The Steve Jobs Legacies

Pancreatic cancer robbed the world of a true genius on October 5, taking Apple founder Steve Jobs at the age of 56. Today's corporate CEOs are rarely shy about promoting themselves, but Jobs has been legitimately compared to Thomas Edison and Henry Ford. His Apple Corporation changed our relationship with technology. Apple's original Macintosh popularized the PC mouse and changed the way we interact with computers. Pixar Studios set a new standard in film animation. Apple's iPod changed the way we listen to music. And Apple's iPhone, love it or hate it, has changed how millions of us communicate with family, friends, and colleagues.

Here are two more tangible measures of Jobs's success:

1.On July 28, Apple Corporation had more cash on hand ($76.2 billion) than the United States government ($73.8 billion).

2.Just two weeks later, on August 8, Apple briefly surpassed ExxonMobil as the most valuable corporation in the world.
What's next — more money than God?

Well, at least some smart tax planning. Jobs was obviously as shrewd about business as he was smart about technology. His net worth, which reached as high as $8.3 billion ranked him #39 on the 2010 Forbes 400 list of the country's richest people and #110 on their list of the world's billionaires. Not bad for a college dropout! Ironically, the bulk of his fortune came from Disney stock he received for selling Pixar in 2006 — Jobs was Disney's largest shareholder and owned 7.4% of the company, with a stake worth more than $4.4 billion. (Does it surprise you to hear that a stock-for-stock deal let him defer tax on the gain until selling the Disney shares?)

Jobs acquired most of his Apple stock in 2006 as well, when it was trading at $64.66/share and was worth $325 million. Since then it has grown six-fold, to $2 billion. If Jobs had sold it before his death, he would have owed tax of 15% on the capital gain. But by holding it until his death, he lets his heirs inherit it with a "stepped-up basis." That means they could sell it immediately and pay no capital gain on the growth during his lifetime. If they sell down the road, they'll owe tax only on the growth from the date of his death.

Of course, his estate may also be subject to estate tax. Congress dropped the ball and let that tax expire entirely in 2010 before bringing it back, for this year and next, at a flat 35% on estates over $5 million. However, just as Jobs deferred income tax on the sale of his Pixar stock, his estate can defer estate tax on any amounts left to his wife.

Jobs's estate can also avoid tax on any amounts left to charity. High-profile billionaires like Jobs typically take up philanthropy after they make their pile. Microsoft founder Bill Gates and Berkshire Hathaway founder Warren Buffett, for example, have led the way in pledging to give away the bulk of their fortunes and even established the "Giving Pledge" to persuade their fellow wealthy elites to give away at least half of their fortunes. Jobs left little hint of any charitable intentions, and in fact, Apple Corporation doesn't even match employees' gifts! But Jobs is rumored to be the source of an anonymous $150 million donation to the Helen Diller Family Comprehensive Cancer Center at the University of California, San Francisco. And his wife Laurene sits on several prominent boards, including Teach for America.

We realize that you don't enjoy quite the same fortune that Steve Jobs did! But the same strategies that let Jobs maximize his wealth and legacy can help you maximize your wealth and legacy too. The key, as always, is planning. So call us when you're ready for a plan!

The More Things Change . . .

This summer's debt-ceiling debate led to creation of a 12-member "Supercommittee," charged with finding $1.2 trillion in deficit cuts over the next decade. And wouldn't you know, the committee's progress seems to be sticking over taxes instead of spending. Both sides have said they're willing to close loopholes that benefit particular groups of taxpayers. But Democrats generally want to use new revenue to close the deficit, while Republicans generally want to use it to lower overall rates.

This debate over tax loopholes is hardly new. Way back in 1937, Treasury Secretary Henry Morgenthau drafted an 11-page memo for President Franklin Roosevelt revealing some of the perfectly legal "devices which have caused our revenues to be less than they should have been, and some of the taxpayers employing them." And Morgenthau didn't just reveal how his era's bold-face names used proactive planning to avoid taxes. He revealed who, naming names in a way that would delight today's Wikileaks fans! Here are a few cases Morgenthau thought had been taken to an inappropriate extreme:

•Creation of multiple trusts. Mr. Louis Blaustein of Baltimore established 64 different trusts for his wife and three children, saving them $485,257. Merrill Lynch founders Charles Merrill and Edwin Lynch had 40 trust funds and 23 personal holding companies. "They operate a great many numbered brokerage accounts and only at the end of the year identify for whose benefit the account has been operated. In this way innumerable transactions are carried on between the different corporations and trusts which have no effect upon the beneficial interests of Merrill and Lynch, but which are designed to reduce their tax liability very greatly."

