Toby Keith's "I Love This Tax Problem"

In 2003, country music superstar Toby Keith released "I Love This Bar," the first single from his Shock'n Y'All album. (For those of you under age 25 or so, an "album" is . . . oh, never mind.) Billboard predicted the song would become "a beer-joint staple for years to come," and it promptly shot to #1 on the charts, selling over a million copies.

"I Love This Bar" is just one of Keith's odes to drinking — he's also scored hits with "Whiskey Girl," "Get Drunk and Be Somebody," and "Get My Drink On." "Red Solo Cup," his 2011 smash, made the red plastic cups the symbol of "party time" for the under-30 set. Naturally, with that sort of appeal, Keith had to open a bar of his own. Singer-songwriter Jimmy Buffet pioneered the concept, opening dozens of tourist traps Margaritavilles anywhere middle-aged men of a certain disposition gather to recall their youth. If Jimmy can do it, why can't Toby?

And so it came to pass that there are now fifteen Toby Keith's I Love This Bar & Grill locations from sea to shining sea. Keith's namesake joints feature guitar-shaped bars, beer served in mason jars (just like in the song), and elegant southern fare like chicken-fried chicken (?), fried bologna sandwiches (!), and deep-fried twinkies (!!). You'll find them plunked down in cities across our fair land, including such traditional country-music strongholds as Boston, Detroit, Cincinnati, and even Syracuse.

It's that last location in upstate New York — 1,400 miles from Keith's hometown of Norman, Oklahoma — that brings us to our story. You'd think the guy who sang "Beer for My Horses" with Willie Nelson would have no problem turning a profit with sales from a bar packed with thirsty fans. But apparently, you'd be wrong. The New York Department of Taxation and Finance has just hit the store with a "tax warrant" for $189,392.17 in unpaid sales taxes. The warrant lets the state levy the business' bank account or even seize the business entirely. (The restaurant remains open for now, as officials seem to think they have a better job collecting if they don't kill their golden goose. Phew!)

Bars and restaurants are notoriously risky businesses, even with "can't miss" concepts like "I Love This Bar." (If you think rising meat and cheese prices are hitting your wallet hard, just imagine what happens when you're feeding thousands of fans a month!) Restaurant owners who find themselves in trouble can be tempted to "borrow" from the government by hanging on to taxes they collect on behalf of customers and employees. The problem, unfortunately, is that every day they continue, they fall deeper and deeper into the hole — and sometimes they never dig back out.

Keith's restaurant may be struggling. But the singer himself isn't having any money problems. Forbes magazine has called him "Country's $500 Million Man," and "a one-man cash machine." He owns a liquor company, a record label, and a golf course. There's even an eight-passenger Learjet, painted in Oklahoma Sooner crimson and cream, outfitted with saddle-leather seats. But one thing Keith doesn't own is "his" restaurant in New York. While he does own chunks of the first few locations, he generally just licenses the newer locations to outside operators in exchange for a piece of the gross.

We realize few of you could imagine making millions selling fried bologna sandwiches. But we can imagine how unhappy you'd be if word leaked out that you owed enough tax to pay for an entire house! That's why we work so hard to help you plan to pay less. So call us if you'd rather spend your money treating your friends to a round of drinks. And remember, we're here for them, too!

The New Known Unknown

Donald Rumsfeld may be one of the most controversial figures of our time, but you have to respect his resume. He won a seat in Congress at an age (30) when some of today's college graduates are still living in their parents' basements. He served as the youngest Secretary of Defense in American history (under President Ford) and the oldest Secretary of Defense in American history (under Bush #43). Between those positions, he headed G.D. Searle, General Instrument Corporation, and Gilead Sciences, Inc. Those corporate posts helped make Rumsfeld the second-richest member of Bush's cabinet, with a net worth north of $62 million.

Rumsfeld is also known for his unique, sometimes blunt and sometimes slippery, speaking style. Who can forget this response he gave a reporter who asked him about the lack of evidence tying Saddam Hussein's Iraqi government to weapons of mass destruction?

"[A]s we know, there are known knowns; there are things that we know that we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know."

Rumsfeld's quote has been roundly mocked, and even has its own Wikipedia page. But now he's weighed in on a new "known unknown" that we all can support. We're referring, of course, to the letter he sent on April 15, addressed to "Sir or Madame" at the IRS:

"I have sent in our federal income tax and our gift tax returns for 2013. As in previous years, it is important for you to know that I have absolutely no idea whether our tax returns and our tax payments are accurate. I say that despite the fact that I am a college graduate and I tried hard to make sure our tax returns are accurate."

Four paragraphs later, you have to wonder if he's being snide or sad about the whole exercise:

"I do hope that at some point in my lifetime, and I am now in my 80s, so there are not many years left, the U.S. government will simplify the U.S. tax code so that those citizens who sincerely want to pay what they should, are able to do it right, and know that they have done it right."

