Change of Address

Moving to a new home can mark an exciting transition in life. Maybe you've just gotten married and you're settling into a real house after a series of walk up apartments. Maybe your children are finally out of the house and you're trading four bedrooms and a suburban backyard for lofty downtown sophistication. Maybe you're ready to retire and opt out of snowy winters for good.

Moving is also a monumental pain in the butt. We're not just talking about packing up and sorting through years (decades?) of accumulated stuff. We're talking about the practical details of changing your address with everyone from the bank to your car registration . . . including, of course, your Uncle Sam. If you don't dot your i's and cross your t's, you can wind up in a fair amount of trouble. And so this week's story takes us deep into the weeds of something you wouldn't think the IRS needs to argue about: the all-important "last known address."

Damian and Shayla Gregory moved from Jersey City, NJ to nearby Rutherford on June 30, 2015. For some reason, they filed their 2014 tax return from their old address in Jersey City. Then they won the lottery. Unfortunately, it wasn't the Powerball, it was the audit lottery. And they didn't win the $7,000 per week for life they were hoping for — they won a demand for more tax!

While the IRS was auditing them, the Gregorys filed a power of attorney and extension to file their 2015 return from the new address. Now, you'd think that would be enough to put the IRS "on notice" that they had moved. Sadly, you would be wrong. And so, with the audit over, the IRS sent their demand to the Gregory's old address in Jersey City. (The Post Office returned it as undeliverable.) The Gregorys finally learned about the deficiency three months later. They filed a petition challenging it in Tax Court literally that same day. But the IRS told them no dice.

Naturally, the IRS has miles of red tape governing all of this. 26 CFR §301.6212-2 defines "last known address" as the one that "appears on the taxpayer's most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address." Rev. Proc. 2010-16 goes on to list the forms that qualify, and states clearly that the power of attorney and extension don't count. Even the instructions for those forms say you can't use them to change your address. And so the Tax Court ruled for the IRS.

The Gregorys weren't completely off-base asking the IRS for a break. Courts have said that if the IRS knows a taxpayer has moved, they should exercise due diligence to find them, even if they haven't given notice. Having said that, last October the Tax Court ruled the IRS didn't have to sic the bloodhounds on Daniel Sadek, a California subprime lending "mogul" who racked up $25 million in tax deficiencies before fleeing his "last known address" in California to ride out an FBI investigation in Beirut. (Nothing suspicious about that move, right?)

Here's the broader lesson from this week's story. Beating the IRS starts with big-picture strategies like choosing the right business entity, finding the right benefit plans, and taking advantage of code-based savings strategies. But concepts and strategies aren't enough. Implementation is the key to putting them to work, and you can't overlook the details. So call us when you're ready to work the system and let us put those strategies to work for you!

AP Fraud

Early on a Tuesday morning, FBI agents fan out across the country to arrest dozens of people in six states on racketeering charges and other offenses. The next Gambino family mob "rollup"? No, it's "Operation Varsity Blues" — the newest celebrity scandal, featuring CEOs and Hollywood stars bribing their children's way into competitive colleges! And, like with most good scandals, there's a tax angle lurking underneath the juicy gossip.

Some of our most successful CEOs never finished college. The list includes Bill Gates, Steve Jobs, Mark Zuckerberg, Russell Simmons, and dozens more. Astonishingly, millions of Americans manage to find happiness and success in life without ever going to college at all! But competition for spots at top schools grows ever more intense (Stanford University's acceptance rate is down to one out of twenty.) That's forced striving students to up their game . . . so is it any surprise their striving helicopter parents are upping their game, too?

This week's story starts with a former teacher named William Singer, who established a college counseling business called "The Key" and a nonprofit called Key Worldwide Foundation. The Key may have been a legitimate-enough service for affluent families who wanted a regular dose of rigging the system. But parents who were willing to pay for VIP-level rigging could make "charitable" contributions to the foundation, which Singer used to bribe test administrators and college coaches. Singer bragged that he had helped 761 families open what he called a "side door" into top schools.

In one case, actress Felicity Huffman shamelessly "donated" $15,000 to Singer's foundation to doctor her daughter's SAT results. (Huffman is currently free on $250,000 bail.) In another, Lori Loughlin, who played Aunt Becky in the critically-acclaimed drama "Fuller House", paid $500,000 to market daughters as rowing team recruits at USC. Of course, neither girl would recognize a scull if you knocked her over the head with it. (Loughlin is free on $1 million bail — bigger bribe = bigger bail.) Both families should probably tell their accountants to expect correspondence from the IRS about those bogus charitable deductions.

Ironically, the Tax Code includes plenty of legitimate breaks for financing college costs. Scholarships and fellowships are generally tax-free. There's the American Opportunity Credit, the Lifetime Learning Credit, and an above-the-line deduction for student loan interest. The problem, of course, is that none of those breaks help you get in to that pricey school in the first place! (You can't even deduct your kids' SAT test-prep fees.)

As for Singer, he's been cooperating with feds since September. He pled guilty just hours after the story broke, and it looks like the Justice Department has all the receipts they need to lock down more convictions. That's typical for federal prosecutors, who don't bring charges until they have a stack of evidence tall enough to stand on and change a light bulb. Coaches and even some of the parents have been fired, too.

So, how hard are you working to get your kids into college? It used to be enough just to schlep them from soccer games to violin lessons to test-prep classes. Now you've got to start committing felonies, too? Are you sure Olde Ivy is really worth it? Fortunately, you don't have to commit any crimes to put smart tax planning to work to pay for it, wherever they go. You just need a plan. So call us when you're ready to ship the kids off to school, and let us help you save enough to throw a party when they graduate!

Batter Up!