•Foreign personal holding corporations. George Westinghouse, Jr. "has a $3 million Bahamas corporation and in an attempt to prevent the Bureau of Internal Revenue from catching up with him, moves his home address from one small hamlet to another each year." Razor king Jacob Schick renounced his citizenship (renouncing his U.S. Army pension in the process), formed Schick Industries in the Bahamas, and transferred to it his stock in his Connecticut company, thereby evading U.S. law imposing a 25% tax on transfers of securities to foreign corporations.
•Incorporated yachts and country places. "Mr. Alfred P. Sloan's yacht is owned by Rene Corporation, one of his personal holding companies, along with $3 million in securities. He rents the yacht from his company and the company uses its income from securities to pay depreciation on the yacht, the wages of the captain and crew, and the expenses of operating the yacht." Wilhelmina Du Pont Ross used a corporation to own her $421,000 country place, saving $20,000 in tax, and even paid her husband a salary for managing it — "she thereby supplies him with pocket money, and in effect secures a deduction for the expense of maintaining him."
•Percentage depletion. Morgenthau attacked the percentage depletion allowance, which lets oil and gas producers deduct part of their income as an allowance that the well will someday run dry. He reports that he had recommended eliminating this break back in 1934, "but nothing was done, presumably because of the heavy pressure from the large oil and mining companies which are profiting immensely" from them. (Sound familiar?)
•Municipal bonds. John D. Rockefeller, Jr. owned over $32 million worth of municipal bonds, while Frederick W. Vanderbilt owned $28.7 million. Morgenthau found wealthy taxpayers gradually increasing their purchases of these tax-free bonds.
Morgenthau's report reveals that legal tax avoidance is nothing new, and sophisticated planners have always worked the Tax Code to their clients' best advantage. All of the strategies he describes were legal back then, and many of them — such as percentage depletion and tax-free municipal bond income — remain legal today. (Is there anyone who seriously proposes eliminating the tax exclusion for municipal bond income?) You may not have the income or assets that Charles Merrill or Frederick Vanderbilt enjoyed. But you have the same right to arrange your affairs so that your taxes are as low as possible. Our job is to help you do just that. And make sure your family, friends, and colleagues know we're here for them, too!

Shooting Down the "Snooki Subsidy"

New Jersey Governor Chris Christie must feel like the Most Wanted Man in America as his fans clamor for him to join the 2012 presidential race. Some observers say it's too late to mount a credible run, while others worry about positions that might offend the Republican base. A year ago, he flatly ruled it out, declaring "Short of suicide, I don't really know what I'd have to do to convince you people that I'm not running." But since then, he appears to be warming to the idea, and he's expected to announce a final decision shortly.

Politicians usually work overtime to avoid offending anyone. And Republicans rarely meet a tax cut they don't like. So how serious can Christie be if he's willing to alienate the crucial "Guido" voting block — especially if it involves shooting down a tax break? That's right, last week Christie actually vetoed a $420,000 tax credit for producers of MTV's hit Jersey Shore reality show!

Film producers bring jobs, spending, and sometimes even a touch of glamour to the locations they choose. And who doesn't want to share a bit of that Hollywood spotlight? For those reasons, over half of all states now offer film tax credits to encourage in-state movie and television production. (Remember, a tax "credit" is a dollar-for-dollar cut in a taxpayer's actual tax bill, not just a deduction from that taxpayer's income.) New Jersey's program is typical, and gives production companies a credit equal to 20% of qualified expenses so long as they incur 60% of their costs in New Jersey. Fans of these programs argue that subsidized productions actually pay for themselves by creating jobs and increasing tourism. Skeptics respond that film credits just transfer existing jobs from one location to another and that they generate short-term, project-based jobs that leave specialized laborers out of work.

MTV's Jersey Shore premiered in late 2009 and quickly became the network's most-watched series ever. Cast members Nicole "Snooki" Polizzi, Mike "The Situation" Sorrentini, Jennifer "JWoww" Farley, and their outrageous, hard-partying housemates have become New Jersey's most famous "family" since The Sopranos. Snooki makes $30,000 per episode now, commands $10,000 for personal appearances, and even rang the bell to open the New York Stock Exchange.

