Creepy Little Elf Has Nothing on the IRS

If you have kids and you celebrate Christmas, you're probably familiar with the Elf on the Shelf — a storybook and accompanying doll that help encourage your little darlings to behave themselves before the holidays. The book tells wide-eyed children how Santa marshals an army of scout elves to sneak into their houses before Christmas, then fly back to the North Pole every night to rat out the stinkers. Every day the elves return find a new place to hide, which turns this whole monstrous Fourth Amendment violation into an adorable ongoing game of hide and seek.

Parents love how the elf enforces good behavior. (Mommy says it's that or an extra glass of wine!) But not everyone is a fan. The Atlantic magazine mocks it as a "marketing juggernaut dressed up as a tradition" that bullies kids into thinking good behavior equals presents. The Washington Post condemns it as "just another nannycam in a nanny state obsessed with penal codes." And a Canadian professor argues that the elf brainwashes kids into accepting the surveillance state: "if you grow up thinking it's cool for the elves to watch me and report back to Santa, well, then it's cool for the NSA to watch me and report back to the government."

Our friends at the IRS have their own version of the Elf on the Shelf. In fact, they have several — and they're all more effective than the pointy-hatted little informant spying on your kids. Here's how the IRS knows if you've been naughty when it comes to reporting your presents throughout the year:

    The first "elf" is the IRS's computerized income matching program. For example, employers report wages on Form W2, mutual funds report investment income on Form 1099-DIV, and partnerships report partners' income and expenses on Schedule K1. IRS computers cross-check these figures to your return to make sure you've reported those amount. If you haven't, you'll get a lump of coal notice calculating how much more you owe and a deadline for paying up.

If computerized matching fails, the IRS can squeeze more information out of third parties. If the IRS elves suspect mischief, they can subpoena your bank records then add up your deposits to make sure you've reported the income. If those deposits add up to more than you've reported, the IRS will assume the difference is taxable. Good luck convincing a Tax Court judge that Santa left that extra cash in your stocking!

Finally, the IRS dangles cash bounties to catch tax cheats. The IRS Whistleblower Office pays rewards of up to 30% of amounts it collects in disputes topping $2 million. Bradley Birkenfeld, who helped the IRS score an $852 million settlement with Swiss bank UBS, spent two years in jail for his part in the scheme, but walked away with a $104 million reward for his effort. We can think of an elf or two who would be happy to make that trade!

The IRS systems may not be quite as effective as what the CIA or Department of Homeland Security can put to work. But they put that stool pigeon Elf to shame, at least until they can force Santa into filing a 1099-GIFT for every present he leaves.

Here's the bottom line, for the elf and for you. Planning is the key to paying less tax, and you can do it without worrying about who's watching. So call us to pay less in 2017, and have a happy New Year!

Christmas Tax Breaks for Christmas Tree Growers

'Tis the season to be jolly, and how jolly could we be without Christmas trees on display? For some of us it's the classic Pinus Sylvestris, or scotch pine. For others it's the soft-needled Abies fraserie, or Fraser fir. Still more make do with the store-bought plasticus annualensis, or "Target special." (Artificial trees can be beautiful, too!) Christmas trees are a festive symbol of holiday spirit, and most of us can't help but smile when we see one. (Unless we're at a department store in August.)

We're pretty sure that taxes are the last thing you think about when you see a gaily-decorated tree. But this is a tax column you're reading, and part of the fun is taking something you think has nothing to do with taxes, and showing how they fit behind the scenes. With that in mind, let's look at how the IRS treats your tree's trip from the stump to the stand.

Code section 631(a) states that, "For purposes of this subsection and subsection (b), the term 'timber' includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes." That makes Christmas tree farming a business and not an investment. But timber lobbyists have been busy little elves, and they've found some presents to leave under the growers' trees:

    To maximize their deductions, growers need to keep careful records. This might involve separate accounts for merchantable timber (measured in thousand board feet), young growth timber, deferred forestation, and reforestation amortization assets.

Unfortunately, trees planted for ornamental purposes don't qualify for the reforestation amortization deduction. (How's that for a lump of coal in a stocking?) Instead, growers capitalize planting costs and add them to their plantation account, then recover them as they harvest the trees for sale.

On the bright side, Revenue Ruling 71-228 clarifies that pruning and shearing costs are currently deductible business expenses, not capital expenditures.
"Occasional producers" who sell on the stump might take advantage of lower capital gains rates by establishing on-site sales procedures to qualify under Section 631(b). But beware Revenue Ruling 77-229, which held that income from "choose and cut" operations are ordinary income unless the grower makes a special election to determine gain or loss under the rules of Regulations Section 1.631-1(e)(1).

Aren't you glad you've got us to worry about all this stuff?

Try thinking about it this way. The tax code itself is really just one giant Christmas tree! It starts with the trunk, branches, and needles — the sections imposing the tax and setting the rates. Then Washington tarts it up with lights, ornaments, tinsel, and candy canes — the deductions, credits, loopholes, and strategies you hang on your return to lower your bill. (Cynical scrooges might even say we have too much hanging on that tree, but that's a discussion for a different day.)

Here's wishing you and your family the happiest holiday this season, however you celebrate. We'll be back in 2017 to make sure you pay as little tax as possible, not just during the holidays, but all season long!

Sweet!

December is a busy month for holidays, what with Christmas, Hanukkah, and Kwanzaa all crowding calendars. But there's a lesser-known holiday that falls on December 16 that we don't want you to miss. It's not Ugly Christmas Sweater Day or Free Shipping Day (although those are both fun, too). We're talking, of course, about the obvious celebrations surrounding Chocolate Covered Anything Day. (Look it up!)

Most of us look for foods that are delicious, filling, and healthy. Chocolate-covered pretzels, chocolate-covered potato chips, chocolate-covered bacon, and chocolate-covered chili peppers are all yummy and filling, and — well, as the philosopher-poet Meat Loaf taught us, "Two out of three ain't bad." Think of Chocolate Covered Anything Day as pre-season training for the real binging that comes later in the month. (ABC News reports the average American consumes nearly 7,000 calories on Christmas Day alone.)

Just like the rest of us, tax collectors love chocolate-covered treats, too. They're not savages! But tax collectors have been plying their trade alongside candy makers and pastry chefs, for nearly as long as the rest of us have been enjoying their treats:

    The Aztecs, who believed their feathered serpent deity Quetzalcoatl had received chocolate as a gift from the gods, used cocoa beans as actual currency. We're not sure what sort of taxes the Aztecs might have levied on themselves . . . but it had to make it a little easier to pay them in beans!

In 1692, France's King Louis XIV, whose wife loved drinking chocolate, levied one of the first actual cash taxes on the delicacy.

In 1847, a British chocolate company called J.S. Fry & Sons produced the first modern-day chocolate bar. Shortly thereafter, Britain lowered taxes on chocolate to encourage production of the new treats.
In Finland, taxes on chocolates and other sweets will melt away on January 1, 2017. A Finnish financial parliamentary committee decided last year that the taxes violated European Union rules on treating similar products fairly and equitably.

Today's chocolate makers are just as tempted by sweet tax breaks as the rest of us. In 2010, Kraft Foods bought British chocolatier Cadbury in a bittersweet hostile takeover for £11.5 billion ($18.9 billion). Since then, they've left a bad taste in the taxpaying public's mouth by using interest payments on the debt they used to buy the company to avoid paying tax on hundreds of millions of pounds of profits. Even worse, they changed the recipe for Cadbury creme eggs (!) and started selling them in packages of five instead of six (!!).

There's nothing sweet about paying taxes you don't have to pay. That goes for your chocolates, your income, your investments, and anything else. And we're always looking for ways to help accomplish that goal. So think about us while you're dipping a twinkie into chocolate sauce, and call us with your questions!

400 Cigar-Chomping Fat Cats Aren't Enough Anymore

Author F. Scott Fitzgerald, who brought us the Great Gatsby among other well-heeled characters, once said the rich are very different from you and me. To which Fitzgerald's jazz age compatriot Ernest Hemingway sarcastically retorted, "Yes, they have more money." But how much more money do they really have? Nosey parkers want to know!

Every year, the financial snoops at the IRS release a study analyzing the income and the taxes of the top 400 earners in the country. We're not talking ordinary 1%ers here — we're talking card-carrying plutocrats. If you show these people your Hamptons house, they'll raise you their bigger Hamptons house, right on the beach — plus a penthouse in Manhattan plus a ski chalet in Gstaad plus a second beach house in St. Bart's.

Last week, the IRS released their report for 2014, and revealed that the country's 400 fattest cats had gotten 20% fatter. It took $127 million of adjusted gross income to join the top group, up from $100 million in 2013. But that was just the ante — the average income was $318 million, 20% more than the previous year. The 400's total income was $128 billion, which is just a few billion shy of Nevada's Gross Domestic Product.

Where does all that money come gushing in from? It's not salaries and wages (4.47% of the total), interest and dividends (15.13%), or even closely-held businesses (11.6%). You'll have to turn to Schedule D, "Capital Gains and Losses." The average Fortunate 400 filer reported $192 million in gains. This suggests our typical tippy-top earner makes it by selling a business they spent a lifetime growing. As it turns out, 3,262 of the 4,584 Fortunate 400 who have appeared on the list in the last 23 years have made it just once, which reinforces this point.

The numbers going out are just as impressive, too. The group averaged $37 million in charitable contributions (6.9% of the country's total), $22 million in state and local taxes, $5 million in interest, and $11 million in miscellaneous itemized deductions. Sadly, the report doesn't tell us how much they spent on million-dollar watches, diamond-studded dog collars, and other essentials of over-funded lives.

