Don't Bogart That Deduction, My Friend

Imagine you're a hardworking pot dealer just trying to operate an honest shop in the newly legal marijuana industry. You get audited, and the examiner hits you with a $290,000 bill. He then asks to talk "off the record," and tells you he was lenient with your examination. The real bill, he says, should have been a million dollars higher. Then he looks you in the eye and says, "Hey . . . how about a little something, you know, for the effort?"

That's pretty much what happened to one marijuana dispensary owner in Seattle. Except the auditor's dopey request didn't quite work out the way he hoped. (And really, if it had, would you be reading about it here?)

You may think that running a legal marijuana dispensary is 4:20 all day long, but it's no ordinary business challenge. Polls show that a majority of Americans think it's high time for legalization, yet there's still a stigma attached. Banks and other financial institutions are reluctant to deal with the industry, which forces most vendors to do business in cash.

If those challenges aren't enough, the tax code makes "ganjapreneurship" even harder. Section 280E says you can't deduct any expenses for trafficking in controlled substances. Marijuana sellers can deduct their "cost of goods sold." But there are none of the usual deductions for overhead expenses like rent, salaries, utilities, and professional fees that any other business can write off. That's why tax advisors generally recommend that dispensaries sell as much other stuff, like apparel and accessories, as they possibly can. That way, they can allocate at least part of those overhead expenses to deductible purposes.

Now back to our Seattle story, already in progress. Paul Hurley is was an auditor working in the Seattle IRS office. But he wanted to "roll his own bonus" so he could pay down student loans. That's when he went off the record with our pot shop owner and complained about living paycheck-to-paycheck. The shop owner sensed that Hurley was looking for a bribe, held up his hand to rub his fingers together, and looked dubiously at Hurley to see if that was the case. Hurley replied with a simple "20," then specified that he wanted it in cash.

The shop owner agreed to meet the auditor at a local Starbucks. (Where else do you go to collect a bribe in Seattle?) But here's where Hurley's fortunes went up in smoke. The shop owner had called the FBI. Special agents gave him cash to pay the bribe, wired him for sound, and set up cameras outside the shop. They recorded the first meeting, on September 16, when the shop owner gave Hurley $5,000. They recorded a second meeting, on September 21, when he paid the remaining $15,000 and put a lid on Hurley's fate. The FBI then swooped in and arrested him "without incident."

Not surprisingly, Hurley is looking at 15 years in the joint. (Sometimes the jokes just write themselves.) That's on top of a $250,000 fine, which makes the $20,000 request look like seeds and stems.

Of course, the real moral here isn't to "just say no" when the IRS asks for a bribe, it's to avoid getting into that situation in the first place! Our honest dealer really did owe a bale of extra tax, because he didn't have the right plan. So don't get busted like he did — call us today for your plan! 

Share a Coke with the IRS

Coca Cola has earned a lot of headlines for their "Share a Coke with . . . " marketing campaign, printing bottles and cans with 1,000 of the most popular names in the country, along with nicknames like "Mom," "Dad," Soulmate," and "BFF." You can even go online to customize your own bottle for just five bucks. (Just imagine the possibilities . . . "Share a Koke with a Kardashian" for reality-TV wannabes, or "Share a Diet Coke with Your Yoga Instructor" for fitness fanatics? The Center for Science in the Public Interest even created a "Share a Coke with Obesity" can.)

Last week, our friends at the IRS decided to open a little happiness of their own. And apparently, they want more than just a can or two of fizzy sugar water. On Friday, Coca Cola Enterprises filed a Form 8-K with the Securities and Exchange Commission revealing that, after a five-year audit, the IRS is dunning them for $3.3 billion in extra taxes. Plus interest! (Fun fact: the audit covered just three tax years from 2007-2009. That means the IRS spent more time auditing Coke's income than Coke spent earning it!)