The show's producers reported spending $2.1 million in New Jersey to tape the first season. And officials in Seaside Heights, where the show was first set, agree that it's been a bonanza. That sounds like success, especially in today's tough economy. But not everyone is pleased with how Jersey Shore portrays its subjects. Critics object that it paints New Jerseyites and Italian-Americans as drunken, brawling louts, obsessed with their "GTL" (gym, tanning, and laundry, for those not in-the-know). Ironically, most of the cast isn't even from New Jersey — and not all are Italian, either.

Governor Christie himself has previously blasted the show as "negative for New Jersey" and charges that it "takes a bunch of New Yorkers and drops them at the Jersey Shore and tries to make America feel like this is the real New Jersey." So it came as little surprise when he shot down the tax break. "In this difficult fiscal climate, the taxpayers of New Jersey should not be forced to subsidize such projects as ‘Jersey Shore,’” he wrote in his press release vetoing the credit. “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.”

So, it looks like Garden State taxpayers won't be subsidizing Snooki's bail the next time she's arrested. What do you think? Is Governor Christie right to stand up for New Jersey pride? Or should he just lighten up, grab a "blast in a glass," and join the fun?

Chicken Little Sells Her House

Life would be a lot easier for all of us if tax laws didn't change all the time. Every year, Washington writes new laws. The IRS writes new regulations interpreting those laws. The Tax Court issues new decisions interpreting those regulations. And the IRS issues enough revenue rulings, revenue procedures, private letter rulings, and similar proclamations to keep an army of accountants and attorneys gainfully employed.

Sometimes, in the midst of all that motion, facts get twisted and misinterpreted. Sometimes a rumor gets launched that takes on a life of its own. Right now, there's an email going around that has most of us tax professionals shaking our heads. It warns that, starting in 2013, the healthcare reform act imposes a 3.8% sales tax on home sales. If you sell your $400,000 home, you'll owe a $15,200 tax!

If you see it in an email, it must be true, right? The truth, as is often the case with taxes, is a little more complicated than that — and a lot less scary. First, let's take a look at how taxes are figured on home sales today:

•First, calculate "adjusted sale price." This is the sale price of the house, minus expenses of actually selling it (last-minute fixups, commissions, etc.).

•Next, subtract "adjusted basis." This is the price you paid for the house, plus closing costs, plus any improvements you make that add value, prolong its life, or give it a new or different use. "Adjusted sale price" minus "adjusted basis" equals "gross profit."
•If you've owned your home for more than two of the last five years and used it as your primary residence for more than two of the past five years, you can subtract a "Section 121 exclusion" of up to $250,000 if you file individually or $500,000 if you and your spouse file jointly. If you don't meet the two-year requirement, you can still take a pro-rated exclusion reflecting how long you did meet those requirements.
•"Gross profit" minus "allowable exclusion" equals taxable gain. If you hold your house longer than a year, it's taxed as long-term capital gain and capped at just 15%.
The bottom line here is that few home sales are taxable — especially in today's down market — because of that Section 121 exclusion. So, where does the new healthcare law come in? Well, it does impose a new "unearned income Medicare contribution," beginning in 2013, of 3.8% on capital gains, for individuals earning over $200,000 and families earning over $250,000. (Don't you love how the folks in Washington spin that 3.8% "unearned income Medicare contribution"? Wouldn't it just be easier to call it a "tax"?)

That means any gain on the sale of your home that isn't already sheltered by the $250,000 or $500,000 exclusion might be subject to the new tax if your adjusted gross income is over the $200,000 or $250,000 threshold. That's a pretty far cry from saying there's a new 3.8% sales tax on home sales!

But somewhere along the line, Chicken Little saw the new 3.8% tax, missed the rest of the process, and saw the sky starting to fall. Being a thoroughly modern chicken, she hopped on her computer to fire off an email telling all of us that the sky was falling — and that email spread faster than the latest news about Snooki or the Kardashians. So now here we are, setting the record straight.

The next time you get an email with a rumor that sounds too awful to be true, don't just run around like Chicken Little. Send it to us. We can tell you if it's something you really need to worry about — and if so, we'll help you craft a plan to avoid or minimize the threat!

