People Who Live in Glass Houses

Takisha McGee works (at least for now) as a Section Manager for the IRS Office of Professional Responsibility, where their mission is to "interpret and apply the standards of practice for tax professionals in a fair and equitable manner." Among her other duties, she travels around the country teaching IRS officials and tax preparers how to behave themselves. She gives lectures with titles like "When Your License To Practice Before the IRS Is On The Line." You would think someone like that would watch her own back pretty carefully. But sadly, that's not the case, at least as far as McGee herself is concerned.

This week's story starts back in 2007, when McGee helped her future husband's Aunt Rue collect $8,900 after an auto accident. At the time, McGee was two years out of law school, working on employee benefit issues at the Department of Labor, and had never handled a personal injury case before.

On July 21, 2008, the insurance company sent McGee a settlement check for $8,900. McGee kept $1,000 for herself and deposited the remaining $7,900 in her little "firm's" trust account. Two weeks later, McGee gave her client $4,500, $4,700, or $4,900 (depending on whose affidavit you believe). McGee understood that she was also supposed to pay her client's medical bills, which totaled $2,682.46. She withdrew $1,800 more in cash from the trust account, but none of it found its way to the doctors.

Apparently, that was when McGee decided she wasn't cut out for a life of chasing ambulances, because that's when she started her job helping supervise the IRS ethics cops. She also started not answering her email, and even disconnected her cell phone and fax machine "to reduce stress." (Don't you wish you could do that?)

With all that stress reduction going on, Aunt Rue eventually filed a complaint with the District of Columbia Bar Association. McGee defended herself with several inconsistent stories about paying the medical bills, but the Bar Association wasn't buying it. They recommended disbarring her, based on "clear and convincing evidence of intentional misappropriation," among other offenses. McGee apparently feels the heat, although she dismisses her shenanigans as a "one-time mistake." Last week, she confessed to the Washington Times that it keeps her awake at night. "As it relates to my job, may I possibly lose it? Yes, I face that each and every day." She says that she notified the IRS about the pending disbarment when she started working there, but an IRS spokesman said the Service was unlikely to comment. (Privacy issues . . . .)

The 18th-century Frenchman Jean Baptiste Colbert, who worked as King Louis XIV's Minister of Finance, once said that "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing." The IRS employs almost 90,000 people in that pursuit. Most of them work hard at a thankless job. They don't get a lot of love, and they don't make a lot of money. So it's probably fair to cut them at least a little slack for honest mistakes, even as we hiss at being plucked. But some people just don't belong where they are, and McGee sure sounds like one of them.

Meanwhile, the other 89,000 people who work at the IRS are still on the job — and so are we. Which is why we're reminding you that since it's after Labor Day, tax planning season has officially begun! You've got less than four months until December 31, when the most valuable planning opportunities turn into pumpkins just like Cinderella's carriage. So call us when you're ready for a plan to pay the least tax possible!

 

It's International Bacon Day!

The last Saturday in August is International Bacon Day here in the United States. (Yes, it's really a thing.) Hang your bacon decorations and warm up your voice for carols! IBD is your chance to celebrate all things bacon, like peanut butter-bacon pop tarts, bacon-flavored ice cream, and bacon cocktails. There's even THC-infused chocolate-covered bacon (!) for the Cheech & Chong set. It's all great fun for everyone except the pig.

There's no denying that bacon mania has swept the country. (Cupcakes? Soooo yesterday.) But today's clever chefs are combining all sorts of unexpected ingredients to make all sorts of new dishes. They're drizzling chocolate on things that never went with chocolate. They're deep-frying things that should never, ever be deep-fried. Today's eaters are having more fun with food than at any time since John Montagu, the fourth Earl of Sandwich, decided not to get up from his card game to eat lunch.

