Hotties and Notties

Junior high school is a difficult time for parents as well as students. It's a time when boys start to discover girls, and girls start to discover boys. (Reports differ on exactly which group discovers the other first, but it's equally terrifying for most parents.) One of the very first things junior high boys and girls start doing when they discover each other is rating each other — usually on a scale of 1-10. The 9s and 10s form cliques to congratulate each other on their good fortune, while the 3s and 4s learn to tell jokes, plan on making money, or learn to get by with a "great personality." (In case you've forgotten, junior high school can be really cruel.)  

It turns out, though, that junior high kids aren't the only ones rating the world around them. Now comes news that two German economics professors have rated the attractiveness of 100 different countries' corporate tax systems. Their paper, "Measuring Tax Attractiveness Across Countries", develops a new measure, which they call the Tax Attractiveness Index, "reflecting the attractiveness of a country's tax environment and the tax planning opportunities that are offered." And the results aren't nearly as obvious as that cutie you spotted across the locker hall that first day of eighth grade. 

The professors identified 16 relevant components of corporate tax systems. They started with obvious factors like statutory tax rates, taxation of dividends and capital gains, and withholding taxes. Then they added more esoteric factors like group taxation regime, loss offset provisions, double tax treaty networks, thin capitalization rules, and controlled foreign company rules. (That's the stuff you pay us to worry about.) Next, they developed methods to quantify each factor from zero (signifying the least favorable conditions, such as high statutory tax rates) to one (signifying the most favorable conditions, such as tax-free capital gains). Finally, they added the values for each condition and divided each country's total score by 16 to yield the final rankings.  

Whew! So, what do the results show? Which countries are the hotties and which countries are the notties? Well, generally, Caribbean tax havens like Bermuda and the Bahamas (tied for #1), the Cayman Islands (#3), and British Virgin islands (#4), ranked highest. European nations also fared well, especially European Union nations benefiting from the Parent-Subsidiary Directive and Interest and Royalty Directive abolishing intra-EU withholding taxes.  

And what about Uncle Sam? Is he flirting with the "mean girls," or is he waiting to get picked last for kickball? Well, the United States scored 0.2342 out of a possible 1.000. That placed Uncle Sam 94th out of 100 countries. We're trailing Egypt, Japan, and Zimbabwe. But we're still beating the Philippines, Indonesia, Peru, South Korea, Venezuela, and last-place Argentina!  

So now you know — tax-wise, at least, Uncle Sam's a dud, averting his eyes from hotties like Bermuda. We confess we don't know the first thing about Cayman Island group taxation regimes or Zimbabwean thin capitalization rules. But we do know the most expensive tax mistake you can make, in this or any country, and that's failing to plan. So call us if you're ready to start saving, whether you want more dollars, euros, shekels, pesos, or yen. And remember, we're here for your family, friends, and colleagues, too!

Bada-Ching!

The acting world lost one of its brightest lights when Sopranos star James Gandolfini died of a sudden heart attack while touring Italy with his family last month. Gandolfini was the iconic face of HBO's acclaimed drama, which made cable television, rather than the movies, the place for serious actors to "make their bones." Gandolfini himself became the model for a new breed of anti-heroes like Breaking Bad's Walter White and Mad Men's Don Draper. Few critics would dispute The Sopranos place as one of the greatest dramas in TV history.

Hollywood stars have always been famous for bringing home the big bucks, and Gandolfini was no exception. He fought as hard as a real mobster to maximize his pay. But he was legendarily generous, too. Co-star Steve Schirripa, who played Bobby Baccalieri on The Sopranos, recalled that in Season Four, Gandolfini gave each of his co-stars $33,000 for "sticking by him." And after holding up filming on Season Five over a pay dispute — which reportedly doubled his own salary to more than $800,000 per episode — Gandolfini included a clause in his deal making sure everyone else who worked on the show got paid retroactively for what they missed during the standoff. Not just a "goodfella" — a good guy.

Apparently, though, Gandolfini never had that all-important sit-down with his consiglieres about estate taxes. That means the capos at the IRS are about to give his heirs a shakedown that would make Salvatore "Big Pussy" Bonpensiero gulp in disbelief.

If you know nothing about estate taxes, remember this. You can bequeath as many millions as you like to your spouse, completely tax-free. Anything else above a "unified credit exemption amount" (currently $5.25 million per person) is subject to a 40% tax. That's a cut approaching mob-level "protection."

