England's creative class is known throughout the world for the richness and variety of its work. Some is good (think Savile Row tailoring and the architecture of Sir Christopher Wren). Some is not (Princess Eugenie's royal wedding hat). And some is just sublime (the 1961 Jaguar E-type). But there's one art form the English are better at than anyone else, and that's highbrow television.
It all started with Upstairs Downstairs. Next came 1981's lavish Brideshead Revisited. And now there's yet another snooty television "programme" invading American hearts and minds — Downton Abbey, a period drama centered on the aristocratic Crawley family and their servants, during the reign of King George V.
Yes, it's a soap opera. But oh, what a soap opera it is. You have your standard-issue improbable plot complications and ill-advised romances, naturally. But it's set against a backdrop of class, manners, and humanity that seem long lost a century later. And where else will you find a soap with Oscar- and Tony-winning actors, much less a pheasant hunt? Add in Edwardian sensibilities, amusing antique technology, and impossibly dry British wit, and you have an irresistably compelling package.
Programs like Downton Abbey showcase British culture to the world and boost the nation's economy, too. So Her Majesty's Treasury began offering film tax credits for movies roughly 10 years ago. For 2010, they gave about £100 million in credits to support more than 200 productions — including, of course, both Harry Potter sequels. But now, as part of their 2013 budget, officials are extending the incentives to high-end television, too. To qualify, dramas must cost more than £1 million (roughly $1.58 million), and must pass a "cultural test."
We have tax credits for movies and television here in the United States, of course. There's nothing at the federal level, but state and local governments eagerly compete for filmmakers' dollars with a vast variety of tax incentives. While Hollywood is the obvious center of the film universe, you might be surprised to learn that the next most attractive location for film production, based in part on generous tax incentives, is Louisiana. In fact, Louisiana was the first state to adopt tax incentives for filmmakers, and sparked a trend across the country. Producers get a 30% transferable tax credit on total in-state expenditures, plus a 5% labor-tax credit on payroll of employed residents.
Here in the US, you wouldn't think we'd worry too much about the quality of the productions we encourage. That, after all, is part of our uniquely American charm. But at least one state official has imposed his own informal "cultural test" in an apparent attempt to class up the joint. Last year, the New Jersey legislature approved $420,000 in credits for the producers responsible for MTV's raucous Jersey Shore — then watched in dismay as Governor Chris Christie vetoed the bill, declaring "as chief executive I am duty-bound to ensure that taxpayers are not footing a $420,000 bill for a project which does nothing more than perpetuate misconceptions about the state and its citizens." His Lordship the Earl of Grantham would heartily approve.
If you run your own business — or even if you're just thinking about starting a business — you may not qualify for film credits. But you will qualify for more tax breaks than you realize. So make sure you take some time to sit down with us to plan how best to take advantage of those breaks. And let your friends, family, and colleagues know we're here to help them, too!
Monday, March 26, 2012
Wednesday, March 21, 2012
Tax Business, Russian Style
Working in the tax business is usually a pretty safe gig. You really just need an office, a computer with an internet connection, and a fast laser printer for all those piles of paper. There's not much heavy lifting — and even less intrigue or danger. But sometimes the tax business is a different story. Just ask Pavel Petrovich Ivlev, who works (now) in suburban New Jersey.
Pavel was born in 1970 just outside Moscow. He earned a law degree from Moscow State University in 1993, studied more in Amsterdam and London, then joined an international law firm. At that point, he appeared set to become another one of a new breed of Russian lawyers, helping newly-privatized companies negotiate the awkward transition to "real" capitalism.
Pavel's clients included Yukos Oil, and its charismatic chairman, Mikhail Khodorkovsky. Khodorkovsky had started out collecting dues for the Communist Youth League. But as the Soviet Union collapsed, he rejected his old Leninist ideology. Taking advantage of glasnost and his party connections, he became an entrepreneur, published his own capitalist manifesto called The Man with the Ruble, and traded his way up to controlling 20% of Russia's lucrative oil production. For one brief shining moment, Khodorkovsky's $16 billion fortune made him the richest man in Russia and the 16th-richest man on earth.
In 1999, Vladimir Putin succeeded to Russia's Presidency. Putin had started his career in the KGB — working counterintelligence, no less — and he was no stranger to blunt force. (Google "Putin+thug" and you get 2,190,000 hits. 'Nuff said.) Putin quickly moved to tighten his grip on power, clamping down on elected officials and billionaire oligarchs alike. Khodorkovsky naturally pushed back, and at one point in 2003, embarrassed Putin in a nationally televised meeting of business leaders. Unfortunately, such resistance amounted to bringing the proverbial knife to a gunfight.