What does any of this have to do with taxes? Glad you asked! We've said before that every financial decision you make has at least some tax consequence, even if it's a simple sales tax. So let's look at three random nuggets about food and taxes to wet your appetite for this weekend's global celebration of all things bacon:

1. What fun is a business meeting without food? Meals and entertainment that include a bona fide business discussion are ordinarily 50% deductible. But claiming a tasty deduction for a delicious meal doesn't have to mean eating at a restaurant. Did you know you may be able to write off the cost of entertaining at your Labor Day barbecue? It's true even if you don't serve bacon. And you don't even need receipts for expenses under $75. Just record who you host, when you host them, how much you spend, your business relationship with your guest, and the specific benefit you hope to gain by hosting them.
2. Some business meals and entertainment are 100% deductible. You can deduct 100% of your expenses for meals and entertainment for sales seminars and similar events where the meal is integral to the presentation. You can also deduct 100% of the cost of sporting events you organize to benefit charitable organizations, and recreation expenses for your employees. Be generous with those delicious little bacon-wrapped scallops on toothpicks that everyone loves — it's on the IRS!
3. Switching gears a bit, here's another new food hit. Taco Bell's new Doritos Locos taco is a fiesta wrapped up in a tortilla for customers and tax collectors alike. Taco Bell sold 100 million of the messy faux-Mexican creations in the first ten weeks, and still sells a million a day. In fact, Taco Bell claims the phenomenon is responsible for 15,000 new jobs. And while those probably aren't the sort of high-paying positions that prop up an economy, they still generate millions in federal, state, and local income, payroll, and sales taxes. (Just imagine how many more they would sell if they came with bacon!)

So enjoy International Bacon Day. If you're a vegetarian, help yourself to some tofu "facon." Don't call us for recipes — but do call us with any tax questions before you make important financial decisions. We'll help you get the satisfying results you crave, without any financial gluten, trans fats, or heartburn.

"Gaming the System"?

America's biggest companies fight like tigers for surprisingly tiny advantages. Grabbing as little as a single extra percent of market share can mean millions in new revenue, especially in popular categories like soft drinks or laundry detergent.

The same is true when it comes to taxes. A chief financial officer who cuts his company's tax rate by a percent or two is a hero — and while his name may not make headlines, his paycheck will show it. The Fortune 500 compete for tax planning talent like baseball teams compete for starting pitchers. General Electric is a great example — from 2002 through 2011, it earned billions in profit and paid an average tax rate of just 1.8%. No wonder its tax department has been called "the world's best tax law firm."

Right now, the coolest kids in corporate America's tax departments are all talking about "tax inversions." The strategy involves buying a foreign company headquartered somewhere with lower taxes, then moving their "tax domicile" to the new country while leaving their core business here. Nine U.S. companies have taken the plunge in 2014, and a dozen more are currently weighing it. Take Medtronic, for example. The Minnesota-based pacemaker manufacturer was groaning under a combined 39.1% federal and state tax rate. That's enough to give any CFO a stroke. So what do the tax doctors prescribe? Merge with Covidien, in Ireland. Take advantage of the Emerald isle's 12.5% rate, and party like it's 1999. The move could save as much as $4.2 billion in U.S. taxes.

If you think this sounds like the sort of move that would upset our friends at the IRS, you're right. (Google "tax inversion + weasel" and you'll get 4,450,000 results.) Last month, President Obama condemned it as "gaming the system," and urged Congress to slam the doors shut, saying "stopping companies from renouncing their citizenship just to get out of paying their fair share of taxes is something that cannot wait.” Of course, inversions have their champions, too. Defenders point out they're perfectly legal under Internal Revenue Code Section 7874. They argue that the tax savings created by inversions flow through to customers, employees, and shareholders in the form of lower prices, higher wages, and higher profits. And they assert that the deals will help American companies compete against rivals in lower-taxed jurisdictions, protecting jobs and wages.

But not everyone is jumping on the tax inversion bandwagon. This summer, Walgreens announced they would be completing their acquisition of Alliance Boots, Europe's largest pharmacy. Walgreens had contemplated using the deal to move their tax headquarters to Switzerland, but ultimately decided to pass. Since then, the company's stock has dropped 15%. So . . . a mistake? Well, moving could have saved a bundle — as much as $4 billion over the next five years. But it also could have backfired, big time. Executives worried it could spark a decade-long fight with the IRS, chase customers away, and even jeopardize the millions of dollars in federal revenue that Walgreens rakes in from Medicare and Medicaid. Senator Dick Durbin reported he was thrilled that "the corner of happy and healthy" would stay "right here in Illinois."