As for taxes, the group's average IRS contribution was $73.5 million, which represents a 23.13% rate. Of course, those are just averages — the study revealed that nine of our super-earners paid less than 10% and 26 more paid less than 15%. (It's probably a good thing their neighbors don't know who they are!)

It's all an early Christmas for data nerds. Now here's the bad news. This year we'll be waving goodbye to our lucky 400 winners. Because of our growing population, the IRS will shift their focus to the country's top 0.001% of taxpayers, or 1,396 returns. "This is a more analytically useful tabulation compared to the top 400 tabulation in that it provides a longitudinally consistent data point relative to the entire percentile distribution," they say. (We told you this was data nerd stuff.)

Here's one last thing the Fortunate 400 have in common. They don't just take a shoebox full of receipts to their accountant on April 14 and say, "What do I owe?" No, these very smart people plan and plan and plan — to ensure they keep every last penny possible. It works for them, and it can work for you. So call us to take advantage of opportunities still remaining in 2016, and let's see what we can do for you!

Over the River and Through the Woods

Thanksgiving is a time for homecoming, and some of us are fortunate to return to a place where we've spent decades of holidays. Who wouldn't relish celebrating in a cozy farmhouse out of a Norman Rockwell print, with an overstuffed chair in front of a crackling fire and a warm kitchen smelling of pumpkin pie?
But these days, more Americans spend their Thanksgiving in a different setting. Who wants grandma's cramped parlor when they can welcome guests in a two-story foyer with dueling spiral staircases and a faux-crystal chandelier? We're talking, of course, about the design mishmash that critics have dubbed "the McMansion."
A McMansion is more than just a big, new house. It's a special breed of architectural jumble that favors sheer size and showiness over quality. You may not be able to define it, but you sure know it when you see it! Blame them, if you like, on the eager builders who sell them and the feckless zoning boards that green-light them. But there's one more more enabler that makes them possible, and that's our beloved U.S. tax code.
When Congress birthed the income tax back in 1913, they made all interest deductible. But the tax itself hit less than one percent of Americans. And most buyers in that day paid cash for their homes. So there was no specific intent to subsidize mortgage interest for the masses.
Since then, however, mortgages have become indispensable to the home buying economy and the mortgage interest deduction has become central to the tax code. In 1986, Congress eliminated tax breaks for most personal interest, but kept the deduction for interest on up to $1.1 million of mortgage debt. Today's code also lets you exclude up to $500,000 of capital gains from your income when you sell your primary residence.
Given our progressive tax system, these tax breaks tend to favor the wealthy. Mortgage interest is deductible only for the highest-earning third of Americans who itemize deductions. And the capital gains exclusion helps the most in high-cost markets clustered on the east and west coasts. One study found that just five high-cost urban areas snagged 87% of the net tax benefit, with over half going to California alone.
So . . . combine imperfect tax subsidies with the general decline of aesthetic integrity, and what do you get? Crimes against architecture. You can love stately brick courses, homey wood shingles, and even grand stone accents, without mashing them all into a single facade. You can admire the Greeks' taste in columns without slapping stick-on foam imitations on your bathroom wall like a suite at Caesars Palace. You don't need to know what a hipped roof, a gable, and a jerkin-head are to know they don't all belong on the same house.
Making fun of McMansions has even become part of popular culture. There are several web sites dedicated to mocking the form. In House of Cards, Frank Underwood gave home buyers his own brand of home buying advice: "Money is the McMansion in Sarasota that starts falling apart after ten years. Power is the old stone building that stands for centuries."
We don't care if your dream home is a suburban estate, a city loft, or a condo at the beach. Our job is to help you navigate the jumble of tax laws that make even the gaudiest McMansion look balanced and proportional. So call us when you're ready for a blueprint — we'll be here to help you build the tax shelter you need!

All You Need is Love

No matter who we voted for, we can all agree that this has been the nastiest presidential election since Thomas Jefferson called John Adams a hermaphroditic bastard. This week it's finally (finally!) come to an end. Whether you're elated or nauseated by the results, there's probably one emotion you share with most Americans right now: relief that the campaign is over. You've taken a long hot shower, and you got to enjoy your Sunday afternoon football with no political ads.

Now it's time for everyone to make nice. Donald Trump began his victory speech by graciously praising his rival Hillary Clinton: "Hillary has worked very long and very hard over a long period of time, and we owe her a major debt of gratitude for her service to our country." Hillary returned the favor the next day, telling her supporters we owe Trump an open mind and a chance to lead. Outgoing President Barack Obama stated we are all on the same team and we are all rooting for his success.

As the Beatles once sang, it seems that "all you need is love." Unfortunately, not everyone seems to agree. We're talking, of course, about the romantics at the Internal Revenue Service.

Our story this week starts with Joseph L. Jackson and his wife Sylvia. Joseph is the pastor at Triumph Church of God, a tiny Florida congregation with just 25 to 30 regular members. His wife sat on the board of directors. Together, the Jacksons managed the church's checking account and appeared to sign all checks jointly. As you can imagine, this won't be one of those stories involving rich people with billions of dollars or rich corporations with trillions of dollars.

Joseph told the church's board of directors that he didn't want an actual, taxable salary for his work. However, he said, he would be perfectly delighted to receive "love offerings," gifts, or loans from the church. In 2012, the couple signed $4,815 worth of checks payable to Mr. Jackson, with "love offering" or "love gift" marked on the memo line.

At the end of the year, the church issued Jackson a 1099-MISC for the income. Next year, when the Jacksons filed their return, they reported $6,478 in deductible contributions to the church. But they omitted the $4,815 the church had paid to them. Naturally, with 1099 in hand, the IRS objected, and everyone wound up in court.

Last month, Special Judge Daniel Guy issued his opinion in Jackson v. Commissioner. No one objected to the deduction for the Jacksons' gift to the church. But the love gifts were a different matter, and Judge Guy took just four sentences to conclude that Jackson's "subjective characterization of the payments as nontaxable 'love offerings' and 'love gifts' is misguided." (By "misguided," of course, what he really meant was "ridiculous" — you just don't get to say that when you're a Tax Court judge.)

When your kids were little and they got flustered, you might have looked down at them and said "use your words!" The same advice is true here. It's a common misperception that taxes and tax planning are all about numbers. But really, they're about the words we use. Can we legitimately interpret words to characterize money we receive as "nontaxable"? Can we interpret them to characterize money we spend as "deductible"? Merely calling something "nontaxable" or "deductible" isn't enough. Call us if you want to use your words to pay less. We're pretty sure you'll love the results! 

No, They Don't Want Justin Bieber Back

Given how long the 2016 presidential election season was, you're probably in one of two camps right now: ready to move to Canada, or relieved you don't have to. Either way, it's likely more Americans have actually thought about Canada in the last year than in the entire last century. So let's take a look at how Canada's tax system works, eh? Here's what you're in for (or what you're missing) from a country that calls its money the "loonie."

At first glance, Canada's tax system looks a lot like ours. The Canada Revenue Agency is the Great White Northern equivalent of our IRS, and it collects income and payroll taxes. "Revenue Canada" also collects the Goods and Services Tax (a 5% value-added tax) and Harmonized Sales Tax, a combined federal/provincial sales tax that replaces the GST in five eastern provinces. Tempted to cheat? Just remember they've got the Mounties on their side!

Canada's federal income tax looks a lot like ours, too, only nicer. Rates start at 15% and top out at 33% on incomes over $200,000. (Right now, one dollar equals about 1.34 loonies.) Capital gains are taxable; however, you'll only include 50% of them in your income. You can defer up to 18% of your previous year's income, up to about $25,000, into a Registered Retirement Savings Account that resembles our 401(k)s. You can also put up to $5,500 per year into a Tax-Free Savings Account that resembles our Roth IRAs.

The big difference comes in the provinces and territories. Here in the US, state tax rates rarely climb above 8%. California has the top rate at 13.3% and it doesn't apply until $1 million. Canada's provincial rates generally start around 8% and climb quickly from there. Quebec has the top rate at 25.75%, and it kicks in at just $103,151. (But it sounds so much better because it's in French!)

Of course, Canadians get something for their provincial tax dollars that we don't get from our states: Canada's legendary healthcare system. Canucks love their healthcare almost as much as they love maple syrup. Doctors handle billing directly with the government for everything but prescription drugs, long-term care, eyeglasses, and dental care. It's hardly perfect, of course — critics point to long wait times for specialists and Canadians traveling to the U.S. for elective surgeries. But in the end, Canadians drop just 9% of their GNP on healthcare, versus 17% here.

And Canada has the usual collection of oddball tax rules you'd expect in any democracy. Blank CDs carry a special "private copying levy" because the government assumes you're using them to violate somebody's copyright. Geese, ducks, and turkeys are tax-free if you're going to breed them, but taxable if they're on the menu. And just this year, Alberta boosted taxes on small breweries from 10 cents to $1.25 per liter, which drinkers are finding hard to swallow.

Canadians will roll out the welcome mat if you decide to pack up your skates and take off. If you're single, visit MapleMatch.com, a dating site to match fleeing Americans with lovelorn Canadians. (Check the boxes for "bacon" and "hockey" to up your odds.) And don't forget that Canada's most recent election lasted just 78 days.

The new administration is sure to bring to change to Washington, and that probably includes changing tax laws. We'll stay on top of it all to help you pay less. Maybe you'll use some of the savings for a city weekend in Montreal, or a ski trip to Whistler? Bring us back some souvenirs, hoser! 

Hut, Hut, Hike! (Your Tax Bill)

The 2016 NFL season is in full swing, and fans are spending billions of dollars to show their loyalty to their teams. The average ticket costs $92.98. The average beer runs $7.38. Even parking can cost as much as $75 to see the Cowboys at AT&T Stadium. And fans spend billions more on licensed hats, jerseys, jackets, and other apparel.