Tax Inspiration from Warren Buffett

Last month, billionaire Warren Buffett wrote a piece for the New York Times arguing that it's time for our tax system to stop coddling the super-rich. Buffet reported that while he paid a healthy $6,938,744 in federal income and payroll taxes last year, that figure was just 17.4% of his taxable income — a lower percentage than was paid by any of the other 20 people in his office. The solution, Buffett proposed, is for Congress to raise rates immediately on the 236,883 taxpayers reporting income over $1 million, and raise them even further on the 8,274 earning more than $10 million. "My friends and I have been coddled long enough by a billionaire-friendly Congress," he concluded. "It’s time for our government to get serious about shared sacrifice."

Buffett's argument attracted immediate objectors. Some argue that taxing "the rich" can't raise enough revenue to close the deficit because there just aren't enough of them. Others pointed out that much of the income that Buffett says isn't taxed enough consists of "qualified corporate dividends," which are taxed at corporate rates ranging up to 35% before being paid out to individuals.

Now President Obama has weighed in — and it turns out, he likes Buffett's argument enough to adopt it as his own. On Monday, he proposed a $3 trillion deficit reduction package with several important tax provisions:

•First, he would let the Bush-era tax cuts expire, raising top rates on ordinary income from 35% to 39.6% and capital gains from 15% to 20%. This would raise $800 billion over the coming decade.

•Next, he would close corporate loopholes and cap the value of itemized deductions for individuals making more than $200,000 and joint filers making more than $250,000. This would raise another $700 billion.
•Finally, he would impose a special minimum tax, called "the Buffett Rule," on those earning more than $1 million. He didn't specify a rate, but said it should be no less than what the average middle-class taxpayer pays. The new rate would only apply to about 0.3% of taxpayers, and wouldn't raise significant revenue — but it sets a more populist tone for the debate and underscores Obama's assertion that "we can't cut our way out of this hole."
Polls show a majority of Americans favor higher taxes on top earners to help reduce the deficit. And Democrats generally favor this week's plan. In fact, some supporters don't think it goes far enough. Former Labor Secretary Robert Reich, for example, suggests raising taxes to 50% on income between $500,000 and $5 million, 60% on income between $5 million and $15 million, and 70% in income over $15 million.

Opponents, on the other hand, have already attacked the proposal as "class warfare" and "political games." Congressional Republicans have said they're willing to consider closing tax loopholes, so long as the resulting gains go towards lowering overall rates. But they've pledged to resist any net increase in revenue, and House Speaker John Boehner has declared tax hikes "off the table." That means this week's plan in general, and the Buffett Rule in particular, stand little chance of actually passing.

Obama's proposal is still worth paying attention to, even if Republicans don't pretend to take it seriously. It illustrates how the rising deficit is increasing pressure to raise taxes. And it signals where Obama might go if he wins next year's election — especially if Democrats retake the House of Representatives. Count on us to keep an eye out for you so that we're ready to keep your taxes as low as possible — no matter which proposals wind up passing into law!

Jobs and Taxes

Earlier this year, the men and women in what Donald Trump famously referred to as "Disneyland on the Potomac" battled it out over the debt ceiling, in a fight that turned largely over whether to include new taxes. Now the "Rock 'Em Sock 'Em Robots" in Washington are gearing up for another bout — and once again, taxes are taking center stage.

With "official" unemployment still hovering above 9%, and "unofficial" unemployment estimated at near double that, you might expect to hear clamoring for a New Deal-type employment plan — a sort of "Works Progress Administration" for a new era. Our roads, bridges, and schools could certainly use it! But deficit constraints make that impossible. So what do the candidates' plans have in common? Well, they all share a reliance on tax reform to encourage "job creators" to hire.

Last week, President Obama took to the airwaves to introduce his plan, which he presents as "recession insurance." Obama would extend the 2% payroll tax cut for employees (from 6.2% to 4.2%), currently in effect through the rest of this year, through 2012. He would cut the payroll tax on employers from 6.2% to 3.1% on their first $5 million of wages, and eliminate it entirely for any net increase in payroll up to $50 million. He would extend the current enhanced depreciation provisions scheduled to expire at the end of this year. And he would create a new "Returning Heroes" tax credit ranging up to $9,600 to encourage hiring unemployed veterans. (Come on, now . . . what heartless Scrooge could possibly oppose a "Returning Heroes" tax credit for veterans?)