Eight months later, Putin had Khodorkovsky arrested, and slapped everyone else associated with Yukos with tax and fraud charges. And that's where our tax attorney friend Pavel comes back into the picture. Here's how he describes his own interrogation by government investigators. Clearly, they felt no need to screw around with the usual "good cop-bad cop" shtick — or maybe the good cop was just off grabbing a ponchiki (Russian doughnut):
"On November 16, the lead detective in the case said to me 'Now I am going to interrogate you.'
I said, 'You can't do that, it's against the law.'
'I guess we are going to have to break the law then. Tell me all.'
'What do you want me to say?'
'You are the lawyer — you know the penal code. Whatever you say, we'll use.'
'You want me to describe how we took sacks of cash out of Yukos and delivered them to Khodorkovsky personally?'
'Yes.'
'But nothing like that ever happened.'
That's when he threatened to arrest me."
Pavel's momma didn't raise any dummies. He caught the next plane out of Moscow and didn't even call his wife till he landed. But he remains under indictment in his homeland for stealing $2.4 billion, laundering $810 million, and evading tax on the gain. At least he's better off than his former client — Khodorkovsky has spent the last seven years in a series of former Soviet prisons.
Look, there's nothing fun about the IRS. And we've all met someone who went through an "audit from hell." But few people actually flee abroad to shake off the tax man! So while we gripe about how much we pay, we can at least appreciate the IRS playing on a level field. Let Pavel's story help you feel fortunate that we won't be chased out of this country for paying less tax!
Pavel was born in 1970 just outside Moscow. He earned a law degree from Moscow State University in 1993, studied more in Amsterdam and London, then joined an international law firm. At that point, he appeared set to become another one of a new breed of Russian lawyers, helping newly-privatized companies negotiate the awkward transition to "real" capitalism.
Pavel's clients included Yukos Oil, and its charismatic chairman, Mikhail Khodorkovsky. Khodorkovsky had started out collecting dues for the Communist Youth League. But as the Soviet Union collapsed, he rejected his old Leninist ideology. Taking advantage of glasnost and his party connections, he became an entrepreneur, published his own capitalist manifesto called The Man with the Ruble, and traded his way up to controlling 20% of Russia's lucrative oil production. For one brief shining moment, Khodorkovsky's $16 billion fortune made him the richest man in Russia and the 16th-richest man on earth.
In 1999, Vladimir Putin succeeded to Russia's Presidency. Putin had started his career in the KGB — working counterintelligence, no less — and he was no stranger to blunt force. (Google "Putin+thug" and you get 2,190,000 hits. 'Nuff said.) Putin quickly moved to tighten his grip on power, clamping down on elected officials and billionaire oligarchs alike. Khodorkovsky naturally pushed back, and at one point in 2003, embarrassed Putin in a nationally televised meeting of business leaders. Unfortunately, such resistance amounted to bringing the proverbial knife to a gunfight.
Eight months later, Putin had Khodorkovsky arrested, and slapped everyone else associated with Yukos with tax and fraud charges. And that's where our tax attorney friend Pavel comes back into the picture. Here's how he describes his own interrogation by government investigators. Clearly, they felt no need to screw around with the usual "good cop-bad cop" shtick — or maybe the good cop was just off grabbing a ponchiki (Russian doughnut):
"On November 16, the lead detective in the case said to me 'Now I am going to interrogate you.'
I said, 'You can't do that, it's against the law.'
'I guess we are going to have to break the law then. Tell me all.'
'What do you want me to say?'
'You are the lawyer — you know the penal code. Whatever you say, we'll use.'
'You want me to describe how we took sacks of cash out of Yukos and delivered them to Khodorkovsky personally?'
'Yes.'
'But nothing like that ever happened.'
That's when he threatened to arrest me."
Pavel's momma didn't raise any dummies. He caught the next plane out of Moscow and didn't even call his wife till he landed. But he remains under indictment in his homeland for stealing $2.4 billion, laundering $810 million, and evading tax on the gain. At least he's better off than his former client — Khodorkovsky has spent the last seven years in a series of former Soviet prisons.
Look, there's nothing fun about the IRS. And we've all met someone who went through an "audit from hell." But few people actually flee abroad to shake off the tax man! So while we gripe about how much we pay, we can at least appreciate the IRS playing on a level field. Let Pavel's story help you feel fortunate that we won't be chased out of this country for paying less tax!
Monday, March 12, 2012
March Madness and the IRS
The NCAA's college basketball tournament — "March Madness" — has become an unofficial national holiday. Fan-in-Chief Barack Obama kicked off this year's action by flying to Dayton (with British Prime Minister David Cameron!) for this year's "First Four" tipoff games. And even people who don't like basketball enjoy watching the tournament. This year's top seeds — Kentucky, Syracuse, UNC, and Michigan State — will probably dominate coverage. But every year features at least one Cinderella team, waltzing up through the brackets with little more than heart. Who will it be this year? Creighton? Virginia Commonwealth? Or maybe #6 seed Cincinnati?