But teams don't always return that loyalty. In recent years, the Cleveland Browns became the Baltimore Ravens, the Houston Oilers became the Tennessee Titans, and the St. Louis Rams, who had previously been the Los Angeles Rams, scampered back to LA. In most cases, teams make lateral moves to new hometowns to find better stadium deals. These days, a 10-year-old stadium is about as exciting as a quarterback with a torn hamstring.

Now the Oakland Raiders — who started out in Oakland before moving to Los Angeles before moving back to Oakland — are hoping to move again, this time to Las Vegas. Once again, a new stadium is the big incentive. So let's take a look at the role taxes will play in the move.

A top-notch quarterback can cost north of $20 million per year. But a top-notch stadium costs closer to two billion. That's a lot for an NFL owner to swallow, even with the average team worth $2.43 billion. So it's customary for owners to approach their civic hosts with tin cups outstretched, looking for help to foot the bill. And taxpayers are usually happy to help — over the last 20 years, state and local governments have ponied up nearly half the cost of building or renovating stadiums for the league's 32 teams.

Here's what's happening in Vegas. Raiders owner Mark Davis says he's willing to throw $500 million towards a proposed $1.9 billion, 65,000-seat domed stadium. Casino owner Sheldon Adelson is willing to to hand off $650 million more. Nevada Governor Brian Sandoval has signed a bill hiking hotel taxes by 0.88% to cover the remaining $750 million. The plan also involves accelerating $899 million in transportation improvements already on the drawing board. Will all that spending turn out to be a smart bet?

At least the Las Vegas plan involves tackling visitors for the tax money. (Hotel taxes are especially popular sources for stadium revenue.) But sometimes public financing leads to a complete fumble. St. Louis dropped $259 million on the Edward Jones Dome to lure the Rams from LA, financing it with 30-year bonds. The team stayed for 21 years before sacking St. Louis to return to California. Now St. Louis taxpayers are stuck paying $12 million per year for a football stadium with no football team in it. It's going to take a lot of tractor pulls to cover that bill.

Team owners and their lobbyists argue that shiny new stadiums pay for themselves in the form of jobs, spending, and sales taxes. But study after study shows that's rarely true. Ultimately, it comes down to supply and demand. There are only 32 teams in the league, but there are far more cities that want one. Politicians can promise until they're blue in the face that they won't raise taxes. But what elected official wants to face his voters after letting a greedy owner strip their team from their town?

We realize that your game plan probably doesn't involve paying more tax to finance a stadium. In fact, it probably involves paying less. That's where we come in. So hand us the ball and let us take it up the field for you. We're confident you'll cheer for the savings. And remember, we're here for all your teammates, too! 

Warren Buffett's Real Superpower

Spend an afternoon at any area theater, and you'll see heroes with superpowers wreaking havoc wherever they go. Superman is faster than a speeding bullet (and leaps tall buildings in a single bound). Superheroes band together to save the world and debate whether they can ignore civilian authorities while they do it. Sometimes they even get married — just witness the Incredibles, an entire family of "Supers" dedicated to battling evil on a daily basis.

Every so often, mere mortals reveal they have superpowers, too. Take Warren Buffett, the "Oracle of Omaha." The longtime chairman of Berkshire Hathaway has grown his company's book value by 19.7% per year for the last 49 years, making him the third-richest man in the world. Most observers would say Buffett's superpower is his talent for spotting undervalued companies to buy. But is stock picking really the ace up his sleeve? Or could his true superpower be tax planning?

Here's what's going on. Most public companies start out by plowing their profits back into their own growth. At some point they become confident enough to reward investors with cash dividends. The typical S&P 500 company pays out about 30% of its earnings to shareholders for a 2% dividend yield. Those dividends encourage more investors to buy in. But they're taxable as soon as paid, and slow a company's growth, too.

Buffett plays a little tighter. He looks for undervalued targets with rich cash flows and solid dividend histories. He buys them, then kills their dividends to redeploy that cash for future acquisitions. Buffett's own company hasn't paid a dividend since Lyndon Johnson was president!

Buffett owns $65 billion worth of his company's stock. If he paid a 2% dividend like the typical S&P 500 company, he would have taken $1.2 billion last year, meaning a $280 million tax bill. Plowing those millions in tax savings back into his company's growth adds even more to Buffett's net worth! (What would Buffett do with all that income, anyway? He's famously modest, still living in the same Omaha house he bought for $31,500 back in 1958. And when he bought a private jet, he had the self-awareness to name it "the Indefensible.")

But wait . . . there's more! Buffett isn't just avoiding tax on dividends. By locking up all his income inside the business and rewarding investors in the form of higher share prices, he's converting ordinary income into capital gains. That means that shareholders who hold their stock until death will qualify for "stepped-up basis" treatment and escape tax on their gains entirely.

Of course, all those billions are still subject to estate tax. But Buffett has a plan for that, too. He's a legendarily generous philanthropist who's pledged to donate 99% of what's left at his death to his friend Bill Gates's (tax-free) foundation. So the untaxed billions he's squirreled away will escape the IRS forever. Now that's a superpower! Buffet's planning has worked so well that Hillary Clinton has even named a campaign proposal after him: the "Buffett Rule," which would set a minimum tax rate of 30% on anyone earning over $1 million per year.

We can't promise that saving taxes will compound your dividends into billions. But it's just common sense that keeping more for yourself contributes to your bottom line. So call us if you want to borrow a little of Buffett's superpower for yourself!

We're Number One!

Americans love awards shows — the Oscars, the Grammys, the Emmys, and the Tonys. So we all watched eagerly as the nonpartisan Tax Foundation rolled out the red carpet and released "International Tax Competitiveness Index 2016." The ranking rewards countries with low marginal rates to discourage businesses from fleeing abroad and simple systems to raise the most revenue with the fewest "economic distortions."
Which of the 35 member states of the Organisation for Economic Co-operation and Development (OECD) took home the gold? Was it our own United States? Maybe some sunny Caribbean tax haven where international gangsters travel to sip Pina Coladas and light cigars with their money? Perhaps one of those dinky European "Grand Duchies" tucked away in the Alps with strict bank secrecy laws?
No, no, and no. The winner, for a third year in a row, is the polka-dancing, wife-carrying, ice-yachting land of — Estonia! That's right, the Baltic country of just 1.3 million people, that most Americans couldn't find on a map, has the most competitive tax system in the world. Surprised?
What makes tiny Estonia's tax code so mighty? Try a 20% flat tax on earned income — the lowest top rate in the world. A 20% corporate rate with no tax on reinvested profits or double taxation of dividends. Property taxes based solely on land values, not buildings or improvements. A 20% value-added tax. And no taxes on foreign earned income, estates, or financial transactions.
Beyond Estonia, who are the top scorers? According to the ITCI:

• Silver medalist New Zealand has "a relatively flat, low-rate income tax that also exempts capital gains (with a combined top rate of 33%), a well-structured property tax, and a broad-based value-added tax."

Estonia's neighbor Latvia, at #3, "has a relatively low corporate tax rate of 15%, speedy cost recovery, and a flat individual income tax."

Fourth-ranked Switzerland has "a relatively low corporate tax rate (21.1%), a broad-based consumption tax, and a relatively flat income tax that exempts capital gains."

Even socialist punching bag Sweden, which rounds out the top five, has "a lower than average corporate income tax rate of 22%, no estate or wealth taxes, and a well-structured value-added tax and individual income tax." Where does our internal revenue code fall on this international ranking? Well, it turns out, "we're number 31!" (What kind of medal do you get for 31st place, anyway, Styrofoam?) Among other demerits, we have the highest marginal corporate tax rate and some of the most complicated taxes out of the entire OECD.
Our tax code may not impress our fellow nations, but that doesn't mean all hope is lost. It just means you have to plan a little harder to avoid paying more than your fair share. That's where we come in. So call us for help, and start thinking where in the world you want to take your savings!

Will It Blend?

If you've spent any time on the internet, you know it's a vast rabbit hole of places to waste precious minutes of your life. "Will it Blend" is one of those places, a video series showing off the Blendtec line of blenders. The videos feature the company's founder, smiling in a white lab coat and safety goggles, dropping the day's experiment into one of his company's appliances. Not surprisingly, avocados, credit cards, and an Big Mac Extra-Value meal all blend just fine — but iPhones, golf clubs, and an English-German dictionary on CD-ROM don't fare nearly so well. ("Don't try this at home," they warn.)

Taxpayers play a similar game. It's not as fun to watch as a Justin Bieber doll in a blender, but it's potentially far more profitable. That game, of course, is "Will it Deduct?" The results don't go viral in the same way as the "Will it Blend?" videos. But they do wind up on the internet, in the form of Tax Court opinions.

This week's "Will it Deduct" story features Herbie Vest, a CPA who launched an investment advisory firm for fellow CPAs. He took the company public and stayed on until 2001, when he sold out to Wells Fargo for $125 million. By that point, he found himself looking for a new challenge in life. He found it in his own past. When Vest was just two years old, his father was found hanging in the bathroom of his Texas shop. Investigators ruled it a suicide. But in 2003, he received an anonymous letter alleging murder. So Vest began investigating this coldest of cases.

Vest spent $6.4 million, pursuing the case as doggedly as any fictional detective. In 2007, he tried to salvage that effort with a book or movie, hiring a writer to tell his story and a PR firm to market it. But Vest never found a killer, and the story never found a buyer.