Choosing where to live is one of the most important decisions we make on this journey we call life. Do we embrace the familiar comfort of the small town where we grew up, or do we strike off for fame and fortune in the big city? Do we celebrate new advances in home snowblower technology, or do we opt-out of winter entirely on a houseboat in the Keys? Choosing where to put down roots is an intensely emotional choice. But for some of us, it's a tax-planning choice, too.

Bryce Harper is a baseball player who lives in his native Las Vegas. Up until last season, he played right field for the Washington Nationals, where he became the youngest National League MVP ever. He's especially good at hitting home runs on Opening Day, and was the first player to hit five home runs in Opening Day games before age 25. Last year, Harper made $21.65 million for his effort, which means the umpires at the IRS will be rooting for him all season long.

Harper is 26 now, with a new wife and probably a family on the way. Time to come to the mound for some adult financial planning, right? And so, on March 2, Harper signed a 13-year, $330 million contract with the Philadelphia Phillies. It's the biggest free-agent deal in American sports, and works out to $156,695.16 per regular-season game. Remarkably, it wasn't even Harper's highest offer — the Giants offered $312 million over 12 years, while the Dodgers reportedly dangled north of $35 million per year.

But Harper's choice is a great example of tax planning. The California offers Harper let go may have looked more generous than the Philly pitch he swung on. But California beans players with a 13.3% tax on income over $1 million, while Pennsylvania caps its tax at just 3.07%. Think of the Philadelphia pitch as a meatball down the middle, while the California offers were more like hanging sliders.

Harper won't escape California tax entirely. He'll pay whatever "jock tax" applies to income from road games, which means paying the California rates when he visits National League rivals in San Francisco, Los Angeles, and San Diego. But the difference could mean Harper keeps tens of millions more in Philadelphia than in California.

Baseball players aren't the only 1%-ers to consider taxes in their decisions where to work. In 2016, hedge fund manager David Tepper, who earned $6 billion from 2012 to 2015, fled New Jersey for Florida. His move could cost the Garden State hundreds of millions in tax. The Tax Cuts and Jobs Act of 2017, which caps deductions for state and local taxes at just $10,000, has nudged residents of high-tax states like New York and New Jersey to consider sunnier tax climates in Florida, Texas, and Nevada.

And Harper can be glad he's not facing even tougher choice-of-venue questions. For example, the Supreme Court just agreed to decide whether North Carolina can tax the undistributed income of a New York trust based on the beneficiary's residence in North Carolina. Now, that may sound like a boring technical question. (Ok, it is.) But it's the kind of debate that gets the coolest kids in the Tax Club really excited.

The bottom line here is important whether you're at the plate or just watching from the stands. Every financial decision you make has at least some tax consequence. And the choices you make today can produce home runs for season after season. So make the smart choice . . . come to us for a tax plan, and see if we can help you hit it out of the park!

Always in Fashion

She's a long-haired European exotic beauty. She lives a life of glamour and luxury that most of us can only dream of. She has 300,000 followers on Instagram. She's earned $3 million in royalties and endorsements. She's launched fashion lines, and been the subject of two books. Oh, and she has absolutely no idea how much she pays in taxes, and she wouldn't care if she did.

Who is this gorgeous creature? Is she latest supermodel sensation, posing for the Sports Illustrated swimsuit cover on a deserted Croatian beach? Is she Kim Kardashian's newest best friend? Perhaps she's about to star in the next James Bond movie? No, no, and no. Her name is Choupette, and until fashion icon Karl Lagerfeld died last week at age 85, she was his . . . cat. She's also Lagerfeld's heiress, which may make her the richest cat in the history of her species.

Lagerfeld cut an instantly recognizable figure with his trademark white hair, black sunglasses, fingerless gloves, and starched collars. He's credited with breathing life back into France's House of Chanel by revamping their ready-to-wear line after the death of founder Coco Chanel. His efforts earned him a fortune estimated at $200 million. But he died childless, with no partner and no obvious heir. Enter Choupette . . . who gets enough money to pay for all the Little Friskies she can eat for the rest of her life!

Leaving money to pets is more common than you think. It's not a great tax-planning move because bequests to pets — unlike those to spouses or charities — are subject to estate tax, which starts at 40% on amounts over $11.4 million. But plenty of people love their animals more than their families. Michael Jackson left $2 million for his pet chimp Bubbles. And hotel heiress Leona Helmsley, who served 19 months in prison for tax evasion, left $12 million for her dog Trouble. (That's more than some of her grandchildren got!)

Obviously, the money doesn't go to the animals. (Can you imagine standing in line behind a cat trying to use an ATM, or writing a check to pay for groceries?) It goes to a trust, with an actual person controlling the money for the benefit of the animal. In 2016, Minnesota became the last state in the country to authorize pet trusts. Many of those statutes even dispense with the usual "rule against perpetuities" limiting them to 21-year terms, making them appropriate for longer-lived animals like horses or parrots.

Sadly, there's one complication standing in the way of Choupette getting her paws on her inheritance. She lives in France, where pets are property, and can't legally inherit anything themselves. (Has PETA been notified?) They can't even benefit from a trust. So Lagerfeld would have to leave Choupette's money to a nonprofit organization or a trusted friend to take care of her.

And that, in turn, brings up one final question: who inherits Choupette's fortune when she dies? France has the highest inheritance tax in Europe, with rates running up to 60%. And while cats may always land on their feet, they can't hire estate-planning attorneys. (While we're on that topic, does having nine lives mean Choupette gets to pay the tax nine times?)

We realize you haven't earned millions in royalties from licensing your image. But if you had, you'd probably want to keep as much of them as you can. So call us, and discover just how stylish tax planning can be!