The issue centers on "transfer pricing," which governs how businesses set prices between controlled or related entities. Let's say Coca Cola sells a bottle of their delicious Vanilla Coke in Bermuda. (That sounds especially delicious, right?) How much of their profit should be taxed in Bermuda, where the average effective tax rate for multinational corporations is just 12%? And how much of it should be taxed back here in the U.S., where the rate tops out at 35%? That may not sound like a huge difference on something you can buy for a pocket change at a highway rest stop. But Coca Cola sells a lot of beverages — $46 billion worth last year. And 57% of that revenue comes from international markets.

With all that money sloshing back and forth across international borders, you can see how shifting tax rates on a few cents of income per drink can really add up. Transfer pricing issues may sound boring (and they are), but they're a big deal. The very serious lawyers who specialize in these sorts of disputes work out of stuffy offices in high-rent big-city buildings, and they've never even heard of casual Fridays.

Naturally, the folks at Coke don't think it will be especially refreshing to send the IRS an extra $3.3 billion:

"The Company has followed the same transfer pricing methodology for these licenses since the methodology was agreed with the IRS in a 1996 closing agreement that applied back to 1987. The closing agreement provides prospective penalty protection as long as the Company follows the prescribed methodology, and the Company has continued to abide by its terms for all subsequent years. The Company's compliance with the closing agreement was audited and confirmed by the IRS in five successive audit cycles covering the subsequent 11 years through 2006, with the last audit concluding as recently as 2009."

Coke says they plan to file a notice challenging the deficiency in Tax Court. They've reassured shareholders that they have "adequate tax reserves," which means they can pay up if they lose. And if all else fails, they've got that secret formula locked up in a vault in Atlanta. That's got to be good for something, right?

Here's the bottom line. Coke makes billions of dollars a year. But they understand it's what they keep that counts, and they're willing to fight to keep more. Shouldn't you be working for the same goal? So call us for a plan, and pay for your next Coke with the savings. It's the real thing! 

Alibaba and the Forty Percent

Turn on the financial news and you'll hear all sorts of explanations for the stock market's ups and downs. Oh no, the Fed's going to raise rates! Oh no, they're not! Who knows what the real answer is? But last week, the IRS moved the market — when they casually signaled they wouldn't be greenlighting Yahoo's plan to spin off their remaining stake in the Chinese company Alibaba.

Yahoo was the first big online search engine, and they helped popularize services like free email addresses. It's still the most-read news website and fourth-most visited site in the world. But those eyeballs just aren't translating into dollars, especially now that search engine advertisers have surfed their way over to Google.

But Yahoo can brag about one grand-slam home run — back in 2005, they paid $1 billion for a 40% stake in Alibaba, "the Amazon of China." Since going public, Alibaba's "market capitalization" (the total value of outstanding shares) has climbed as high as $248 billion. (It's down to a paltry $162 billion today.) In fact, some analysts argue Yahoo's entire market capitalization was worth less than its holdings in Alibaba and Yahoo Japan, making its core U.S. businesses worth less than zero!

Naturally, Yahoo's long-suffering shareholders want to unlock that value. So when Alibaba went public, Yahoo sold a slice of their stake for $7.6 billion — but therefore got hit with a $2 billion tax bill. The folks at the IRS said "Yahoo!" But shareholders, not so much.

Earlier this year, Yahoo proposed a different strategy for the rest of their stake. First, create an entirely new company. Then stuff it full of their remaining Alibaba stock, along with a dinky slice of Yahoo's remaining operating business. Then spin it off to their existing shareholders. Why jump through all those hoops? Well, if Yahoo just distributes cash and prizes like the Alibaba stock, the IRS gets their usual cut. But if they include an active trade or business in the new entity, Code Section 355 says it's tax-free. (Wink, wink.)

There's just one problem. The IRS doesn't say how big that operating business has to be to make the whole thing work. Would a lemonade stand work? How about a hot-dog cart? Just to be sure, Yahoo went to the IRS to get their blessing first. They applied for a "private letter ruling," which is a written ruling that interprets and applies tax laws to one specific taxpayer's facts. Fees for a letter ruling range from $625 to $50,000, which makes them a cheap form of insurance against billions in taxes. (Of course, the kind of law firm that handles those sorts of requests can run up that much in legal fees just answering the phone!)