You can probably guess what Vest did with his pile of bills. That's right, he played "Will it Deduct?" The IRS pureed his claim on the grounds that he hadn't embarked on his effort for profit. So he applied for a do-over and took his case to the Tax Court. Last week, the Court released its opinion. Would Vest's deduction fare better than a toilet plunger in a blender? Here's what the judge said:

    "By January 2008 [Vest] had been investigating his father's death for five years. As of that time, his investigative activities had not generated a single dollar of revenue. Those activities generated no income during 2008, 2009, or 2010, and [Vest] had no reasonable prospect of generating future income. Petitioner never developed a business plan for commercializing his father's story. He has no professional background in writing, book publishing, or media. He did not modify the scale or scope of his investigative activities during 2008-2010 in an effort to minimize the substantial losses he was incurring."

Sadly for Vest, his investigation did not deduct, and now he owes the IRS $4 million in tax.

Don't let Vest's disappointment stop you from playing "Will it Deduct." Section One of the tax code imposes a tax on every taxpayer and sets forth the various rates. Think of it as a "red light" on the road to financial independence. But the rest of the code outlines hundreds of exceptions to that tax — the deductions, credits, loopholes, and strategies that give a "green light" for taxpayers to pulse, chop, and liquefy their tax bills. So call us to take advantage of those green lights. And remember, we're here for your family, friends, and colleagues too!

Round 'em Up and Shake 'em Down

Last month, Hollywood brought back the classic western with a remake of The Magnificent Seven. It's a tale as old as the West itself. An evil land baron terrorizes a town to satisfy his insatiable greed . . . and a ragtag squad of outlaws rides in to the rescue.


You might be surprised to learn that the IRS has its own elite posse, too. They ride into battle wearing wool suits and skirts instead of leather chaps, brandishing subpoenas instead of six-shooters. They're the brave men and women of the Global High Wealth Industry Group.


The "Wealth Squad," as they're known, is dedicated to battling tax evasion in the face of two growing trends, the rich getting richer and taxes getting more complicated. The IRS has always dedicated its most capable auditors to its most complicated cases. But those auditors tend to work in their own little bubbles — partnerships, corporations, estates, etc.


The Wealth Squad is a horse of a different color — an interdisciplinary group dedicated to "enterprise cases," where they look at taxpayers plus the businesses, trusts, foundations, and other entities they control. One accountant quoted in Bloomberg magazine described them like this: "highly capable, experienced examination specialists, which include technical advisers to provide industry or issue-specialized tax expertise, specialists regarding flow-through entities (such as trusts, partnerships, LLCs), international examiners, economists to identify economic trends within returns, valuation experts and others."


Got a private jet? How about a private foundation? The Wealth Squad is especially interested in those.


How does the Wealth Squad do it? With a deceptively powerful weapon: the Information Document Request, or IDR. Those requests start with your business and personal returns for the year in question, and get more intrusive from there. Imagine finding yourself on the business end of this summons:


    "Provide complete copies of all financial statements and method of accounting used to compile them, net worth computations, or other financial data probative of your assets, liabilities, net worth, income and losses, and cash flows from all sources, within and without the United States, including all underlying documents and any exhibits associated therewith, and if not apparent, please identify the preparer of such documents."


Yikes. Someone's going to bill a lot of hours complying with that request!


How much money are we really talking here? For the 2013 tax year, the IRS audited 1.5% of all tax returns reporting income from $200,000-399,999, and dug up $605 in additional tax for every hour they worked. That sounds like a pretty solid return on investment, until you look at what those auditors do with the "one-percenters" making real money. That same year, the IRS examined 12.1% of the returns boasting income of $5 million or more, and brought in a much-more-gratifying $4,545 for every hour invested.


If there's any good news here, it's that unless you're a billionaire, you're probably not going to find yourself in the Wealth Squad's crosshairs. But that doesn't mean you don't deserve the same sort of proactive planning as their targets take for granted. So let us be your heroes on horseback who help you pay less!

Moneyball? Ehhh, Not Really

America is a nation divided. Cat people vs. dog people. Trump people vs. Clinton people. And last week, we discovered a new gulf to bridge: "Brad" people and "Angelina" people. That's right, Brad Pitt and Angelina Jolie are filing for divorce after two years of wedded non-bliss. Will the "Brangelina" breakup turn into a fight club? Will it drag out, or will she be gone in 60 seconds?
Whose side are you on? How much do you care about the biggest celebrity divorce of 2016? Will you breathlessly wait for the next issues of your favorite supermarket tabloid, follow #brangelina on Twitter, and pass along rumors of infidelity, drug use, and child abuse? Or will you turn your nose up at the whole celebrity gossip machine and get on with your own life, thankyouverymuch?
Odds are good that our friends at the IRS will fall into that second group that just doesn't care. It's not that there aren't oceans of money at stake — it's just that the divorce isn't likely to change how much of it falls into IRS hands. Let's take a closer look:

• Jolie isn't asking for alimony. But even if she were, both stars earn well into the top 39.6% bracket on their own. (Forbes estimates Pitt has raked in $315.5 million since the couple met, with Jolie picking up $239.5 million more.) Alimony is deductible by the payor and taxable to the payee. That means, with Brangelina, it would be deductible by Pitt at 39.6%, and taxable to Jolie at . . . 39.6%. It's hard to see the IRS caring much who pays the tax on that last slice of income.

Next, property settlements. Pitt is a renowned architecture buff, with homes in Malibu, Manhattan, New Orleans, and the south of France. Jolie was famous for wearing a locket of her ex-husband Billy Bob Thornton's blood around her neck. (Let's just call that "separate property" and move on.) But transfers of property between divorcing spouses are tax-free — as far as the IRS is concerned, it's a wash no matter who winds up owning what.

Next, child support. Jolie has requested full physical custody of the couple's six children. (She's accused Pitt of being an inglorious bastard with the kids.) If she wins, Pitt will probably wind up paying child support. However, child support in any amount is nondeductible by the payor and nontaxable to the payee. In fact, it doesn't even appear on a tax return. Once again, there's no reason for the IRS to get excited.

If Pitt and Jolie really were just like us, the one area where the IRS might get concerned involves their filing status. Generally, when a couple earning more than about $100,000 gets divorced, they wind up paying less tax as singles than they would jointly. But again, Pitt and Jolie will both still pay the maximum 39.6% on the vast bulk of their income. We talk a lot here about the importance of planning. When it comes to divorce, it's almost inconceivable that Brangelina, with three previous divorces between them, didn't have a plan for it — also called a prenuptial agreement. Now, prenups are an asset protection tool, not a tax-planning tool. But it's equally inconceivable that a couple earning $555 million between them doesn't also have a plan to beat the IRS. So, while we can't get your picture on the cover of People magazine, we can help you with that same sort of protection. So call us!

Do They Or Don't They?

Matt Bissonnette grew up in a dinky flyspeck of a town off the Alaskan coast that you can't get to without a boat or a plane. He ultimately escaped to join SEAL Team Six, the Navy's most elite counter terrorism force. He took part in the 2009 mission to rescue Captain Mark Phillips from Somali pirates, a story which was told in the movie Captain Phillips. But that was just a warmup for his biggest mission: "Project Neptune Spear," the 2011 raid that killed Osama Bin Laden.

In 2012, Bissonnette wrote a memoir called No Easy Day: The Firsthand Account of the Mission That Killed Osama Bin Laden. It earned him $6.7 million in royalties, which he planned to donate to the families of fallen SEALs. It also launched a lucrative second career as a public speaker. Unfortunately, Bissonnette broke the Pentagon rule requiring him to submit it for vetting before publishing. The day after the book landed on shelves, officials said it revealed classified information, a breach that could subject him to years in prison.

Last month, Bissonnette settled the dispute and agreed to pay back every dime of royalties, plus another $100,000 in speaking fees he earned before they approved the slides he uses in his presentations. Question: can he now deduct that payment from his taxes going forward?

Code Section 162(f) seems to shoot down any tax benefit. "No deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law." But what about payments made to settle a dispute before a fine or penalty is imposed? Treasury regulations state that payments made to settle that sort of potential liability aren't deductible. But the regulations also state that compensatory damages do not qualify as fines or penalties.

So, that's the $6.7 million question. Does Bissonnette's payment serve to compensate the government for the damage his book caused? If so, then he gets his deduction. Or does it merely settle his potential liability for civil or criminal fines or penalties — in a way that benefits both the government and him by avoiding the time, expense, and potential public disclosures involved in a trial? In that case, no dice.

Bissonnette isn't the only celebrity who may miss out on a fat tax deduction for a big gesture. Actress Amber Heard recently finalized her divorce from Johnny Depp with a $7 million lump sum payment, then announced she's giving it all to charity. But she probably won't get the deduction you'd expect. That's because you can only deduct up to 50% of your adjusted gross income in any year (and carry any remaining balance forward five years). Ouch! Bet she didn't see that coming!

Now, there are two ways Depp and Heard might be treating that $7 million. It could be a transfer between spouses, incident to the divorce. In that case, it's nondeductible to Depp and tax-free to Heard. (Too bad her financial disclosures show she doesn't have nearly enough income to take advantage of the full deduction.) Or it might be alimony, deductible to him and taxable to her. In that case, she'll still owe tax on the 50% of her donation that she can't deduct this year.

Here's the lesson. Sometimes pricey things happen, and we console ourselves by saying "at least I get a tax deduction." But that's not always true, and it's rare that value of the tax deduction is enough to compensate for the loss that creates it. So call us before your next big transaction and make sure it serves you best!

Ahoy, Maties!

Labor Day has faded into memory, and before you know it, the holidays will be here. Halloween, Thanksgiving, and the year-end Christmas/Hanukkah/Kwanzaa cavalcade of commercialism are the obvious "Big Three." But in all the holiday season hype, it's easy to overlook a newer celebration that grows more popular every year. We're talking, of course, about International Talk Like a Pirate Day — observed this year on Monday, September 19.

Have you heard about the new pirate movie? It's rated ARRRRRGH!