So, early reports suggest that Gandolfini's estate was worth in the neighborhood of $70 million. (That's a lot of gabagool for the son of a bricklayer and high-school lunch lady!) He left 80% to his sisters, his 13-year-old son, and his nine-month-old daughter. Tax on those bequests could reach up to $30 million. He left the remaining 20%, after taxes, to his wife Deborah Lin. That means she could wind up with 20% of just $40 million, rather than 20% of $70 million she could have enjoyed with better planning. In case you're like Paulie Walnuts and math ain't your strong suit, that's a six million dollar mistake. No wonder New York estate-planning attorney William Zabel (author of The Rich Die Richer and You Can Too), called Gandolfini's will a "disaster" and a "catastrophe"!

What's worse, the tax itself is due nine months from Gandolfini's June 16th death. And, in another eerie similarity to the Mob, the kneebusters at the IRS want "cash." (They'll take a payment plan if they have to, but they won't be very happy about it.) That means Gandolfini's heirs may be forced to sell assets, perhaps at fire-sale prices, to come up with the money, making the loss even worse.

We realize you may not have to worry about the IRS pinching $30 million from your estate. But James Gandolfini's untimely passing reminds us just how important proactive planning can be to your family's future. So here's an offer you can't refuse: call us now for the plan you need before the IRS takes a whacks at you. And if you already have the plan you need, is there someone just like you who could use the same savings? We're here for them, too!

You Think You Got Audited?

Getting an audit notice from the IRS isn't any one's idea of a party. But it's not the end of the world. Usually the auditor just wants to make sure you're entitled to the breaks you've claimed. Did you really spend as much as you reported on meals & entertainment? Did you really spend enough hours managing your rental properties to qualify as a "real estate professional"? If the IRS finds a mistake, they issue a "deficiency notice" and bill you for what you owe. How bad can it really be?

Well, just ask Raymond J. Lane.

Ray Lane is a longtime tech industry veteran. He started his career at IBM, then moved to Electronic Data Systems and Booz Allen Hamilton before becoming Chairman and CEO of Oracle Corporation. More recently, he's been a partner at the venture capital firm of Kleiner Perkins Caufield & Byers, a board member at Fisker Automotive, and non-executive Chairman of Hewlett-Packard.

In 2000, Lane invested $25 million into a partnership, Vanadium Partners Fund LLC, to invest in technology start ups. The fund used a strategy called "Partnership Option Portfolio Securities," or POPS, to generate paper losses far in excess of his actual investment. Then he claimed $251 million in losses to offset income he recognized from exercising Oracle stock options.

Since then, the government has taken direct aim at POPS and similar "abusive" strategies, arguing that they lack economic substance. Lane reports that the IRS originally audited him in 2004, then asked him to sign extensions on a statute of limitations every 18 months while they reviewed his file. Last December, they found the partnership to be a sham, with no "legitimate business purpose." In fact, they argued, Lane's $25 million "investment" — which he claimed was for warrants in the LLC — was designed merely to disguise fees paid to tax-shelter promoters and tax professionals. Lane filed an appeal with the Tax Court. Then, on May 6, he announced he had signed an agreement to pay the IRS $100 million!.

For his part, Lane says "the thing is unfortunate." (Really?) He adds that "the amount of taxes I pay are staggering, and this is the only transaction I've been audited on." He claims to have paid between 32% and 38% of his income in net taxes in the past 15 years. Now, while paying the $100 million to the IRS will certainly hurt, it won't put him in the poorhouse. He still owns two homes across the street from each other in pricey Atherton, California, worth a total of $30 million, along with a home in Manhattan Beach worth $20 million, a farm in Oregon worth $4 million, and two properties in Palm Desert, California, worth another $10 million.

But still . . . a $100 million tax bill! Can you imagine signing that check? Or even authorizing that wire transfer?

Here at our firm, we understand that if you ever get an audit notice, you're not going to be happy — even if there's not a hundred million bucks at stake! That's why we stick with tried-and-true strategies to help you pay less. Everything we recommend is court-tested and IRS-approved. So call us to see how you can put some of these strategies to work for yourself!

The IRS at the Wedding

You've all heard that April showers bring May flowers. That's fine and all, and it doesn't leave anything for the IRS unless you're a farmer or a florist. But June brings brides — young brides, old brides, blushing brides, even bridezillas. Now the IRS pays attention, because now the IRS gets to reach out for all sorts of extra taxes from the happy couple.

So, Mike and Sarah meet in college, fall in love, and get married. Maybe they host the big day at their college chapel. Maybe they get creative with the reception and throw a barbecue in a barn. What will the IRS think?

The classic "marriage penalty" occurs when two spouses, earning roughly equal amounts, earn enough together to push their taxable income into the 28% bracket for joint filers. For 2012, that bracket started at $142,700. So if Mike and Sarah each reported $100,000 in 2012 taxable income before the wedding, they each owed $21,454 in tax. But if they got married any time before the end of the year and reported $200,000 in joint income, they would owe $43,779 together. Do you think it will bug them to send the IRS an extra $871?