Here's where our story gets interesting. Last week, an IRS attorney announced at a bar association conference that the IRS was "reconsidering their ruling policy" on spinoff requests — and Yahoo's stock price promptly dropped 7.6%. That meant over $2 billion in value vanished in a heartbeat. Now, Yahoo can certainly proceed with the deal. They still have an opinion letter from their lawyers telling them it will work. But their profile is high enough that they're under constant audit. It's not like they can pretend they never asked for the ruling, or just hope that nobody at the IRS "notices" the spinoff!

Here's the lesson. Tech companies like Yahoo understand the value of proactive tax planning. They've used it to save billions in taxes, and they realize the money they spend on it is an investment, not an expense. Shouldn't you take advantage of that same opportunity yourself? 

Vive le Tax!

This year, as usual, millions of American tourists took advantage of summer vacation to travel abroad. Favorable exchange rates made European destinations especially attractive. Seeing Old World cultures gives us perspective that we just can't get when we load up the family truckster and head for Disney World. The sights, the sounds, and the great big smells we encounter abroad shed new light on our ordinary lives. New languages, new governments, and even new taxes can prompt us to reconsider our place in the world.

Take Paris, for example. France is the most popular tourist destination in the world, and the City of Light sees almost 2 million American visitors per year. So what sort of tax system do visitors to Paris encounter?

Income taxes are the first place to start. We don't see them, of course, but our French hosts certainly do! Impôts sur le revenu start at 14% on taxable incomes over €9,691 (about $10,800) and rise to 45% on amounts over €151,956 ($169,400). There are also surcharges on incomes above €250,000, and again at €500,000.

Income taxes are just the start. French taxpayers also shell out 7.5% for their version of Social Security, a 0.5% "social debt" tax, plus 3.4% in "additional sampling social contribution" and 1.1% in "solidarity labor" tax on investment income. And that's all before they pay their local professional taxes, residence taxes, and land taxes!

That may sound like a lot. But French employers have even more to grumble about. Employers pay 13.1% of their employees' wages for medical and disability programs, 5.4% for parenting benefits, 4% for unemployment programs, and at least 18.2% for retirement benefits. Granted, that first 13.1% replaces much of what American employers pay for health and disability insurance. But you can certainly see why the Parisians think twice before deciding to hire someone new. Oh, and don't forget the 33.1% corporate income tax!

No visit to Paris would be complete without a pain au chocolat at a sidewalk cafe or a late-night degustation of foie gras, escargot, and cheese. The good news is, the price you see on the menu is the price you actually pay. Value-added taxes (which take the place of our sales taxes) and even service charges are included in the marked price. It's customary to leave a small amount of cash (5% or so) as a tip. But it's reassuring to know that when the snooty waiter brings you l'addition and sneers at your AmericanExpress card, you won't have to calculate the usual 15-20% that we tack on here. (Go ahead, have an extra macaron, they're delicious!)

We're not done yet. France levies an impôt de solidarité sur la fortune (wealth tax), starting at 0.55% on net worth over €790,000 and rising to 1.80% on fortunes over €16,540,000. The wealth tax only raises about two percent of the country's revenue, but it's quite controversial — some consider it a symbol of worker solidarity, while others object that it encourages the wealthy to leave the country. Last but not least, droits de succession et de donation (gift and estate taxes) climb as high as 60%, with no unlimited marital exclusion like we enjoy here in the U.S.

Here in the states, we complain that our taxes are too high. But a quick look at the French tax system reveals that liberté, égalité and fraternité don't come cheap, either! Fortunately, our tax code is stuffed like a crepe with all sorts of deductions, credits, loopholes, and strategies to cut your bill. So call us when you're ready to pay less, and see how much more you can put towards your dream vacation!