When you think of pirates, you probably picture swashbuckling "Golden Age" captains like Edward "Blackbeard" Teach or "Calico Jack" Rackham. Maybe your tastes lean towards the fictional Jack Sparrow or Long John Silver. Either way, you'd probably be surprised to learn that the real pirates of history could be a sophisticated lot, organizing themselves into democratic societies, with checks and balances to enforce discipline — and even "taxing" themselves to pay expenses.

What has two eyes, two arms, and two legs? Two pirates!

Some captains went so far as establishing written codes to maintain law and order. (No one walks the plank without due process!) Bartholomew "Black Bart" Roberts, who captured over 470 ships before dying in a broadside of British grapeshot, ruled according to 11 articles. Number ten on his list provided that, "The captain and the quartermaster shall each receive two shares of a prize, the master gunner and boatswain, one and one half shares, all other officers one and one quarter, and private gentlemen of fortune one share each." Even Bernie Sanders could approve of such equal distribution!

What do you call a pirate that skips class? Captain Hooky!

Today's pirates face a whole new set of challenges, including how to handle their ill-gotten gains. If you decide to deep-six your desk job for an eyepatch and life on the sea, you'll find your income subject to the same tax as any other business, legal or not. "Booty" is taxed at fair-market value under the rules of Code Section 83(b).

What was the pirate's golf score? Parrrrrrrrrr!

Fortunately, you'll get the same deductions as any other business. Ships and equipment you buy to conduct raids are considered capital equipment, depreciable over the applicable period. Guns, grappling hooks, and smaller items qualify for first-year expensing. And if the Indian navy sinks your ship, you can claim a capital loss. It's good to know that if an IRS auditor says "I'm the captain now," you won't be completely hornswoggled.

How much does it cost a pirate to get a piercing? A buck an ear!

Yo ho ho mateys, pay attention here. The end of the year isn't just holiday season, it's planning season. And planning is the key to keeping your treasure and making it grow. So call us to help keep the scallywags at the IRS from getting too many of your pieces of eight!

Red Tax Rising

Novelist Tom Clancy shot to the top of the best seller lists when former president Ronald Reagan called his debut, The Hunt for Red October, "the best yarn." His stories featuring CIA analyst-turned-president Jack Ryan redefined the "techno-thriller" genre, with hyper-realistic plots that foreshadowed real-world developments. Clancy earned special praise for his obsessive attention to detail, especially with military hardware. But that attention to detail didn't quite extend to his finances — and a Maryland court just ruled that it would cost his children millions in estate tax.
Clancy made a fortune from his books and invested his royalties into an impressive collection of toys: six penthouse condominiums totaling 17,000 square feet at Baltimore's Ritz-Carlton, a 535-acre estate on Maryland's Chesapeake Bay, a Sherman tank (!), and a 12% stake in his beloved Baltimore Orioles. When he died suddenly in 2013, his estate was worth $86 million — not bad for a guy who started writing part-time while selling insurance.
But Clancy faced a dilemma common to divorced men with children who later remarry. Leave as much of his estate as he wants to his second wife Alexandra, where it escapes tax until her death? Or leave it to his kids from his first marriage, where the IRS grabs 40%, without remorse, immediately upon his death? The usual solution is something called a "qualified terminable interest property" trust, or Q-TIP. Without getting into the weeds of Treasury Regulation §20-2056(b)-7(b)(2)(ii) here (which, trust us, you do not want to get into), this gives Wife #2 (or #3 or #4 or #5, as the case may be) the income from the trust while she's alive and defers tax on the principal until the kids get it at her death.
Clancy's will left the real estate to Alexandra and divided the rest of his estate into three parts: a marital trust for Alexandra, a family trust for Alexandra and their young daughter, and a children's trust for the four kids from his first marriage. Under the usual rules, the marital trust would escape tax and the family trust and children's trust would pay. But after he drafted the original will, Clancy added a Q-TIP provision to the family trust and a "savings clause" to protect the marital deduction to the maximum amount possible.
When Clancy died, the will directed that taxes be paid out of the residuary estate — the family trust and the children's trust. That would have meant a $15.7 million bill, split between the two trusts. But that creates a problem: if Clancy's executor uses money from the tax-exempt family trust to pay tax, that amount becomes subject to tax itself. Clancy's widow objected, pressing to take advantage of the Q-TIP provision and savings clause. That would lower the tax bill to just $11.8 million but stick it all to the children. (Holiday dinners at the Clancy house must be a hoot.)
Naturally, the dispute wound up in court. Last year, a Baltimore probate judge ruled that the savings clause trumped the directions to pay tax from the residuary. Last month, an appeals court agreed. (Don't feel too sorry for the kids — they'll probably inherit plenty more from their mother Wanda, who made out just fine when she and Clancy split in 1999.)
Here's the lesson from today's story, and you don't have to work for the CIA to see it: poor planning poses a clear and present danger to your finances! So call us before you die, and keep Uncle Sam from playing patriot games with your tax dollars!

Back to School Tax Time

Now's the time of year when kids across America start heading back to school. New kindergartners eagerly don their snazziest big-kid outfits to pose for smiles and pictures. (The tears come after they get dropped off. We're talking the mom and dad, of course.) New high-schoolers hit the snooze button and look forward to sleeping through morning classes. (Why yank teens out of bed so early when their younger siblings are up before sunrise without alarms?) And new college students can't wait for the independence of campus life, because = beer. (Their empty-nester parents wonder if it's finally time to treat themselves to that divorce they've always wanted, then look at the tuition bills and sigh in disappointment.)

You know who else is busy this time of year? That's right, the tax man! Here are some random musings on some of the things that happen when back-to-school time meets tax time:

• Many states offer sales tax holidays for back-to-school shopping. Ohio is typical: from Friday, August 5 through Sunday, August 7 (2016 only), there was no tax on clothing priced at $75 or less, school supplies priced at $20 or less, and school instructional materials priced at $20 or less. Of course, those back-to-school sales tax holidays are just like your old homework assignments — you can't get credit if you miss the deadline!

Teachers are naturally on the front lines of shrinking school budgets, and they often chip in with their own money to fill the gaps. (Ironic, right, considering how generously they get paid!) The Educator Expense Deduction lets teachers who work full-time at any accredited school deduct up to $250 they pay for books, school supplies, computer equipment and software, and even athletic equipment they buy on behalf of their students. For years, this has been one of those deductions Congress scrambled to extend every December — last year, Congress finally gave our kids' long-suffering teachers a break and made it permanent.

Student loan debt has topped a trillion dollars, and loan forgiveness programs have sprung up to help borrowers who go on to work for qualifying employers like governments and 501(c)(3) not-for-profits. But those service-minded borrowers may face an unexpected surprise: sometimes the amount forgiven is considered taxable income! Sure, eliminating, say, $40,000 would be welcome relief for a hardworking teacher or social worker. But what about the $10,000 tax bill that comes with it?

You probably wouldn't think a college degree would be tax-deductible. And there's no deduction for training that prepares you for a new job. But if your graduate program is intended to improve or enhance your skills for your current job — or if your employer requires you to get an advanced degree — you may be able to deduct your tuition and other expenses. Let's say you're a tax lawyer, and you want to brush up on your skills. That $40,000 you drop on a Master of Laws degree may get you a raise and a deduction. (Now you know why tax lawyers drive Jaguars!) Here's today's lesson — pay attention, because there will be a quiz. When it comes to taxes, school is never out! The more you know and the more you plan, the less you'll waste on taxes you don't have to pay. So call us before exams and let us help with the tutoring you need!

Go for the Gold

For awhile there, it looked like the just-concluded Rio Olympics would be a carnival of chaos. Golfers boycotting to avoid the Zika virus? Check. Swimmers making their way through raw sewage? Check. And those were just the disasters we anticipated before the opening ceremonies! Who could have predicted divers splashing into a pool of green water, or Ryan Lochte "over-exaggerating" making up a whopper about a drunken robbery?
In the end, it all worked out, and we got to witness the usual quadrennial spectacle of sport, livened with a dose of Latin color. Swimmer Katie Ledecky earned five gold medals and, in one race, beat a woman on a jet ski. Gymnast Simone Biles is headed for the cover of Sports Illustrated and has gone viral with her quote, "I'm not the next Usain Bolt or Michael Phelps. I'm the first Simone Biles." And none of Rio's projected shortfalls disrupted the spirit of competition.
Olympic games are full of upsets, disappointments, and uncertainty. But there's one team that's always guaranteed to win, and that's the team at the IRS. They're not taxing winners on the value of their medals, at least not yet. But the U.S. Olympic Committee awards cash prizes to U.S. medalists: $25,000 for bringing home the gold, $15,000 for the silver, and $10,000 for the bronze. Uncle Sam's teams finished #1 in the medal race, combining for 46 golds, 37 silvers, and 38 bronzes. That means over $2 million in new income to tax!
How do those cash awards compare with our competitors across the globe? Well, we're nowhere near #1 in that race, for sure. If you live in Azerbaijan, bringing home the gold puts the Azerbaijani equivalent of 510,000 pretax dollars in your pocket. (We're not sure where you can actually spend $510,000 in Azerbaijan, but men's taekwando champ Radik Isaev probably can't wait for the challenge.) If you live in Russia, and you aren't disqualified for doping, bringing home the gold means an extra $135,000. Thailand's Sopita Tanasan, who dominated the women's 48kg weightlifting competition, will enjoy a $314,000 annuity to be paid out over the next 20 years.
Of course, the keepsie money isn't in the prizes, it's in the endorsements. Swimmer Michael Phelps cemented his Olympic legend by breaking a 2,168-year-old record for most individual medals. (Leoniodis of Rhodes, the previous record holder, had to win a footrace while carrying a 50 pound shield and wearing a complete suit of armor.) Phelps has won "just" $1.9 million from his actual swimming. But he's parlayed his fame into $94 million of taxable endorsements and a $55 million net worth. Maybe there's really something to that "cupping" nonsense?
Winning at the Olympics can open doors we can't even imagine yet. Consider this theory. In 1976, a young Bruce Jenner packed up his hopes and dreams and headed to Montreal. What if he gave it his all in the decathlon and finished . . . fourth? No medal, no Wheaties box, no Playgirl cover. Would we be keeping up with those krazy Kardashians today? (And for that matter, which of today's stars will be headlining a reality-TV train-wreck while we're watching the 2056 games?)
Here's the final result. Planning for one-time windfalls (like Olympic gold) can be just as important as planning for periodic income (like endorsements). The IRS wants a piece of it all. So call us before you earn your medals and we'll help you make the most of your gold!