At this point, a cynic might reply that Rumsfeld can find "tax simplification" hiding in the same place as Saddam's weapons of mass destruction. But cynicism aside, if Rumsfeld really wants to see tax simplification, he should write to his former colleagues in Congress. They're the ones who wrote the 2,600-page monstrosity known as "the tax code" that gives him such fits. And one remedy he could pursue in the meantime is to sit down for a plan. We would be happy to show him how he can pay less on his income from speaking fees, memoirs, and investments. Of course, if Rumsfeld doesn't come knocking, that means more time for you. So call us about your "unknown unknowns," if you think you paid too much on April 15!

Master This Green!

The calendar may say that spring officially begins on March 21. But for millions of golfers across the country, the season didn't really start until this weekend — specifically, when Bubba Watson outplayed 20-year-old phenom Jordan Spieth to claim his second green jacket at the 2014 Masters.

Augusta National Country Club, home of the Masters, is America's temple of golf. Augusta's "perennial ryegrass" fairways are manicured to a smoother finish than your living room carpet, and its greens are so hard and fast you could play billiards on them. So, with all that lush green stretching as far as the eye can see, would it surprise you to learn that the residents of Augusta have "mastered" a lucrative tax break? It's become so identified with the legendary golf tournament that it's known as "the Augusta rule." But if you own your own business, you may be able to take advantage of it yourself.

Augusta, Georgia, is a small city with about 200,000 year-round residents. But for the second week of April every year, it becomes the center of the sports universe. Wealthy golfers descend upon the town from around the world. They want quality accommodations. But the nearest Ritz-Carlton is a looong drive away. (81 miles, to be exact. You don't even want to know what par that is.)

For many of those fans, the answer is to rent a house in town, just a chip shot from the tournament. Augusta National and the Augusta Metro Chamber of Commerce have even teamed up to create the Masters Housing Bureau to pitch week-long rentals — for up to $40,000. For lots of Augusta homeowners, that's a hole in one! (Of course, homeowners outside Augusta have taken advantage of the same rule for events like the Olympic games, the Final Four, and the Super Bowl.)

Now, ordinarily the IRS would take a big divot out of that $40,000 windfall. (Pro golfers typically tip their caddies 10% of their winnings, and if you think that's enough for Uncle Sam, think again!) But here's where the Augusta rule comes in. Code Section 280(A)(g)(2) provides that if you rent your home (or vacation home) for less than 15 days a year, there's no tax due on that income. In fact, IRS Publication 527 says you shouldn't even report it. So, if you have a house in Augusta, you've got that going for you! Which is nice.

Don't have a house in Augusta? Don't despair! Let's say you own your own business, and you want to host a customer appreciation event. You could hold it at your house and deduct the cost of meals and entertainment you provide for your customers. But the Augusta rule also lets you rent your home to your business — for a commercially reasonable "fair market value," of course. Your business will deduct the rent it pays, which gives you a birdie on your tax bill. But so long as you don't do it more than 14 days per year, you won't have to report the income on your personal return. Pretty slick, right?

If you're a golfer, you've almost certainly dreamed of someday playing Augusta. But you wouldn't dream of doing it without an experienced caddy — because, when you sign that scorecard, you want as few strokes as possible. When it comes to taxes, that's our job. We give you the plan you need, so that when you sign your 1040 . . . well, you get the picture. So call us before you "hit the course." And remember, we're here for the rest of your foursome as well!

Fall into a Fortune

Getting an audit notice is never anyone's idea of fun. But getting audited isn't always the disaster it might seem. In fact, for fiscal 2012, 107,820 lucky winners got refunds after their audits. Granted, that's still shy of seven percent of everyone audited that year. But it proves you can walk away from the IRS a winner.

Here's a clever strategy one taxpayer used to walk away from the IRS with a windfall. But you might want to be careful before you try it yourself!

William Berroyer owned an HVAC contracting company on Long Island. On July 3, 2008, he met with the IRS at their Hauppauge office to discuss a $60,000 payroll tax bill he owed on behalf of his business. The agent in charge of his case directed Berroyer to a conference table, where he nervously worked out a payment plan. As he stood up to leave, he twisted his foot in about 15 feet of telephone cord, spun around, hit a metal file cabinet, and landed flat on the floor.

At first he said he felt fine — he just wanted to get out of that conference room and back to his office. But then he called the auditor from the parking lot to say he had lost feeling in his lower leg. He made it back to his shop alright, but soon felt even worse and headed for the hospital. Berroyer wound up spending seven days in the emergency room and 10 days in rehab. Five years after the accident, he spends most of his time in a wheelchair and can't walk more than a few feet without canes. His injuries have interfered with all aspects of his life, including his work, his boating, his golf game, and even his no-longer-twice-weekly "special time" with Mrs. Berroyer.

