The Great Eskimo Tax Scam

Spring is here, at least according to the calendar, and you probably aren't thinking much about Eskimos as April 15 approaches. But here's a fun story from the Wayback Machine to remind you it's never the wrong time to pay attention to taxes.
Back in 1971, President Nixon signed the Alaska Native Claims Settlement Act. The law was intended to settle a long history of land disputes dating back to before Alaskan statehood. It distributed up to 104.5 million acres of land to the native tribes, paid out $962.5 million in cash, and created 13 "Alaska native regional corporations" to manage those assets. But timing, as they say, is everything. Fishing, timber, and oil industries collapsed, and nearly all of the new corporations were left with losses.
In 1983, Alaska's senior Senator, Ted Stevens, added a provision to the 1984 tax bill letting the new corporations sell those tax losses. Let's say you're a profitable corporation riding the 1980s economic boom and you're looking at a $4 million tax bill on a $10 million profit. You find a needy native Alaskan corporation with $10 million in losses. You pay that corporation, say, $2 million in cash for the right to take the tax loss on your own bottom line (even though you didn't actually incur the loss yourself), and poof — you've just saved yourself $2 million in tax!
It didn't take long for tax planners to find Stevens's little Easter egg. In 1986, a Marriott exec named Stephen Norris learned about the new loophole. Norris hooked up with David Rubenstein, a former Carter administration official who had left his White House post to start peddling influence from a Washington law firm. Marriott paid Rubenstein's firm a seven-figure sum in fees for saving an even higher seven-figure sum of taxes. Norris smelled opportunity for himself and checked out of Marriott to set up shop brokering tax deals with Rubenstein.
Norris and Rubenstein had no trouble finding needy Eskimos. They flew the struggling CEOs into Washington, wined them and dined them, and got them just as hooked on free money as the crack cocaine that enterprising drug dealers were just then bringing to America's Lower 48. The partners took 1% of the transaction for themselves and juiced a billion dollars of losses through the system. (If you hated math in school, that's $10 million in fees.) In 1987, the pair built on that success to help found the Carlyle Group, a private-equity fund named after the pricey New York hotel that became a home away from home for senior Washington officials looking to cash in on their government connections.
Meanwhile, back in Alaska, our naive native tribes were learning the hard way why Wall Streeters caution, "Bulls make money, bears make money, pigs get slaughtered." Eskimo companies started overstating their losses, taking "liberties" and "cutting corners" marking down the value of their timber and oil assets. Suddenly everyone had losses for sale, and even the accountants were getting rich! But every party has a pooper, and pretty soon the IRS caught on. In 1988, Congress repealed the law, put the tax break on an ice floe, and pushed it out to sea.
Arrangements like the Great Eskimo Tax Scam force tax planners to scramble as they appear and disappear. Fortunately, our tax code includes dozens of perfectly legal strategies that aren't in any danger of disappearing — and don't include the word "scam" in their name. Call us when you're ready to start putting more of them to work for yourself!