Up in Smoke

The Mafia. The Mob. La Cosa Nostra. Call it what you will, this "certain Italian-American subculture" has a long and storied history. Mobsters like Al Capone, Henry Hill, and John Gotti have become folk heroes of a certain sociopathic sort. Fictional mobsters make special guest appearances alongside pop culture icons — witness The Simpsons' "Fat Tony" D'Amico, crime boss of Springfield.
Organized crime also has a long history of tangling with tax authorities. Try as they might, Elliot Ness and his fellow "Untouchables" couldn't jail Al Capone for bootlegging, bribery, or the St. Valentine's Day Massacre. It took IRS agent Frank Wilson three years of dogged investigation to finally put Capone behind bars for the pedestrian offense of failing to pay his taxes. Even Tony Soprano knew enough to report a salary from his waste management business to keep the IRS off his back.
Earlier this month, the Mob was back in the news as the FBI unsealed an indictment and arrested 46 members of various New York and Philadelphia-area crime families. The suspects sported the usual collection of colorful nicknames like "Tony the Wig," "Anthony the Kid," "Tony the Cripple," and "Mustache Pat." But their actual crimes seemed a far cry from the wars that defined the Mob's glory days. While the indictment included old-school staples like gunrunning, loansharking, and bookmaking, it also featured "participation trophy" offenses like health care fraud, credit card fraud, and selling untaxed cigarettes.
Cigarette smuggling might sound like a penny-ante crime, especially compared to the whacking, kneecapping, and "protection" rackets of mob legend. ("Nice business ya got here. Be a real shame if anything happened to it.") But the Bureau of Alcohol, Tobacco, Firearms, and Explosives estimates that black-market smokes cost governments $5 billion per year. In New York, where the tax is $4.35 per pack, an estimated 57% of all sales involve smuggled cigarettes. And every time the tax goes up, so do the incentives to smuggle.
How does the scheme actually work? Simple arbitrage. Buy your cigarettes someplace cheap like Virginia, where the tax is just 30 cents per pack. Truck them up I-95 to New York City. Sell them at a discount to bodegas and other independent retailers. Then conveniently "forget" to tell the tax man about it. Smugglers generally make between $4 and $6 per pack. That means a single truckload, which contains 48,000 cartons, can light up nearly $3 million in profit.
Numbers like that make "bootlegging" so attractive that terrorists have fired up their own efforts. The 1993 World Trade Center bombing, in fact, was financed by cigarette smuggling. In 2002, a federal jury convicted a Lebanon native of smuggling cigarettes from North Carolina to Michigan to funnel profits for Hezbollah. And investigators believe that European cigarette smugglers help pay for ISIS's reign of terror, too, both in the Middle East and throughout Europe.
Here's the lesson from today's sad story of Mob decline. Every financial move you make involves at least some tax consideration. Now, snuffing out those taxes shouldn't be your sole priority. But once you've made the right financial choice, your next step should be to find the most tax-efficient way to do it. That's where we come in. So call us for the plan you need, and watch those unwanted taxes go up in smoke!

The Darker Side of Reality TV

Americans can't seem to get enough of reality television. Most critics think that's because reality TV presents us as we all aspire to be. Something about the camera seems to bring out the best in people, whether they're bachelorettes, drag queens, or cake chefs. Reality TV is where we go to restore our faith in the simple human dignity in everyone, from hoarders to pawn stars to ice-road truckers. (Right?) Besides, what kind of masochist would voluntarily waste an hour of their precious life watching a gaggle of "real housewives" fighting like a sack full of drunken cats?
That's why it was so disappointing to hear that Abby Lee Miller, star of Lifetime's Dance Moms, has pled guilty to federal tax fraud and money laundering charges. It's a bit like finding out the mighty Wizard of Oz is just a little man behind a curtain. (Think of the children!)
If the Kardashians are the bright shining sun of the reality TV solar system, Abby Lee Miller is a minor outlying planet, or maybe a famous comet. Dance Moms has spent six seasons following Miller, her Pittsburgh studio, her dance team, and of course the dancers' moms. (We don't have to actually watch this stuff to write about it; the show even has its own Wikipedia page.)
Miller may be a whiz at choreographing routines like the one highlighted in "Topless Showgirls," featuring her preteen troupe performing a burlesque routine in flesh-toned bra tops and tights. (The show's producers mercifully pulled that episode from the season's DVD compilation.) But when it comes to business, she's got two left feet. In 2010, she filed for bankruptcy, claiming $325,000 in assets and $400,000 in debt. As part of that process, the court ordered her to do all her banking out of a single central account and file monthly operating reports disclosing her finances.
But Miller failed to disclose she would be profiting once her show debuted on July 14, 2011. In 2013, the judge supervising her affairs found himself channel-surfing one night and clicked onto Dance Moms. Naturally, he wondered why he wasn't seeing that income.
Miller could have cleaned up her act. Instead, she choreographed more scheming. She held on to checks to deposit them after her case was discharged, deposited money into hidden accounts, and asked customers to pay her mother instead of herself. And of course she didn't show that little pirouette to the IRS. How much are we talking? According to prosecutors, $755,492.85. That's a lot of sequined leotards!
Last October, a federal grand jury indicted Miller on 20 counts of fraud. For an encore, prosecutors added a money-laundering charge after discovering she and her employees had smuggled $120,000 in cash from Australia in Ziploc bags hidden in their suitcases. A week later, she pled guilty to one count of bankruptcy fraud and one count of not reporting an international currency transaction. Now she's looking at 24 to 30 months in a place where sequined leotards are in very short supply.
Ironically, Miller's cheating didn't save her anything — once the judge found her television gold mine, she wound up using it to pay her creditors in full! And that's the lesson of our story. Cutting corners and breaking the rules may seem to offer short-term relief. But survivors know that long-term planning is the key to financial success. So call us for help with your planning and enjoy some real world savings!

Like This!

If you're like most Facebook users, you get plenty of friend requests from people who aren't really friends. Co-workers you never respected from your last job; classmates you never really liked 30 years ago; annoying blowhards you meet at your in-laws' anniversary party. If you're lucky, you can just ignore those requests and hope they go away.

But sometimes a request is harder to ignore. That includes the friend request the IRS just sent to Facebook itself, in the form of a Statutory Notice of Deficiency, for $3-5 billion dollars. (Plus interest and penalties, of course.)

Here's the scoop. Facebook has 1.23 billion friends across the world. (Probably not too many more than you do, but who's counting?) That was enough for Facebook to make $3.69 billion selling advertisements last year. But who likes paying tax on all that income at the top corporate rate of 35%? So Facebook set out to edit its profile, at least where the IRS is concerned.

In 2010, Facebook transferred rights to some of its "online platform" and "marketing intangibles" to an Irish subsidiary. The Emerald Isle is a lovely place to do business — who wouldn't want to "make their green" in a place where the wearing of green is a thing? But Ireland's top corporate tax rate is just 12.5% — barely a third of our own. That difference lets Facebook license the intellectual property from its Irish subsidiary, deduct those license payments to save 35% here in the US, and pay just 12.5% on the resulting income in Ireland. Slick, right? Lots of companies have moved their intellectual property to Ireland, and by one study, this sort of profit shifting will cost the Treasury $135 billion in tax revenue this year. If you're counting, that's over 4% of our total tax receipts.

Facebook friended the accounting firm of Ernst & Young to assign a value to the assets it transferred. That's important because the lower Facebook values those assets, the less taxable income they have to bring back from the foreign subsidiary. At the same time, it's a difficult job because there's no real market for them. Who else besides Facebook could possibly use Facebook's marketing intangibles?

There's enough at stake that in 2013, the IRS opened an audit. They saw that Ernst & Young valued each of the transferred assets independently, rather than as part of an integrated whole. And they said this undervalued the assets by billions of dollars. But the IRS needed more information to calculate exactly how much. So they sent Facebook a series of "friend requests," in the form of summonses to produce documents and appear at the IRS's office in San Jose. The company ignored those requests just like you'd ignore a friend request from that drunk loudmouth you met at your spouse's company golf outing.

Last week, with the statute of limitations for the audit closing in, the IRS gave up on requesting information and just sent Facebook the bill. Naturally, Facebook will fight back in court. If they lose, it could cost them enough that investors stop liking their stock! Stay tuned for the rest of the story.

Here's today's lesson. Proper planning is key to keeping your tax bill down. But it's not enough just to plan. You have to implement, too. That takes work, and it means dotting your i's and crossing your t's. So call us for the help you need. Stop wasting money on taxes you don't need to pay. And post a picture for your "friends" to see what you do with the savings!

Now That's Prime

Americans love peeking into the wallets of the rich and famous. Just how much are they really worth? How did they get there? And who's on top of the pile? For years, Microsoft founder Bill Gates ($76 billion) has been the king of that particular gilded hill, with Berkshire Hathaway chief Warren Buffett ($65 billion) capturing a respectable second place.