It gets worse when kids are involved. If Sarah has a qualifying child, she gets a $1,000 child tax credit, so long as her income is under $75,000. But when she and Mike get married and file together, that threshold doesn't double. It goes up just $45,000. That's barely half again what Mike would get on his own.

Those obvious examples are just a starting point. There are plenty of other marriage penalties scattered like icebergs throughout the tax code. For example, the Affordable Care Act imposes a 0.9% Medicare surtax, starting this year, on earned income over $200,000 for single filers and $250,000 for joint filers. If Mike and Sarah each report $200,000 in earned income singly, no surtax. But if our newlyweds report the same $400,000 each as husband and wife, Uncle Sam gets an extra $1,350. Wait a minute . . . shouldn't your uncle be giving wedding presents instead of taking them?

Maybe Mike owns a rental property. Like most rental properties, it loses money "on paper." There's a special "rental real estate loss allowance" that lets him deduct up to $25,000 of rental loss against his other income — so long as that income doesn't top $150,000. When Mike gets married, he and Sarah can still take that same $25,000 loss — so long as their combined income doesn't top that same $150,000! Oh, and that's only if they file jointly. If they file separately, and lived apart for the year, they get just $12,500 each. If they file separately and lived together during the year, the allowance is zero. Who wants to raise a toast to that?

There's still time for you to throw rice (or birdseed) at a wedding or two this month. So if someone you know is getting married, have them call us. We'll see if we can keep a a marriage "penalty" from turning into a marriage "surprise." And don't forget to save some cake for the IRS!

Dad and Taxes

Sunday was Father's Day, and if your family is like most, you talked about golf, or fishing, or the latest happenings on Duck Dynasty. You probably didn't talk about taxes, just because Dad doesn't like paying them! So here are some "father and family" themed tax quotes to put a smile on your face today:

"Every year, the night before he paid his taxes, my father had a ritual of watching the news. We figured it made him feel better to know that others were suffering."
Narrator, The Wonder Years television series

"My father has a great expression: 'The capital-gains tax has created more millionaires than any other government policy.' The capital-gains tax tends to make investors hold longer. That is almost always the right decision."
Chris Davis

"Our forefathers made one mistake. What they should have fought for was representation without taxation."
Fletcher Knebel

"Throughout the first half of our history, Americans hated tax with passion, something they inherited from the founding fathers."
Charles Adams"Giving money and power to government is like giving whiskey and car keys to teenage boys."
P.J. O'Rourke"The trouble with being a breadwinner nowadays is that the government is in for such a big slice."
Mary McCoy"A well-timed death is the acme of good tax planning, better even than a well-timed marriage."
Donald C. Alexander (former IRS Commissioner under Richard M. Nixon)"If you are truly serious about preparing your child for the future, don't teach him to subtract — teach him to deduct."
Fran Lebowitz

If Dad wants to pay less tax, he needs the same thing you do — a proactive tax plan! Summer may not seem like the obvious time to do it, but now is when we have the most time available to help you pay less. So have Dad give us a call — he'll appreciate paying less tax a lot more than he'll appreciate another tie!

Party Time at the IRS

You probably don't think a conference for a bunch of IRS bureaucrats would be much fun. Apparently, though, the IRS knows how to throw a party. Back in 2010, they hosted an event dedicated to "Leading into the Future" for 2,609 executives and managers in the Small Business/Self-Employed division. (You're excited already, aren't you?) It turned into a $4.1 million boondoggle, complete with first-class air travel and Presidential Suites at three different hotels, that even Jay Gatsby might appreciate.

We'll never know how many of our friends at the party woke up hung over the next morning. But predictably, someone blew the whistle on "excessive spending," and now we have another IRS scandal on our hands. Last week, the party poopers at the Treasury Inspector General for Tax Administration released a 56-page report titled "Review of the August 2010 SmallBusiness/Self-Employed Division's Conference in Anaheim, California". Not surprisingly, they found several ways to "enhance controls over conference spending." How's this for genius advice?

• Don't spend $50,187 to produce parody videos like the one featuring IRS officials as characters from "Star Trek", boldly going where no government employee has gone before. (New York Representative Carolyn Maloney called the video "an insult to the memory of 'Star Trek'" and said "I could do a better Captain Kirk.")
  