What do you think? Are the folks who take advantage of tax inversions really "gaming the system," as President Obama has said? Or are they just playing the hand they're dealt, protecting themselves as best they can against the aces up everyone else's sleeves? Whichever you think, remember that we're here to help you play the cards you're dealt. So call us with your questions, and let us help you pay the least tax you can!

"Most of What Follows Is True"

Robert Redford has thrilled movie audiences for decades. He's breathed life into iconic roles like the outlaw Sundance from Butch Cassidy and the Sundance Kid. He's won two Oscars, and even been awarded French Knighthood in the Legion D'Honneur. (It's been a long time since French knights have struck fear in anyone's heart, but it can't hurt when it comes to charming les cinephiles in Paris.)

But Redford is far more than just a pretty face on a screen. In 1978, he founded the Sundance Film Festival near his hometown in Utah, establishing himself as the "godfather of indie film." In 1996, he launched the Sundance Channel, dedicated to airing independent feature films, world cinema, documentaries, and similar programming. And in 2005, he sold part of his equity in that venture — which brings us to today's story.

Redford didn't hold his interest in the channel in his own name. (That would have been be too easy.) Instead, he owned 100% of a New York-based limited liability company called Sundance T.V. That entity owned 85% of an "S corporation" named Sundance Television, Ltd.. And that entity, in turn, owned Redford's interest in yet another entity, called Sundance Channel LLC, which owned the actual channel. (It's just like those little Russian "nesting dolls," except instead of dolls we're talking business entities.)

Now, all of those entities are "pass-throughs," which means that instead of paying tax themselves, they pass their gains and losses directly through to their owners. So, when Redford sold 20% of his interest in the TV channel, his gain passed through Sundance Television, Ltd., to Sundance T.V., to Redford himself. Redford paid his tax on his federal 1040 and his Utah state return, and called it a day.

But Redford missed one thing. That final entity, Sundance T.V., was organized in New York, not Utah. And the New York Department of Taxation and Finance can be just as dogged as the posse that tracked Butch and Sundance through the Wyoming mountains. So just imagine Redford's surprise when New York sent him a bill last May — eight years after the sale — stinging him for $845,066 in unpaid tax plus another $727,404 in interest!

So now Redford and New York are headed to court. Redford is asking the Court to declare that New York's own constitution prohibits the Empire State from taxing him on his gain. That constitution provides that assets in New York that aren't used to carry on an active business are "deemed to be located at the domicile of the owner for purposes of taxation." Redford concedes that, yes, the LLC was established in New York. But he argues that he didn't use his ownership interest in any of the "nesting doll" entities to carry on a trade or business in New York. Nor did he have "any property, payroll or receipts located in or deemed attributable to the conduct of a trade or business" in New York.

Ironically, New York has already said that Redford doesn't owe them any state tax for selling therest of his interest in Sundance to Showtime in 2008. So you'd think he ought to be able to avoid the 2005 bill, too. But anything can happen in court, and we'll just have to wait and see if Redford can shoot his way out this time.

Getting a surprise tax bill isn't any more fun than a surprise visit from the Pinkertons. But you don't need to run to Bolivia to avoid it. You just need a plan. It's easier than robbing a train, and a whole lot safer, too! So call us when the tax man gets close. And remember, we're here for the rest of your Hole in the Wall Gang, too!

Unnecessary Roughness

Football fans can rejoice — the NFL is finally back! On Sunday night, the New York Giants defeated their cross-state rivals from Buffalo, 17-13, in a meaningless pre-season contest. On September 4, the Packers and Rams kick off a regular season sure to be filled with beer commercials, discount double checks, and brain-numbing concussions. It all leads up to Super Bowl XLIX on February 1 in Phoenix — somewhere on cable television, the pregame show has already begun.