But last week brought news that there's a shakeup near the top — and taxes played a big role in that change. Amazon founder Jeff Bezos, who owns about 18% of the company, has seen his stock shoot up over 50% since its recent low in February. At the same time, Warren Buffett has seen his Berkshire Hathaway shares languish. On Friday, July 22, Bezos's uptick and Buffett's downtick crossed, making Bezos the second-richest man in America and the third-richest man on earth.

Now let's look at just a few of the ways taxes played in growing Bezos's wealth:

    Amazon got an early boost by helping customers avoid the state and local sales taxes they would pay at a local brick and mortar retailer. Buying online already meant saving a trip to the store. But skipping the tax bill made the whole proposition even more attractive. Even today, the company collects sales tax in just 28 states.

Amazon's international headquarters is based in low-tax Luxembourg, where it benefits from a sweetheart ruling negotiated with local authorities seeking to lure multinational corporations. Low taxes mean the company has more to reinvest in growing its business.

The company profits from an elaborate structure, dubbed "Project Goldcrest," designed to shift income from high-tax jurisdictions to low-tax jurisdictions. (It sounds like something a James Bond villain would name his tax plan, but it earned the name because the goldcrest is Luxembourg's national bird.) For example, Amazon used a 28-step (!) series of intracompany transfers to shift income from intellectual property like software, trademarks, and brand names to a nontaxable Luxembourg partnership before passing anything back to the United States.

Bezos's taxable salary is $81,840 — just $14,000 more per year than what a lowly Facebook intern makes for fetching Mark Zuckerberg's coffee. (Bezos has no nanny for his four kids, and his wife picks them up from school in a Honda minivan.) His net worth grows through stock appreciation, which isn't taxable until he sells his shares. If he dies while he still owns the stock, his heirs will avoid income tax on that appreciation entirely.

Finally, on July 14, Buffett donated $2.9 billion to a group of private foundations. Buffett is a legendarily generous guy, who's already pledged to give away the bulk of his fortune at his death. But he's also a legendarily smart guy, and he certainly won't be passing up the sweet tax deduction he gets for his gift. Of course, that tax-advantaged gift helped close the final gap between Bezos and Buffett.

Here's the moral of the story. Smart tax planning didn't just help Jeff Bezos make Amazon more valuable. It was a crucial part of his strategy, right from the start. Shouldn't it be part of your strategy? Call us to learn more!

Shell Games on the Big Screen

The dog days are here, and multiplexes across America are delighting audiences with the usual summer fare. Down to the left in Theatre Three, a motley crew of undersea chums are busy finding their friend Dory. Across the hall in Theatre Five, Universal Studios has ripped off reimagined the Toy Story premise with pets instead of playthings. Around the corner in Theatre Six, you can watch the earthlings unite once again to defeat the aliens in Independence Day: Resurgence 3D. (Don't forget your $10 tub of popcorn and your $6 soda!)

Director Steven Soderbergh has shot his share of thrillers, including the Oscar-winning Traffic and the casino-caper series Ocean's Eleven, Ocean's Twelve, and Ocean's Thirteen. Now he's launched work on a different kind of thriller that the critics at the IRS will be sure to applaud: an as-yet unnamed project based on (you guessed it) the pulse-pounding Panama Papers.

Need a quick refresher? Back in April, the International Consortium for Investigative Journalism released bombshell results from a year spent combing through 11.5 million documents leaked from the Panamanian law firm of Mossack Fonseca. The papers revealed the owners of 214,000 mostly-secret shell companies. Mossack Fonseca's clients included the king of Saudi Arabia, the presidents of Argentina and Ukraine, and the former prime ministers of Georgia, Iraq, Jordan, Qatar, and (again) Ukraine.

There's nothing inherently illegal about using offshore entities. Investors often find it easier to own assets outside their own countries through shell companies, and there are legitimate tax advantages as well. But not everyone unmasked by the leak appears to have been operating entirely aboveboard. The prime minister of Iceland resigned after his citizens learned that he and his wife secretly owned millions of dollars worth of Icelandic bank bonds while he was in charge of negotiating their bailout. (Oops.) And it's hard to believe that Mallory Chacón Rossell, an "alleged" money launderer tied to Mexican druglord Joaquín "El Chapo" Guzmán, was using her offshore entity to hold, say, bank CDs.

Soderbergh previously turned the price-fixing scandal at Archer Daniels Midland into a serviceable film called The Informant, and even convinced Matt Damon to star. In this film, he'll be dramatizing the upcoming book Secrecy World, which recounts the tale of the journalists who broke the story. So we won't just be watching a bunch of lawyers in tropical-weight pinstripes filing corporate documents with various governments.

Casting hasn't yet been announced. But there are some stars who may not want to audition. Emma Watson is rumored to have made £24 million for her role as Hermione Granger in the Harry Potter series. But her name turned up in the Papers as beneficiary of a British Virgin Islands company. (No points for Gryffindor!) And martial-arts star Jackie Chan owned at least six BVI companies, including one called Jackie Chan Ltd. (If he really was trying to hide something, he probably should have worked harder on a name.)

We have no idea how much Soderbergh will make from this latest project. But we trust he's smart enough to realize he doesn't have to hide it offshore to pay less tax on it. All he really needs is a plan — and we would be happy to provide it! We can do the same thing for you, too. So call us if you want to pay less without winding up in an unwelcome spotlight!

Harry Potter and the Deathly Tax Bill

Harry Potter's sidekick Ron Weasley has challenged opponents from a mountain troll to the Horcruxes to the Death Eaters. Now the actor who plays him, 27-year-old Rupert Grint, is taking on a foe as powerful as Voldemort himself. Last month, he challenged a squad of dementors taking on the deceptively ordinary appearance of bureaucrats at Her Majesty's Revenue and Customs, Great Britain's equivalent of our IRS.

Grint has conjured up a fortune since being plucked from his local theatre group to play Harry Potter's friend. He's rumored to have collected about £24 million for his work in the series. (That's about $32.4 million, give or take, depending on how panicky currency traders are feeling about last month's Brexit vote.)

In Harry Potter's world, the Ministry of Magic imposes a Hexing Tax of up to 3,000 galleons on the privilege of wizarding. (Junior Wizard Savings Accounts at Gringott's Bank are thankfully free from this tax!) But in our Muggle world, Her Majesty's Revenue and Custom wants considerably more, taxing non-wizardry income at rates up to 40%.

Grint's accountant, Dan Clay, doesn't have a magic wand. But he does appear to have taken a class or two in Defence Against the Dark Arts. On April 6, 2010, the top tax rate on incomes over £150,000 leapt from 40% to 50%. Because the higher rate took effect in the middle of the year, the law required high-income taxpayers to split the 20-month period leading up to the transition into two separate tax periods, of eight months and 12 months. Clay chose a split that let his client report his income from the sixth and seventh films into the period before rates went up so that he could pay the lowest possible bill. But tax inspectors found documents during an unrelated audit suggesting Grint had intended to choose a different split, and imposed the higher tax.

Grint has paid the new tax in full and his barrister is quick to point that out. "There is no tax avoidance involved here." But after paying the tax, Grint filed suit to request a refund in the neighborhood of £1 million. (Pricey neighborhood!) Thus he found himself at a Tax Tribunal sitting at the high court in London, where he told Judge Barbara Mosely that his knowledge of taxes was "quite limited" and he had trusted the details to his father and his accountant. If we had Hermione Grainger's Time Turner, we'd tell you whether he wins. But we don't, so we'll just have to wait for the judge's decision.

Sometimes tax planning involves big-picture concepts and strategies like tax-efficient entity structures for business owners. (If we were to advise the barman at the Leaky Cauldron Inn that opens into Diagon Alley, we might suggest the British equivalent of an S corporation.) Sometimes it involves arcane technical details like accounting periods. And sometimes you have to resort to potions and spells. (We've got those, too. We just can't give them to you because you're a Muggle. Sorry.)

Has the Sorting Hat placed you in a top tax bracket? Here's the good news: You don't have to take on the Ministry of Magic to pay less. You just need a plan. So pick up the phone and call us — or have your owl bring us a letter — and let's see what we can do for you!

This Too Shall Pass

Filing your tax return usually isn't much of a chore. If you're like most people, you e-file it and call it a day. (Maybe you cross your fingers in hope that teenage Russian hackers don't steal your identity.) If you're old-school, you trudge down to the post office to snail mail a paper return. But if Representative Gwen Moore's new bill passes, filing might get a little harder.

Moore represents Wisconsin's Fourth District, which includes Milwaukee and several working-class suburbs. She has a special sympathy for constituents on public assistance because she's been there herself. "I am a former welfare recipient," she says. "I've used food stamps, I've received Aid for Families with Dependent Children, Medicaid, Head Start for my kids, Title XX daycare [subsidies]. I'm truly grateful for the social safety net." And she's offended by measures requiring welfare recipients to pass drug tests to qualify for aid, especially since evidence suggests they're no likelier to use drugs than anyone else.

Apparently Moore believes the notion that what's good for the public-assistance goose is good for the silk-stocking gander. And many of her Congressional colleagues argue that massive tax deductions are grants of public money just like welfare benefits. So, on June 16 she introduced H.R. 5507, The Top 1% Accountability Act of 2016. And what would her bill do to ensure "accountability"? Simple! It would require the highest-income taxpayers to pass a drug test before claiming $150,000 or more in itemized deductions. Can't pass the test? Settle for the standard deduction!

Fortunately, Moore's bill wouldn't require lucky Top 1%-ers to line up at IRS offices with designer specimen cups in hand. It merely requires "a test completed within 3 months before the date on which the return of tax is filed which shows that the taxpayer (or the taxpayer's spouse in the case of joint return) did not test positive for any controlled substance."

