Monday, February 22, 2016

Men, Boys, Price, Toys

How much is a classic bright-red Ferrari worth? Well, if it's the 1957 335 S Spider Scaglietti that the French Bardinon family auctioned earlier this month, the answer is €32 million, or around $35.8 million. But if there isn't a convenient auction to establish how much someone will pay for something, and you need to set a price, how exactly do you go about establishing a number?

Here's where this week's story starts. Pierre Bardinon was a French leather-goods heir whose family manufactured, among other items, bomber jackets for the U.S. Air Force. At a young age, he fell in love with car racing and Ferraris, eventually assembling a collection of over 70 of them. (No word on how many were candy-apple red.) He even dedicated the family's chateau at Mas du Clos to the sport, adding a two-mile track and car museum.

Bardinon sold some of those cars during his lifetime. But when he died in 2012, he still had 20 left. His family valued that remaining collection of 20 at €70 million for estate-tax purposes. But since then, prices for the exotic Italian cars have accelerated nearly as fast as the cars themselves, and today the collection could be worth more like €200 million. Now French tax authorities may take another look.

Estate taxes are a whole different animal than income taxes. The rules themselves aren't especially complicated. The tax doesn't kick in until your taxable estate tops $5.45 million ($10.9 million for married couples). And the rate itself is a flat 40%. (French rates on Bardinon's Ferraris are even higher at 45%.) The real issue is assigning values to assets. How much exactly is everything worth?

If an estate consists of publicly-traded securities, that's easy to determine. Throw in some real estate or a closely-held business, and it gets a little tougher. Bring on the appraisers! And if there are collectibles or other hard-to-value assets — like Bardinon's Ferraris — that's when things get really sticky.

For 2013, the IRS got just 33,719 estate tax returns. However, they audited a hearty 8.5% of them (versus just 0.9% for individual income tax returns). 3,359 of those returns reported assets over $10 million — and the IRS audited a whopping 27% of those. In fact, experienced estate-tax preparers go into the job assuming their returns will be audited.

Naturally, most families want to lowball the value of their assets. And it's not necessarily hard to find an appraiser to go along. But the IRS has their own resources to fight back. When it comes to art, for example, the Service keeps an in-house staff of appraisers and experts. When that's not enough firepower, they also maintain an Art Advisory Panel, made up of two dozen scholars, curators, and dealers with expertise in a variety of areas. In 2014, the panel looked at 159 items and adjusted their values up by $27.8 million. That's an extra $11 million or so in tax.

They say that "he who dies with the most toys, wins." And we realize you'll probably consider yourself fortunate if you make it to the finish line with one Ferrari in your garage. (Can't drive more than one at a time, anyway, right?) But if you do have that good fortune, remember that smart planning will be the key to helping your family keep as many of your toys as possible. So ask us how we can help!

Tuesday, February 16, 2016

Rats Finding Cheese

Anyone who's ever watched a gangster movie knows there's nothing worse than a rat . . . a snitch . . . a stool pigeon. Life is hard for that much-maligned species! In Martin Scorsese's classic mob saga Goodfellas, Henry Hill rats out his partners in crime to get a reduced sentence — then pays the heavy price of having to "live like a schnook" in the witness protection program. But there's one place where rats can earn fat cheesy rewards . . . in at least one case, over $100 million worth. And that's with our friends at the IRS.

Congress established the IRS Whistleblower Office in 2006 to see if cold hard cash could motivate tipsters to rat out tax cheats. (Spoiler alert: It works.) The program pays rewards ranging from 15% to 30% of taxes, penalties, and interest the IRS collects in cases with $2 million or more at stake. Last week, the office released its 2015 annual report — and business is booming.

In 2015, the office closed out 10,615 claims. Nearly all of them wound up getting rejected: the allegations weren't specific enough or "speculative in nature" (53%); the IRS was already investigating the target (11%); the amounts involved didn't meet the $2 million threshold (10%); or the statute of limitations for actually collecting more tax had expired or was too close (7%). But there were still 99 whistleblowers who took home awards totaling over $103 million. That's a lot of cheese!

That sort of success has given staffing at the office a boost. At the beginning of 2015, there were 42 full-time employees. By the end of the year, that number had grown to 61. But this may be one area where most Americans think they're getting their money's worth from their government — since 2007, the program has paid $403 million in awards and collected over $3 billion in tax.

Most whistleblowers remain anonymous, for obvious reasons. But the office has handled the occasional high-profile case, too. In 2012, the IRS paid former Swiss banker Bradley Birkenfeld a whopping $104 million for information leading to a $780 million fine. (He also spent 40 months in jail for the crimes that led him to having that information in the first place — but that's a tradeoff a lot of taxpayers would be willing to consider!) In a more controversial example, David Danon, a former tax lawyer for the Vanguard Group, has alleged the low-cost index fund provider's corporate structure is an elaborate tax dodge and that the company owes $35 billion in back taxes.

Before you give up your day job for a career ratting out tax cheats, consider this: It's not a get-rich-quick scheme. The IRS pays awards out of actual collections, which means no payday until after the taxpayer you're blowing the whistle on has exhausted all of their appeals and the statutory period for filing a claim for a refund has expired or been waived. That typically means it takes five to seven years before your cash is in your hands. (And don't forget that you'll owe tax on your reward, too!)

We realize you're not likely to end up on either side of a tax whistleblower claim. But we know you want to pay less. And you don't need to rat anyone else out to do it. You just need a plan. So call us when you're ready to stop wasting more on the IRS than you absolutely have to!

Monday, February 8, 2016

Deee-Fence!