The NFL is no stranger to controversy, and this year's first dustup came early. Baltimore Ravens running back Ray Rice was caught on video dragging his unconscious fiancee out of an elevator in Atlantic City. The league suspended Rice for two games and fined him $58,823 for conduct detrimental to the NFL in violation of the league’s Personal Conduct Policy. Now, two games is less than the league has suspended players for drug violations and even for driving without a license following a DUI. So Rice's lenient punishment has sparked outrage, including calls for NFL Commissioner Roger Goodell's resignation.

You probably don't think a football player's off-the-field misbehavior has anything to do with taxes. But you might be surprised at some of the subtle consequences of Rice's actions — so let's take a look.

The two-game suspension means Rice will miss the Ravens' season opener against Cincinnati on September 7 and a nationally-televised Thursday night game against Pittsburgh September 11. And that will cost him big-time in salary — $470,588, to be exact. Is that loss deductible? Well, no. Rice won't pay tax on it, but that's only because he won't get it. You can't take a deduction for income you never get in the first place.

Still, our friends at the IRS probably won't be quite as happy as if Rice had earned the two games' salary and paid tax on it himself. That's because whatever doesn't get taxed at 39.6% on Rice's return will wind up on Ravens owner Steve Bisciotti's return. Assuming the Ravens are an "S corporation," which passes income through to its owners, Bisciotti will pay the same 39.6% income tax rate that Rice would have paid. However, Bisciotti would avoid the 3.8% Medicare tax that Rice would have paid. That might not sound like a lot — but 3.8% of $470,588 still works out to $17,882 that would have gone to the U.S. Treasury.

The $58,823 penalty, based on one game's salary under last year's contract, is a tougher call. Fines and penalties are usually nondeductible, unless they're considered an "ordinary and necessary" expense in a taxpayer's trade or business. (Criminal fines are never deductible.) Rice could argue that paying the fine is "necessary" to continue his employment with the Ravens. But from a PR standpoint, that would likely be a fumble. Whether Rice attempts to deduct it or not, the actual money winds up in the League's treasury — and since the league is a not-for-profit organization, it will escape taxation entirely.

Rice himself has chosen not to fight criminal assault charges or appeal the league's punishment. But he's taken a rougher knock to his reputation than any hit he's taken on the field, and recovering won't be easy — if it's possible at all. We shouldn't be surprised to see him making some visible donations to women's shelters or other organizations opposing domestic violence. But those should qualify as charitable contributions and lower Rice's taxes as well.

There's really not much of a "planning" angle here, per se. But there is a valuable lesson, and it's that every financial activity has at least some tax consequence. Sometimes it's easy to see; and sometimes it's hidden. But it's always there, and it's always our job to help you make the best of it. So call us before you act, for a valuable peek at the IRS playbook. And remember, we're here for your teammates, too!

Holy Taxes, Batman!

On July 23, Batman turned 75! Everyone knows how the billionaire industrialist Bruce Wayne dons a bat-like costume to protect Gotham City from supervillains like The Joker, The Penguin, and The Riddler. But did you know that he's just as resourceful when it comes to fighting The Tax Man, too? Let's use the occasion of the DC Comics character's Diamond Anniversary to see what bat-deductions he can bring to the fight:

• Batman may be a brilliant detective and master martial artist, but he can't protect Gotham all by himself. Dick Grayson was the youngest member of the "flying Graysons" acrobat troupe when a mafia boss killed his parents. Batman took Grayson in as his legal ward, and soon Grayson became "Robin." Claiming Robin as a dependent gives Batman a personal exemption, which would reduce his taxable income by $3,950 this year if Batman's high income didn't phase out most of that deduction. But more important, it lets Batman file his taxes using more advantageous "head of household" rates!
  