The bill generously gives taxpayers three ways to pass. They could submit a test conducted by their employer. They could submit a test from a program certified by a state. Or they could provide a certified letter from a "medical review officer" qualified under federal workplace drug testing regulations. "Controlled substances" include pretty much everything you'd expect, with no exception for medical marijuana.

Moore understands there's a certain element of "sticking it to the man" in her bill. "I would love to see some hedge fund manager on Wall Street who might be sniffing a little cocaine here and there to stay awake realize that he can't get his $150,000 worth of deductions unless he submits to a drug test," she says.

But she also wants to raise serious questions about how the government treats Americans occupying different places on the financial food chain. Take housing subsidies, for example. A low-income family renting a 2-bedroom apartment might qualify for a Section Eight voucher of $1,000 per month, depending on where they live. But if that Wall Street hedge funder snorting coke writes off $50,000 in mortgage interest on his swanky Manhattan condo, he'll save $20,000 in taxes. So why shouldn't he pass the same drug test, she asks?

Moore's bill obviously has no hope of passing in today's Congress. But it illustrates how tax threats can come out of left field. That's why it's not enough to settle for tax professionals who just record history. You need a proactive planner with foresight to anticipate challenges before they hit your wallet. So call us for the plan you need!

Take This Tax and Shove It

Country music has a long history of celebrating outlaw behavior, which naturally extends to celebrating "outlaw" performers. Plenty of fans have heard the album Johnny Cash recorded of his first prison concert at California's San Quentin penitentiary. But Cash's fellow country icon Merle Haggard, who recently passed away at age 80, was there to hear the concert live — because he was actually serving time in the joint! (Haggard was no stranger to the wrong side of the bars — his own mother gave him up to juvenile authorities when he was just 11 years old. Haggard later credited Cash with inspiring him to turn from burglary to music.)
Now the singer-songwriter David Allan Coe is the latest to saddle up with the outlaw brigade. Last week, a federal judge in Cincinnati sentenced the 76-year-old performer to three years' probation and ordered him to pay $980,912 in restitution. So what was his crime? Horse thievin'? Cattle rustlin'? Train robbin'? Uh, no . . . try "impeding and obstructing the due administration of the Internal Revenue laws."
Coe is most famous for writing Johnny Paycheck's 1977 smash hit, "Take This Job and Shove It," which climbed all the way to #1 on the charts and even inspired a movie. Apparently, though, he didn't realize the outlaw act was supposed to be just an act. Prosecutors say Coe performed over 100 concerts a year from 2008 through 2013. But he failed to file returns for 2008 and 2010. And he failed to pay for 2009, 2011, and 2013. Where did the money go? To pay gambling debts, of course. (This is a country music outlaw we're talking here, not Robin Hood — did you think he was using it to sponsor orphans in the Philippines?)
Eventually, of course, the IRS caught up with Coe. They even levied his bank accounts to show him they meant business. That's when Coe decided to circle the wagons. He demanded to be paid in cash only, by 3:00PM on the day of the concert. His road manager would pick up the cash, deduct enough to pay himself and the band, and give the rest to Coe in person or through MoneyGram or Western Union. Oh, and there was one more catch: There were "no $50 bills allowed as Coe believed they were bad luck and would not gamble with them."
Last September, Coe pled guilty to one criminal count. He faced up to three years in prison, so he should probably count himself lucky he won't be recording "David Allan Coe Behind Bars."
Coe isn't the only country crooner to find himself in IRS crosshairs. In 1990, the Service seized most of Willie Nelson's assets in an attempt to collect $32 million in debt. Nelson's lawyer negotiated the arrearage down to $16 million, and then again to $6 million, and Willie went to work. He released a double album titled The IRS Tapes: Who'll Buy My Memories, with proceeds dedicated to paying down the feds. He sued his accountant (naturally). He finally cleared his debt three years later. Willie's 83 now, and it looks like he learned his lesson — the only laws he breaks today involve "the Devil's lettuce."
We understand that paying your tax is no fun (especially if it gets in the way of a good wager). Fortunately, we can help you pay less without singing a sad country song. Just call us for a plan — we can bet you'll be happy with the results!

Thrilla in Manila Envelopes

Words like "hero" and "icon" get tossed around pretty casually these days. But the world lost a true card-carrying legend with the passing last week of boxer Muhammed Ali after a long and public battle with Parkinson's disease. Ali first gained fame in the ring, of course, floating like a butterfly and stinging like a bee. But he made his real mark, and redefined the power of an athlete's reach, when he picked a four-year fight to battle induction into the United States Army. Now his estate could be poised for a different and equally expensive sort of battle — this time, with the IRS.

Today's pugilists earn lavish sums for sometimes-mediocre performances — witness Floyd Mayweather's nine-figure payday for 36 minutes of sparring with Manny Pacquiao. But Ali was rarely motivated by money. "What I need money for?" he told Esquire back in 1968. "I don't spend no money. Don't drink, don't smoke, don't go nowhere, don't go running with women." (Pretty smart advice, when you think about it.) The champ gave up millions during the years he was banned from boxing while fighting the army. And he was legendarily generous during his life, giving money to friends, family, and complete strangers.

"The Greatest" continued to earn millions even after retiring from the ring in 1981. Forbes magazine scored his endorsements at $4-7 million per year from 2000-2005. And his estate has been estimated to be worth as much as $80 million.

We don't yet know how he might have divided his assets between his fourth wife and executor, Lonnie, and his nine acknowledged children. However, we do know that he can leave an unlimited amount free of tax to his wife. Anything passing to other parties is subject to a 40% federal estate tax on amounts over $5.43 million. His home state of Arizona levies no additional estate tax.

As is sadly so often the case, it looks like Ali's family is already fighting over the estate. His second wife Khalilah reports that the champ's brother and son have accused Lonnie of cutting them out of the will, and warns that illegitimate children will "come out of the woodwork like roaches."

But the biggest bout over Ali's estate probably won't concern who gets what. Rather, it will involve how much everything is worth — especially intangible assets like "name" and "image." Pop legend Michael Jackson was one of the most recognizable people on the planet, yet his executors valued his name and image at just $2,015. The IRS countered with a slightly higher $434 million, and naturally the two sides are duking it out in court. (Ironic, considering how Jackson declared "I'm a lover, not a fighter!")

Ali ducked part of that left-hook by selling 80% of those rights for $50 million back in 2006. (He named the company he established to manage those rights "Goat, LLC," which modestly stands for "greatest of all time.") But Lonnie and the IRS still have to score how much the 20% he kept for himself is worth.

We spend a lot of our time planning for punches that life might throw, market crashes and business downturns among them. And there are some punches we know we're going to take. Unfortunately, dying tops that list. But it really is possible to avoid estate taxes — and plenty of other taxes — entirely. All you need is a plan. So call us for help with that plan, before you step into the ring with the IRS!

Have a Coke and a Tax

When most of us hear the word "tax," we immediately think "IRS." It's natural to associate those three-letter words with each other (even if "IRS" is an acronym and not a word). But our friends at the IRS are hardly the only tax collectors with their hands out for your money. State and local governments need love money too, and they don't have as many options for raising it as Uncle Sam. So every now and then, someone makes headlines with a plan to tax something new.

Philadelphia's incoming mayor Jim Kenney is the latest local official to propose quenching his city's fiscal thirst with a new tax. His inaugural budget would impose a three cents per ounce tax on soda, juices, iced tea, and other sugary drinks. The mayor claims the measure would raise $400 million over the next five years. The issue has even bubbled up into the presidential race — Hillary Clinton supports the tax, while her challenger Bernie Sanders condemns it as disproportionately harmful to the city's poor.

This isn't the first time governments have tried carbonating their revenue by taxing soda — since 2008, 40 similar taxes have been rejected around the country, including twice previously in Philadelphia. Only one place, famously progressive Berkeley, California, has succeeded. New York Mayor Michael Bloomberg actually banned drinks larger than 16 ounces before a state court doused the rule. (Grateful Gothamites fondly remember it as "Bloomberg's $#*@ing Big Gulp ban.")

Now Philadelphia's Kenney is hoping the third time will hit the sweet spot. But this time, he's coming at it from a different direction. He's not positioning it as a public health measure or using it to fight obesity or diabetes. He's just looking to reinvest some of the soda companies' profits into the communities where the biggest customers live. The $400 million would go towards funding universal pre-kindergarten, creating community schools, and renovating parks, community centers, and libraries.

School funding advocates and public health officials are all for it. New York's Bloomberg has joined the fray in support. But naturally, Kenney's proposal has drawn opponents. You'll be shocked to learn that the American Beverage Association has spent $2.6 million to oppose it. (They poured $9 million down the drain fighting the Berkeley referendum.) Local Teamsters oppose it, too, arguing that flat soda sales will cost jobs. And plenty of city residents feel squeezed enough already — for example, there's already a $2 per pack tax on cigarettes that helps fund local schools.

Political infighting is fierce, and council members are looking at a whole menu of alternatives. One council member proposed a 15 cent tax on beverage containers, designed to hit the people who drink mineral water and fancy kombucha teas just as hard as the people who guzzle Mountain Dew. She also introduced a "healthy beverages tax credit" to encourage stores to stock drinks worth drinking. Others are considering taxing (gasp!) diet sodas. But time is running out — council has to pop the top on a final budget by the end of June.

We realize that a three-cent tax on an ounce of soda won't get in the way of your financial goals. But if you're one of the millions who look somewhere besides coffee for your daily caffeine fix, it would be a constant reminder of the government's power to tax. We never forget how destructive that power can be, and that's why we work so hard to give you a plan to pay the least amount possible — and avoid the unpleasant surprise of a "shook-up" can!