Several Republican candidates have also weighed in with competing proposals:

•Former Massachusetts Governor Mitt Romney argues that "the best course in the near term is to overhaul and to dramatically simplify the current tax code, eliminate taxes on savings for the middle class, and recognize that because we tax investment at both the corporate and individual level, we should align our combined rates with those of competing nations. Lower taxes and a simpler tax code will help families and create jobs." Romney's plan would maintain marginal rates at their current level, further reduce taxes on savings and investments, eliminate the estate tax, and cut the corporate tax to 25%.

•Former Utah Governor and Ambassador to China John Huntsman released his "Time to Compete" jobs plan. Huntsman's plan would take an opposite approach from the President's plan by eliminating all deductions, credits, and loopholes. He would then introduce three rates of 8%, 14%, and 23%, eliminate the dreaded alternative minimum tax, eliminate tax on capital gains and dividends, and lower the corporate rate to 25%. Huntsman's plan has won praise from the usual flat-tax suspects — but unfortunately for them, most observers think Huntsman has as much chance of winning the Republican nomination as Lady Gaga.
•Finally, former Godfather's Pizza CEO and radio host Herman Cain has released an even more radical plan that would eliminate payroll taxes completely, cut corporate and personal taxes to 9%, and impose a 9% national sales tax.
The current debate reminds us of the role taxes play in so many seemingly unrelated issues. In today's political climate, when Washington wants to spend money on anything — whether it be healthcare reform, job stimulus, or even disaster relief — someone has to pay for it. Taxes are clearly at the heart of the job debate. And the candidates' job proposals, centered on taxes as they are, remind us why we need to pay attention to all the news coming out of Washington. What do you think? Are the candidates sincerely working to create new jobs? Or are they mainly interested in preserving their own?

Corporate Taxes and CEOs

Last week, the Institute for Policy Studies (IPS), a Washington-based think tank, released a report revealing that 25 major corporations paid more to their chief executive than they did to the IRS. That list includes household names like Ford, Coca-Cola, Verizon, Prudential, General Electric, Boeing, and eBay. Altogether, those 25 companies averaged $1.622 billion in pre-tax income. They paid their CEOs an average of $16,684,071. But when it came to taxes, they averaged $304 million in refunds on their federal corporate income tax.

How do they do it? The main culprit, according to the IPS, is "offshoring" revenue to low-tax countries. The study found that the 25 corporations collectively maintain 556 subsidiaries in "tax havens" as defined by the Government Accountability Office. And many of the corporations have a long history of working to reduce taxes on shareholder profits. For example, the New York Times once reported that "G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm." Overall, the study concluded that:

"Our 25 hyperactive tax-dodging corporations employed a variety of avoidance techniques. Not all of these techniques are nefarious. Some corporate tax breaks can have redeeming social value. Incentives that encourage our economic transition to a green energy economy offer one example of these beneficial breaks. But such incentives as these play only a minor role. The lion’s share of tax breaks reward corporate behaviors — from “offshoring” to accelerated depreciation — that are of questionable value to society, especially over the long term."

Not surprisingly, critics of the study have accused the IPS of political bias. And several of the companies cited have disputed the study's findings. For example, the IPS states that eBay paid CEO John J. Donahoe $12.4 million while claiming $131 million in federal tax benefits. EBay responded that they actually paid $646 million in worldwide taxes, with the majority paid here in the U.S. Boeing Corporation also disputes the study, claiming the IPS understated their actual cash tax bill by a factor of 20.

At the same time, the study's narrow focus on federal corporate income tax obscures the true tax burden on corporate profits. Corporations pay billions in state and local taxes in addition to federal tax. CEOs who earn millions in salary pay millions in taxes themselves — usually at higher effective rates than the corporations they work for. Every tax dollar saved for shareholder dividends ultimately gets taxed at the shareholder's own level. And ultimately, who can blame corporations for playing by the legal rules? "After all," says one Forbes magazine columnist, "CEOs and boards are supposed to be running their business for the benefit of shareholders, not the U.S. government."

Whichever side you take, as our nation's debt continues to spiral out of control, lawmakers are focusing more attention on taxes in general — and this includes efforts to reform corporate taxes and close corporate loopholes. What do you think? Are healthy corporate profits and low corporate taxes a ray of bright sunshine in an otherwise gloomy economy? Or should the townspeople be gathering up pitchforks, lighting torches, and preparing to storm the corporate castles?