A Little Tax Magic

You already know that our Congress is as gridlocked as at any time in recent history. Budget and spending bills get rolled up into year-end monstrosities. Urgent priorities like immigration reform get hijacked by partisan posturing and "appeals to the base." The wizard Merlin himself would have a hard time pulling a sword from the solid block of stone that is today's U.S. Senate.
So here's a welcome breath of legislative fresh air that everyone can support. Representative Pete Sessions (R-TX) and six colleagues have introduced House Resolution 642 "recognizing magic as a rare and valuable art form and national treasure." Magic "is timeless in appeal and requires only the capacity to dream," they say. It "transcends any barrier of race, religion, language, or culture." It even helps children with disabilities improve their physical and mental dexterity and build confidence.
You know who else seems to like magic? The candidates offering tax plans as part of their effort to succeed Barack Obama as President of the United States! Take Republican Donald Trump, for example. He's drawn attention for his proposal to eliminate the "carried interest" loophole that lets private equity fund managers pay tax at preferential long-term capital gain rates on much of their income. But he also proposes to cut taxes to 15% on business income and 25% on individual income. He would also eliminate tax for singles earning less than $25,000 and joint filers earning less than $50,000, eliminate the marriage penalty and the alternative minimum tax, and make the estate tax vanish into thin air. Sounds great, right? But what does that tax plan do to the country's financial health? According to the Committee for a Responsible Federal Budget, those proposals would pull $12 to $15 trillion more debt from a hat. To balance the budget, spending would need to be cut by 40-80%, or the economy would have to grow by over 10%.
Trump isn't the only Republican with a little magic up his sleeve. Texas Senator Ted Cruz promises that on his first day in office, he'll saw the IRS in half. (Conveniently for the rest of us, he won't be putting it back together.) He also promises we'll be able to do our taxes on a postcard. (That's sort of a "card trick," right?) And former candidate Marco Rubio promised to make capital gains taxes disappear in a puff of smoke. "There's just a lot of magical thinking going on on the Republican side," says Len Burman, director of the Washington-based Tax Policy Center. Republicans aren't the only ones counting on some fiscal sleight-of-hand to make ends meet. Everyone's favorite Democratic Socialist, Bernie Sanders, promises to nationalize health care, make public colleges tuition-free, and raise taxes on the rich. But New York magazine has accused him of "thinking like a Republican," citing four former chairs of the Council of Economic Advisors who hit Sanders for "magic math" claims that his plan would lead to 5.3% economic growth and 300,000 new jobs per month. And while nobody has accused Hillary Clinton of magical thinking, she'll need a fair amount of sorcery to get her plan through Congress.
Look, we all wish we could wave a magic wand and make our tax bills vanish. But unless Penn & Teller run for the White House, that's not going to happen. What's the next best thing? A proactive plan can save you far more than a rabbit hidden in a hat. So call us today and see if we can make some taxes vanish!

The Humor Endures

The passing of former First Lady Nancy Reagan last week at age 94 marks a bit of an end to the 1980s. Nancy earned both praise and criticism for restoring what she saw as some much-needed Kennedy-esque pomp and circumstance to the White House. Later, she earned praise for her work against drug use and, in later years, for championing embryonic stem-cell research. The passage of time proved kind to Mrs. Reagan — her funeral drew an A-list of politicians, Hollywood celebrities, and even former A-Team start "Mr. T," whom Nancy befriended as part of her "Just Say No" campaign. Ironically, given Nancy's own penchant for glamour, her husband Ronald made much of his reputation through his folksy, homespun wit. And taxes were a prime target of his humor. So in honor of both Reagans, here are some of Ronald's most famous quotes about taxes to enjoy as April 15 approaches. And just to make it interesting, we've thrown in a ringer. Can you spot the words that actually came from Russian president Vladimir Putin?

"The taxpayer — that's someone who works for the federal government but doesn't have to take a civil service exam." "We don't have a trillion-dollar debt because we haven't taxed enough; we have a trillion-dollar debt because we spend too much." "Republicans believe every day is the Fourth of July, but Democrats believe every day is April 15." "The government's view of the economy can be summed up in a few short phrases. If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." "There were always those who told us that taxes couldn't be cut until spending was reduced. Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance." "History shows that when the taxes of a nation approach about 20% of the people's income, there begins to be a lack of respect for government . . . . When it reaches 25%, there comes an increase in lawlessness." "The tax agencies have no right to terrorize business . . . "

If there's anything Ronald Reagan hated more than taxes, it was the "evil empire" of the former Soviet Union. That's why it's especially ironic that the last quote about tax collectors terrorizing business came from Russian strongman and former KGB apparatchik Vladimir Putin! Presidents and their spouses will always come and go. (Someday, Americans will mourn the passing of the first "First Gentleman.") But some things won't ever change, and we're confident it won't ever be easy to pay taxes. Want to make things easier? Come to us for a plan to pay as little as possible! Every day you wait is a day you might be able to pay less.