(You already know where we're headed, don't you?) Naturally, Bennoyer sued. For $10 million.

There wasn't much argument over liability. The real contest focused on the extent of the injury. (Translation — was he just faking it?) Hospital records reported his diagnosis as "acute paraplegia, psychogenic in origin." Another doctor noted "Neuro exam and MRI findings not consistent with subjective complaints . . . . Affect is somewhat inappropriately bright." At trial, the government's medical expert conceded Berroyer had probably bruised his spinal cord, but that mild injury should long since have passed. Asked directly if Berroyer was faking or malingering, he replied "I don't use the terms faking or malingering. I use the term nonphysiological." (And really, doesn't "nonphysiological" sound so much better than "faking"?)

Judge Arthur Spatt ultimately ruled that the IRS's negligence had caused a "mild spinal cord injury." He awarded Berroyer $112,000 in medical expenses, plus $350,000 for past pain and suffering, plus another $250,000 for future pain and suffering. Oh, and he threw in another $150,000 for Mrs. Berroyer's "loss of services." And the best part . . .? Internal Revenue Code Section 104 says that compensation for injuries and sickness are nontaxable. That means the Berroyers get to keep all $862,000!

So, what do you think? An easy way to earn nearly a million bucks? Or would you rather skip the physical therapy and take advantage of easier strategies, like choosing the right entity for your business, the right plan for your retirement, and the right benefits for your family? We're sorry to confess we can't help you with a loose phone cord. But we can help you with the plan you need to pay the least tax allowed by law. So call us if you want to save tax — but don't want to wheel yourself into a courtroom to do it!

A Little Bit of Tax

It seems like every day brings new questions about the digital currency called bitcoin, which first appeared in 2009. Who is the shadowy "Satoshi Nakamoto" who created the currency's protocol and software? Who stole $450 million worth of bitcoin from the Tokyo-based Mt. Gox exchange? Who was the mystery buyer who used bitcoin to snag a $500,000 house on the Indonesian island of Bali?

Last week, the IRS solved a mystery by ruling on how bitcoin would be taxed, at least here in the United States. And their answer to that question may shoot a hole in bitcoin's hope to become more widely accepted. Notice 2014-21 holds that virtual currencies like bitcoin will be treated as property — not currency — for U.S. tax purposes. That means, among other things, that if you take payment in bitcoin at your business, those payments will be taxable (at the fair market value of the currency at the time you earn it), subject to the same rules as if you had accepted cash. If you earn wages in bitcoin, they'll also be taxable, must be reported on a Form W-2, and will be subject to income and payroll tax withholding as if you had earned those wages in cash.

But those rules come as no surprise. The real headache comes when you use bitcoin to buy or sell something. Let's say you acquire two bitcoins for $500 each. A week later, they're worth $520, and you use them to pay an independent contractor across the country or even in the Philippines. You'll have to report that $40 gain on your taxes. "That's not such a big deal," you might think. "My bitcoin is worth more; I'm ok with paying tax on my gain." But now imagine having to report gains or losses on every bitcoin transaction you make!

If bitcoin is going to succeed as an actual currency, it has to pass three strict tests. (Getting an "A" for effort won't work here.) First, it has to be a medium of exchange, meaning it has to be widely accepted as payment for goods and services. (Everyone takes U.S. dollars, but most people have never used bitcoin — at least, not yet. Although, Virgin Atlantic has announced that you can use bitcoin for their $250,000 flights into space.) Second, it has to be a store of value, meaning users feel safe holding it without worrying that its value will fall. (You can take payment in cash knowing that it will be worth the same amount tomorrow.) And third, it has to serve as a unit of account, meaning it has a standard value and every bitcoin is the same as every other bitcoin. (If you have a wallet full of $20 bills, it doesn't matter which one you use to pay for your morning latte.)

The IRS's ruling that bitcoin is property means bitcoin fails that last test. Let's say you have three bitcoins: one that you acquired when it was trading at $280, one that you acquired at $480, and one that you acquired at $880. It makes a real difference which one you spend! It's no wonder the New York Times headlined one story on the IRS notice: "Taxes Won't Kill Bitcoin, But Tax Reporting Might."

There's a "bit" of good news in the ruling. If you hold bitcoins for investment, you benefit from lower rates on long-term capital gains. But that's going to be scant comfort for most users who really want to see bitcoin succeed as a true currency.

We've got a long time to go before most clients have to worry about bitcoin in anything but the most theoretical sense. But keeping an eye out on the future is what separates us from the vast majority of tax professionals who just settle for recording history. Your job is to go out and make money, in dollars, bitcoin, or whatever else works best for you. Let us worry about helping you keep it!