We all know college hoopsters don't actually get "paid" (wink, wink). So the players don't run up the score for the IRS — at least, not until they hit the NBA, where the average salary tops $5.15 million. (That suggests an average tax bill of a million and a half!)
But there's one area where the IRS cashes in, and that's the gambling. Vegas sports books report taking in $100 million during the tournament. But that's just the tip of the iceberg. Recent figures show that more Americans participate in March Madness office pools than actually work in offices. Americans bet about $3 billion on pools sponsored by offices, bars, and clubs. And at least part of those winnings wind up in the IRS net.
Gambling winnings are taxable just like any other income. (The IRS doesn't care how you make your money — they just want their "vig.") Gambling losses are deductible as an itemized deduction not subject to the usual 2% floor. But — and this is a pretty important but — gambling losses are deductible only to the extent of gambling winnings. Win $1,000, lose $500, and you owe tax on the remaining $500. Win $500, lose $1,000, and your excess loss is worth about as much as a last-second brick when you're down three points.
So, winners pay tax on their gains (wink, wink), losers cry in their beer over their losses, and March Madness is a bucket hit for the IRS, right? Well, maybe not so fast . . . .
Economists estimate that employees will spend 8.4 million workday hours watching the games. And those office pools, water-cooler conversations, and occasional hangovers will gobble countless million more hours. One research firm estimates the tournament costs the overall economy a whopping $1.8 billion in lost productivity (based on an $18 average hourly wage and 20 minutes lost per employee, per day). And much of that loss drops directly to the IRS's bottom line. How many killer marketing campaigns are delayed because managers are busy checking each other's brackets? How many millions of taxable commissions are lost as glad-handing salesmen sit around televisions instead of selling their stuff?
There's not a lot of planning we can do for March Madness windfalls, simply because we can't actually plan on winning. But what we can plan on is playing hard to help you keep what you win. So call us with your tax-planning questions. And good luck with your picks!
We all know college hoopsters don't actually get "paid" (wink, wink). So the players don't run up the score for the IRS — at least, not until they hit the NBA, where the average salary tops $5.15 million. (That suggests an average tax bill of a million and a half!)
But there's one area where the IRS cashes in, and that's the gambling. Vegas sports books report taking in $100 million during the tournament. But that's just the tip of the iceberg. Recent figures show that more Americans participate in March Madness office pools than actually work in offices. Americans bet about $3 billion on pools sponsored by offices, bars, and clubs. And at least part of those winnings wind up in the IRS net.
Gambling winnings are taxable just like any other income. (The IRS doesn't care how you make your money — they just want their "vig.") Gambling losses are deductible as an itemized deduction not subject to the usual 2% floor. But — and this is a pretty important but — gambling losses are deductible only to the extent of gambling winnings. Win $1,000, lose $500, and you owe tax on the remaining $500. Win $500, lose $1,000, and your excess loss is worth about as much as a last-second brick when you're down three points.
So, winners pay tax on their gains (wink, wink), losers cry in their beer over their losses, and March Madness is a bucket hit for the IRS, right? Well, maybe not so fast . . . .
Economists estimate that employees will spend 8.4 million workday hours watching the games. And those office pools, water-cooler conversations, and occasional hangovers will gobble countless million more hours. One research firm estimates the tournament costs the overall economy a whopping $1.8 billion in lost productivity (based on an $18 average hourly wage and 20 minutes lost per employee, per day). And much of that loss drops directly to the IRS's bottom line. How many killer marketing campaigns are delayed because managers are busy checking each other's brackets? How many millions of taxable commissions are lost as glad-handing salesmen sit around televisions instead of selling their stuff?
There's not a lot of planning we can do for March Madness windfalls, simply because we can't actually plan on winning. But what we can plan on is playing hard to help you keep what you win. So call us with your tax-planning questions. And good luck with your picks!
Monday, March 5, 2012
Il-eagle Assets?
Our estate tax system is quite different from our income tax system. The income tax, as its name implies, focuses on how much money individuals, trusts, and business entities make. The estate tax system, in contrast, focuses on how much assets are worth. Most assets aren't hard to value. Stocks, bonds, mutual funds, and similar assets are valued at their publicly-traded fair market value (FMV) as of the date of death (or the executor can choose an "alternate valuation date" nine months later). But some assets are a little harder. Real estate, for example, is also valued at its FMV — but who's to say what a unique or expensive property is really "worth," especially in today's volatile market? Closely-held businesses can be even harder to appraise. And high-end collectibles, like the kind of art and antiques that usually sell at auction, can be hardest of all.
These issues make estate-tax enforcement a different challenge from income-tax enforcement. For fiscal year 2010, the IRS received 42,366 estate tax returns, and audited 4,288, or 10.1%. But just as income tax audits go up as your income rises, estate-tax audits go up as your assets go up. For that same year, the IRS received 3,013 estate tax returns reporting assets of $10 million or more — and audited 928 of them, or 30.8%!