We Don't Really Like You

The actress Sally Field has appeared in dozens of television and movie roles since first appearing as "Gidget." But she's perhaps best known for a 45-second acceptance speech at the 57th Academy Awards, when she accepted the Oscar for Best Actress and told the audience "you like me . . . you really like me!"
Late last month, that same group of the world's most narcissistic people gathered to congratulate themselves once again. They heard comedian Chris Rock skewer the Hollywood establishment for their "sorority racism." They saw the winners take the stage to spread the word on pet political causes. And a select group of presenters and nominees walked out with something extra: a big IRS bill.
Back in the 1970s, the Academy decided to thank actors for participating in the ceremony with a "swag bag" of modest gifts. But over time, that bag has grown as lavish and extravagant as a Beverly Hills mansion. This year's participants could choose from gifts totaling up to an almost-obscene $230,000. Here's just part of the haul:

• A VIP all-access trip to Israel ($55,000)
• Three nights at the famed Golden Door spa in San Marco, California ($4,800)
• Three nights at the Grand Hotel Tremezzo just down from George Clooney;s summer home on Italy's Lake Como ($5,000)
• A plastic surgery package from 740 Park Associates ($5,530)
• Three sessions with celebrity fitness trainer Jay Cardiello ($1,400)

The bag even included a couple of items that are just too trashy for us to mention here. The haul is so rich that it doesn't fit into an actual "bag." Instead, recipients show up at a hotel suite to pick out what they'll really use, so they don't wind up paying tax on a lifetime supply of Lizora Pu-Erh Nourishing Cream and Tea Cleansing Bar ($31,200) that they just wind up giving to the maid.
As for the tax bill, back in the old days, when the value of the gifts didn't exceed the annual income of 99% of the country, they were tax-free! But by 2006, the IRS had had enough. Time to collect some taxes, they decided. But how can they collect taxes on gifts? Well, take a look at how they answer that question in their IRS Gift Bag Q&A press release:

"Q: If these are gifts, why do they have to be treated as income?
A: These gift bags are not gifts for federal income tax purposes because the organizations and merchants who participate in giving the gifts bags do not do so solely out of affection, respect, or similar impulses for the recipients of the gift bags."

Sorry, Sally Field . . . when it comes to the swag bag, the IRS says the sponsors who "donate" the goodies don't really like you. (But the hotel in Italy sounds lovely!)
Here's the lesson for the week. It's not always obvious what's income and what's not, what's deductible and what's not. If you really want to keep as much as the law allows, you need a plan to wade through the confusion. So call us for a red-carpet plan of your own!

Taxes Without Zaxes

March 2 marks the birthday of Theodore Geisel — better known to millions of children and former children as Doctor Seuss. That's reason enough to celebrate. But the beloved author's birthday is especially noteworthy this year. Archivists working at the Geisel Library have discovered an early draft of the author's most famous classic — and it seems there's something the book's unnamed narrator detests even more than Green Eggs and Ham. That's right — he hates paying taxes just as much as you do!

Slippery taxes on my boat.
Smelly taxes on my goat . . . .
Income taxes here and there.
Excise taxes everywhere!
I sure don't like to pay my tax.
No one does! That's just the facts!

Fortunately, our friend Sam I Am is there with a solution. You might already know what it is:

You do not like them, so you say.
Perhaps a plan can save the day.
'Cause everybody hates to pay,
but careful planning saves you hay.

Armed with a plan, our narrator takes on the task of tackling his Form 1040. (Can you imagine how much fun Dr. Seuss had with that illustration?) And while Sam I Am can't make paying taxes as tasty as a plateful of green eggs and ham, he can make them at least palatable:

Say, I don't hate this tax so much!
Your careful planning saved a bunch!
So now I'm writing off my boat.
You found some credits for my goat!
And now I'm "sheltered" in the rain.
And in the dark and on a train,
and in a car and in a tree.
I'm paying so much less, I see!
I've stuffed my savings in a box.
I'm feeling clever like a fox!
I've saved enough to buy a house!
Tomorrow I'll deduct my mouse!
I know I owe them here and there,
but planning saves me everywhere!
Your planning saved me from a jam —
Thank you! Thank you, Sam I Am!

You've loved Dr. Seuss since you were knee-high to a Sneetch, right? So now that you know how much he appreciates a tax plan, why on earth are you waiting for your own?