• Don't forget to negotiate with hotels over "details" like room rates, continental breakfasts, wireless internet, or "free" cocktails at a welcome reception with salad, appetizers, fajitas, pasta, and dessert.
• Don't spend $17,000 for a keynote speaker to paint portraits of historic figures, including Bono and Michael Jordan, to illustrate lessons on "unlearning the rules, breaking the boundaries, and freeing the thought processes to find creative solutions to challenges."
• Don't spend $29,364 to let IRS employees living within 30 miles of the meeting stay at conference hotels "to reduce the demands on local travelers who would otherwise experience lengthy commutes daily during the conference and to foster employee morale and team spirit." (Oh, and while you're at it, would it kill you to issue a W-2 to those local employees so they can pay tax on the value of those stays?)

Does $4.1 million really sound like too much for that sort of fun? Unfortunately, IRS procedures in effect at the time of the conference didn't require management to track or report actual expenses, so the Inspector General can't verify how much the whole thing cost. Reassuring, right? The people who make us track receipts for a $4 coffee can't track their own expenses?

Just two days after the report came out, IRS officials trekked to Capitol Hill to commit hari kari. Faris Fink, who now heads the Small Business/Self-Employed division (and who played Mr. Spock in that infamous "Star Trek" video), apologized and confessed he didn't know his agency could have negotiated for lower hotel room rates. Acting Commissioner Danny Werfel called the whole thing "an unfortunate vestige from a prior era" and reported that spending on travel and training has fallen 80% since then.

We send these emails urging you to come in for tax planning week after week. And usually we just assume you know why our proactive tax-planning service is such an obvious no-brainer. But seriously — don't you think you can do a better job of spending your money than the IRS? If so, then call us today to get started with your plan!

An Apple a Day

Back when you were a kid, your mom probably told you "an apple a day keeps the doctor away." Well here's something Mom didn't know — apparently, an apple a day keeps the tax man away, too. At least, that's the conclusion we might draw from recent Congressional hearings focused on Apple Incorporated and its strategies for avoiding taxes!

Last month, the Senate Permanent Committee on Investigations conducted a hearing compellingly titled "Offshore Profit Shifting and the U.S. Tax Code — Part 2 (Apple Inc.)." The Committee graciously invited Apple's CEO, Tim Cook, to share how Apple avoids U.S. tax. (We can only imagine how delighted Cook was to receive the Committee's "invitation" — no doubt delivered on the same sort of elegant stationery you might use to announce a spring cotillion or send a "thank you" note to Grandmother.)

Here's the issue in a nutshell. Apple earns tens of billions of dollars per year from their innovative desktop and laptop computers, iPods, iPads, and ubiquitous iPhones. And Apple pays billions in tax on its U.S. profits — in 2012 alone, the company paid $6 billion in federal income tax, $327 million in payroll tax, and $830 million in state income tax. But international operations account for about 61% of the company's gross revenue. So Apple's accountants and attorneys, who sound at least as clever as the engineers who design the company's products, find ways to leave that revenue outside the U.S., where it sidesteps our 35% corporate income tax. From 2009-2012, Apple shifted at least $74 billion away from the IRS's reach.

How do they do it? Mainly through use of subsidiaries in places as diverse and exotic as Ireland, Luxembourg, the British Virgin Islands, and Reno (yes, the one in Nevada). For example, Apple owns a holding company organized in Ireland called Apple Operations International. Because the company is domiciled in Ireland, the IRS doesn't consider it to be a U.S. corporation subject to the 35% U.S. tax. But because Apple manages and controls the company from the U.S., Irish law doesn't consider it to be subject to the 12.5% Irish tax, either. Apple Operations International earned $30 billion from 2009-2012 — and didn't even file tax returns for those years. Edward Kleinbard, a law professor at the University of Southern California and former staff director at the Congressional Joint Committee on Taxation says "There is a technical term economists like to use for behavior like this. Unbelievable chutzpah."

Apple's defenders point out that Apple doesn't make the rules — they're just doing their best on behalf of their shareholders with a tax code that "has not kept up with the digital age." CEO Cook points out that Apple has created or supported 600,000 U.S. jobs (including 50,000 for Apple's own employees and 550,000 at other companies) involved in engineering, manufacturing, logistics, and software development, including third-party "app" development. They claim that Apple is probably the biggest corporate income taxpayer in the country, accounting for $1 of every $40 in corporate tax the IRS collected last year. And they argue that they don't use "tax gimmicks" like moving intellectual property offshore to sell products back into the U.S., using revolving loans from foreign subsidiaries to fund U.S. operations, or holding money in Caribbean islands or Cayman Islands bank accounts.

We realize that some of you reading these words will be outraged, and others will be envious. We're not here to pass judgment on Apple's tax strategy. But we do want to point out that Apple pays less tax the same way we help you pay less — through proactive planning. You may not have quite the same opportunities to save as Apple. But you'll never know how much you can save if you don't sit down with us to try. So call us today!