Occasionally, the IRS finds assets that are especially tricky to value. For instance, how do you value an asset that would be illegal to sell? That was the challenge the IRS faced with the estate of art dealer Ileana Sonnabend. Sonnenbend died at age 92 after amassing one of the country's most important collections of contemporary art, including works by Jeff Koons, Roy Lichtenstein, Andy Warhol, and Cy Twombly. Her heirs valued her estate at $875 million, and sold several works to pay taxes of $331 million to Uncle Sam and $140 million to New York state.
But Sonnabend's collection also included a 1959 work called "Canyon" by Robert Rauschenberg, best-known for his "combine-paintings" incorporating nontraditional materials and objects. And there's a problem with that piece — it includes a stuffed bald eagle. Bald eagles aren't just a symbol of America, they're an endangered species. Selling any part of an eagle, even a single feather, is, well, il-eagle — punishable by a fine of up to $100,000 and a year in prison. (Yes, they will make a federal case out of it.) In fact, back in 1981, the Department of Fish and Wildlife notified Sonnabend that ownership of the piece was restricted by federal law. Sonnabend got permission to retain the piece and lend it to museums, but understood that she could never sell it or export it for sale.
Sonnabend's executors obviously took that constraint into consideration, and valued the piece for estate tax purposes at zero. The IRS, not surprisingly, disagreed. They valued "Canyon" at $65 million — assessed $29 million in tax — and threw in an $11.7 "gross valuation misstatement" penalty for good measure! (The technical term for that is "holy smokes"!) The executors have filed suit, of course, but the IRS has a history of valuing illicit assets, like native American artifacts and stolen art and antiquities, at their "black market" value.
Smart planning could have avoided this whole mess. Sonnabend could have donated "Canyon" to a U.S. museum before her death. That would have avoided the absurd result of owing tax on an asset, but facing jail time for selling it to pay the tax! The good news in all this is that, at least from now through the end of the year, there's no tax due unless your taxable estate tops $10 million. The bad news is that if you do leave enough to owe tax, you can almost count on being audited. So if your house is stuffed with contraband, the time to get rid of it is now! Other tax planning questions? Call us!
These issues make estate-tax enforcement a different challenge from income-tax enforcement. For fiscal year 2010, the IRS received 42,366 estate tax returns, and audited 4,288, or 10.1%. But just as income tax audits go up as your income rises, estate-tax audits go up as your assets go up. For that same year, the IRS received 3,013 estate tax returns reporting assets of $10 million or more — and audited 928 of them, or 30.8%!
Occasionally, the IRS finds assets that are especially tricky to value. For instance, how do you value an asset that would be illegal to sell? That was the challenge the IRS faced with the estate of art dealer Ileana Sonnabend. Sonnenbend died at age 92 after amassing one of the country's most important collections of contemporary art, including works by Jeff Koons, Roy Lichtenstein, Andy Warhol, and Cy Twombly. Her heirs valued her estate at $875 million, and sold several works to pay taxes of $331 million to Uncle Sam and $140 million to New York state.
But Sonnabend's collection also included a 1959 work called "Canyon" by Robert Rauschenberg, best-known for his "combine-paintings" incorporating nontraditional materials and objects. And there's a problem with that piece — it includes a stuffed bald eagle. Bald eagles aren't just a symbol of America, they're an endangered species. Selling any part of an eagle, even a single feather, is, well, il-eagle — punishable by a fine of up to $100,000 and a year in prison. (Yes, they will make a federal case out of it.) In fact, back in 1981, the Department of Fish and Wildlife notified Sonnabend that ownership of the piece was restricted by federal law. Sonnabend got permission to retain the piece and lend it to museums, but understood that she could never sell it or export it for sale.
Sonnabend's executors obviously took that constraint into consideration, and valued the piece for estate tax purposes at zero. The IRS, not surprisingly, disagreed. They valued "Canyon" at $65 million — assessed $29 million in tax — and threw in an $11.7 "gross valuation misstatement" penalty for good measure! (The technical term for that is "holy smokes"!) The executors have filed suit, of course, but the IRS has a history of valuing illicit assets, like native American artifacts and stolen art and antiquities, at their "black market" value.
Smart planning could have avoided this whole mess. Sonnabend could have donated "Canyon" to a U.S. museum before her death. That would have avoided the absurd result of owing tax on an asset, but facing jail time for selling it to pay the tax! The good news in all this is that, at least from now through the end of the year, there's no tax due unless your taxable estate tops $10 million. The bad news is that if you do leave enough to owe tax, you can almost count on being audited. So if your house is stuffed with contraband, the time to get rid of it is now! Other tax planning questions? Call us!
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