett's company, Berkshire Hathaway, announced that would buy Duracell from Procter & Gamble for $4.7 billion. Ordinarily, this would be the sort of wheeling and dealing the Fortune 500 engage in every day. Buffett likes adding well-known brand names to his collection, which already includes GEICO, Fruit of the Loom, and Dairy Queen. At the same time, P&G is shedding "nonessential" businesses to focus on the company's core cleaning and beauty products. (They don't even own Jif anymore — talk about some choosy mothers!)

Here's what makes the deal interesting. Buffett "just happens" to have $4.7 billion worth of P&G stock sitting in his sleigh, stock he acquired for $336 million. Now, he could certainly sell that stock and use the cash to pay for Duracell. Unfortunately, that would mean paying 35% corporate tax on his gain, which would leave him a hair under $3.2 billion to use for his batteries. But, by swapping that P&G stock directly for the battery company, Buffett avoids paying tax on his entire gain. Zero! The strategy is called a "cash-rich split-off," and it's perfectly legal. It won't land Buffett in hot water with the IRS. It won't even put him on Santa's "naughty list"!

You might think that sort of strategy only works for billionaires like Buffett. But you can take advantage of a similar strategy, at least when you make charitable gifts. Let's say you paid $1,000 for some shares of stock that are now worth $10,000. You want to donate that stock to your church. You could sell the stock, donate the after-tax proceeds, and take a deduction for your after-tax gift. Or, you could just give the stock and let the church sell it. That avoids tax on the gain, just as Buffett did with his cash-rich split-off, and even gives you a deduction for the full pre-tax value of your stock.

Buffett hasn't been shy about criticizing the tax system. In 2011, he made headlines when he pointed out that his secretary pays a higher marginal rate then he does. President Obama even dubbed his proposal to impose a minimum tax of 30% on incomes over $1 million the "Buffett Rule." But while Buffett may think the law is unfair, still isn't going to pay any more than it requires. He told Fortune magazine "I will not pay a dime more of individual taxes than I owe, and I won’t pay a dime more of corporate taxes than we owe.” And the Duracell deal isn't even his first cash-rich split-off for 2014!

Warren Buffett wants the same thing for Christmas that you do — tax savings! And he knows he can't just wait for Santa to leave them under his tree. He knows he needs a plan. Fortunately, you don't have to be a billionaire to get the plan you need. There's even time to put it on your Christmas list! Don't write a letter to Santa, just pick up the phone and call us — while there's still time to save in 2014!

Taxation for the Other Guy's Representation

ur United States of America was forged in the flame of tax protest. As early as 1750, our Founding Fathers objected that taxation without representation is tyranny. In 1776, the Declaration of Independence condemned King George III for assenting to Parliament's laws that "impose Taxes on us without our Consent." So is it any surprise the anti-tax movement that gained steam after the 2008 recession took its name from the patriots who dumped a shipload of tea into Boston Harbor rather than pay the Townshend Act duties?

In the two centuries since we traded "God Save the Queen" for "Hail to the Chief," the U.K. has become one of our closest allies. But we Yanks still chafe at paying British taxes. Most recently, the Mayor of London says our diplomats owe £7 million in "congestion charges" on their vehicles in Central London. But our Embassy considers that a tax, argues that our diplomats are immune, and refuses to pay.

It's ironic, then, that that same Mayor is protesting an American tax on the sale of his London home.

Alexander Boris de Pfeffel Johnson was educated at Eton and Oxford. (Where else does a Brit with a name like "Alexander Boris de Pfeffel" go to school?) He began his career as a reporter, columnist, and editor for The Times, the Daily Telegraph, and the Spectator. He then turned his sights towards politics, serving as Member of Parliament for the constituency of Henley and rising to Shadow Minister for Higher Education. He's served as Mayor since 2008, and there's even talk of him succeeding Prime Minister David Cameron as head of the Conservative Party.

So why on earth would Johnson attract attention from tax authorities on our side of the pond? Well, he was born in New York City, when his English father was studying on a Harkness Fellowship, and lived there until age 5. This means he holds dual American and United Kingdom citizenship. And that, in turn, makes him subject to U.S. tax on all his worldwide income, wherever earned.

Back in 1999, Johnson and his wife paid £470,000 for a house on Furlong Road in the London suburb of Islington. (That's about $750,000 at today's exchange rate.) Since then, London real estate prices have shot through the roof, and in 2009, they sold the house for a £730,000 profit. Her Majesty's Revenue and Customs doesn't tax home sale gains, but the IRS taxes anything above a $500,000 allowance. The bottom line on Johnson's gain is a six-figure tax bill in either currency.

Naturally, Johnson is not amused. An NPR correspondent recently asked him point-blank if he would pay, and he literally sputtered: "No, is the answer. I think, it's absolutely outrageous. Why should I? I think, you know, I'm not a — I, you know, I haven't lived in the United States for, you know, well, since I was 5 years old."

That may not be the only tax issue lurking in Johnson's past. He earns £144,000 per year as Mayor, plus another £250,000 as columnist for the Telegraph. Theoretically, he should be paying U.S. tax on everything above a "foreign earned income exclusion" of about £62,000. No word on whether he's been paying all these years, or whether our friends at the IRS want to confront that sticky wicket.

So, 239 years after "the shot heard 'round the world" launched the American Experiment, tax collectors on both sides of the Atlantic think it's jolly good sport to reach into each other's pockets. The good news is, no matter where you're paying, if you want to pay less, you just need a plan. If you don't already have that plan, call us now, while there's still time to save in 2014!