Football fans who enjoyed Super Bowl 50 all know that while offense may sell tickets, it's defense that wins championships. The Carolina Panthers learned this lesson the hard way Sunday night, losing to the underdog Denver Broncos, 24-10. The Broncos scored just one offensive touchdown on their way to winning the Lombardi Trophy, and gained just 194 yards in total offense, the lowest for any Super Bowl champion. Defense ruled the game — linebacker Von Miller led Denver's top-ranked defense to victory, forcing two fumbles en route to winning MVP honors.

But there's one player that every NFL player fears even more than a strip-sacking linebacker, and that's the one who wears number 1040 on his jersey. The league minimum salary is $450,000 this year. That's enough to push even the greenest rookie into the top 39.6% federal income tax bracket. Pile on 3.8% for Medicare, plus state and local taxes, plus whatever state and local "jock taxes" he owes for road games, and it all adds up to a serious financial concussion.

Fortunately for the Super Bowl-losing Panthers, punter Brad Nortman and long snapper J.J. Jansen are there to help. Nortman majored in accounting at Wisconsin and recently passed the CPA exam; he's currently working on a master's degree in finance at Indiana University. And Jansen graduated with an accounting degree from Notre Dame. "I would say J.J. and I are the go-to corner for tax questions, investing questions and personal finance questions," Nortman told FOXSports.com after Carolina embarrassed Arizona for the NFC title in January. "Any guys that want to know about it know where to go to."

How important can those questions be? Let's look at a story coming to us out of the same northern California Bay Area that just hosted the big game.

Oakland Raiders owner Al Davis and his partners have been battling the IRS for years over their income from 1988-1994. In 2005, Davis and his wife finally entered a settlement which required the IRS to make "computational adjustments" to determine the effect on each partner's income. That settlement gave Davis and the partners 60 days to review those calculations. However, by the time the IRS sent Davis the final calculations, calling for an extra $2.5 million, the statute of limitations was about to expire. So the IRS issued the final assessments after just one week, rather than the 60 days the agreement promised.

 
In 2011, Davis suited up in court to invalidate that assessment. Last month Judge Andrew Hurwitz blitzed his claim. IRS closing agreements are contracts, the judge said, and the default remedy for breach of contract is damages. Yes, the IRS breached the contract with the partners by letting the play clock run down. But that doesn't let Davis wriggle out of the IRS's grasp. Davis could have challenged the accuracy of the IRS calculations, filed an administrative claim for a refund, or sought reimbursement for the IRS's breach. "Instead, he threw a Hail Mary and sought a full refund. That pass falls incomplete," said the judge. (Apparently he isn't much of a Raider Nation fan).

No self-respecting NFL coach would ever take the field without a careful game plan designed to defeat the opposition. So why would you try to line up against the IRS without a plan of your own? Call us when you're ready for your own plan, and we'll see if you're wasting enough to cost you a ticket to next year's big game!

Tuesday, February 2, 2016

Ch-ch-ch-ch-changes

Rock & roll fans lost an icon last month with the death of David Bowie just two days after his 69th birthday. Bowie made a career out of breaking molds, pioneering "glam rock" and reinventing himself constantly along the way. Rolling Stone magazine's obituary hailed him as "one of the most original and singular voices in rock & roll for nearly five decades," whose "flair for theatricality won him a legion of fans." His last album, Blackstar, dropped on his birthday and immediately hit #1 on several Billboard charts.
Rock stars are famous for earning enormous sums of money, and blowing those fortunes on pricey mansions, pricey cars, and pricey entourages. (They've even been rumored to dabble in pricey drugs.) But Bowie's fame made him a man who'll take things over — he became one of rock's savviest money managers, and that naturally included proactive steps to beat the tax man.
Bowie's first wife Angie wrote in her autobiography that in 1979, Bowie was living large in California. But he found himself under pressure from $300,000 tax bill, and it seemed the taste was not so sweet. "These were tax debts accumulated over the past few years," she recalled, "during which time vast quantities of taxable cash he had generated had vanished into various murky areas." Strange fascination indeed!
Bowie had several choices. He could stay in sunny California, where combined federal and state rates topped out at 81%. He could head home to England and pay 83%. Instead, he sent Angie to her birthplace in Switzerland and arranged residency in the village of Blonay above Lake Geneva. Sure, it meant spending "significant amounts of time in Switzerland." But Angie likened it to "work release from a very nice, court-ordered health resort," with "an almost ludicrously low tax rate of about ten percent."
In 1992, Bowie opted for a more modern love and married the supermodel Iman, who preferred the glamour of London and New York to the quiet charms of a Swiss village. Would that mean a return to high taxes? Of course not! He bought a 640-acre estate near Dublin in Ireland, which exempts artistic royalties from tax.
Then, in 1997, Bowie released his greatest financial hit: the so-called "Bowie bond." Bowie needed cash to buy out his former manager. But he didn't want to sell the rights to any of his songs. Instead, he transferred the copyrights into a special purpose trust which then issued $55 million in bonds secured by the royalties to the songs. By borrowing against those future royalties rather than selling them, he was able to take tax-free cash. Bowie's deal made him a hero for artists looking to securitize future royalties. It even offers significant estate-tax advantages — an artist's heirs can pay estate tax on their intellectual property without having to sell it.
How well did Bowie's moves succeed? Time may have changed Bowie, but in his golden years, he really did become a richer man. This weekend, reports surfaced that he left a $100 million estate, with half going to his wife and half to his children. He also left $2 million to his longtime personal assistant and $1 million to his daughter's nanny. (We realize that half plus half plus $3 million equals more than the entire estate, but when you've sold 140 million (!) records, you can get away with that sort of math.)
Want to put the same smart tax moves to work for yourself? You sell the records and we'll handle the rest! Seriously, though, you don't need to hit #1 on the charts to pay less. You just need a plan. So call us when you're ready to "turn and face the strange"!