• Batman and Robin live at stately Wayne Manor, an enormous fortress outside Gotham City. Batman's family has owned the home for generations, which means Batman isn't likely to be paying tax-deductible interest on a mortgage. However, he can deduct an unlimited amount of property tax he pays on the home and grounds, including the Batcave. Oh, and the solar panels Batman installed after the mansion was damaged in an earthquake qualify for a 30% solar investment tax credit.
• Alfred Pennyworth is a British actor and former intelligence agent who serves as Batman's butler and best friend. Alfred manages Wayne Manor and cares for the Batcave below. It's not a business relationship, so Batman can't write off Alfred's salary. However, it seems evident that Alfred is required to live on the premises as a condition of his employment — which at least makes his room and board tax-free to him.
• When Robin left for college, Batman decided Wayne Manor was a bit too stately for just Alfred and him. So they decamped to a penthouse high atop the Wayne Foundation building in Gotham City. Naturally, the penthouse includes a secret elevator, leading to a secret Batcave, in a secret sub-basement deep under the building. But there's no need to hide anything from the IRS — it also qualifies as a second home, meaning Batman can deduct interest on up to $1 million of "acquisition indebtedness" on the property, plus an unlimited amount of property tax as well.
• Batman is one of those rare comic book superheroes without actual superpowers. He can't fly, like Superman, or breathe underwater like Aquaman, or transform himself into an invulnerable green humanoid like The Incredible Hulk. (He can't even make plants grow like the Clorophyll Kid!) But he can harness an arsenal of specially-designed bat-themed gadgets and tools. This includes the fleet of vehicles we all love — the Batmobile, Batplane, Batboat, Bat-sub, and Bat-cycle. And it includes a special utility belt to carry the "batarangs" he uses in lieu of firearms (because a gun killed his parents). Batman's "toys" naturally help him fight crime. But they also help him fight taxes — inventing and producing them qualifies for lucrative Research & Development tax credits and Domestic Production Activity deductions!

Billionaire Bruce Wayne understands that smart tax planning doesn't have to mean revealing his secret identity. We can be sure he uses at least part of the savings to fund his fight against the supervillains! But you don't have to be a millionaire crime-fighting playboy to benefit like he does. Activate your bat-signal — or just pick up your batphone and call us — and we'll give you the plan you need to fight taxes you just don't have to pay.

Berkshire Giveaway

Someday, the financial wizards who run things on Wall Street will realize there's "paper to be stacked" opening an Investor Hall of Fame. (Hey, the Rock and Roll Hall makes $40 million a year, and it's in Cleveland.) And when they do, they'll have to dedicate an entire wing to Warren Buffett. The so-called "Oracle of Omaha" has become a rock star among money managers. His chart-topping net worth soared by $37 million per day last year. And his annual Berkshire Hathaway shareholder meeting attracted 40,000 attendees this spring, making it the Burning Man Festival for the cocktail set.

Buffett affects a folksy style, posing for photos with a ukelele and quipping that Wall Street is the only place where people drive Rolls-Royces to get advice from people who ride the subway. But he didn't get to be #2 on the Forbes 400 by being dumb — and this is true with taxes, too. Buffett has made headlines criticizing the carnival of confusion that passes for the "Internal Revenue Code" for taxing his secretary at a higher rate than it taxes him. But his actions show a keen grasp of the power of smart tax planning.

Let's take a look at Buffett's charitable giving. Now, there's no doubt that his motives are sincere — he's pledged to give a whopping 99% of his fortune to charity. But his generosity may have the side benefit of saving him $30 billion or more in tax.

So far this year, Buffett has donated $2.8 billion, including $2.1 billion to the Gates Foundation, $215 million to the Susan Thompson Buffett Foundation, and $150 million each to the Howard G. Buffett Foundation, the Sherwood Foundation, and the NoVo Foundation. But those gifts didn't really "cost" him $2.8 billion. That's because he didn't give cash — he gave Berkshire Hathaway stock. Donating appreciated stock lets Buffett deduct the fair market value of that stock at the time of the gift, even though his "cost basis" — or actual investment in it — is likely to be far, far less. Giving away appreciated stock also lets him avoid tax on the appreciation in that stock.

Let's say Buffett's basis in this year's gift stock was an even billion dollars. (It's probably even less, but who's counting?) If Buffet had sold the stock at a $1.8 billion gain, then given cash, he would have had to pay $712,800,000 in regular tax, plus another $68,400,000 in "net investment income tax." Giving appreciated stock directly, then letting the charities sell it, boosts his largesse by nearly $800 million — money that Buffett evidently thinks his charities can spend better than the folks in Washington.

Buffett probably won't ever "retire" in the go-fishing-in-Florida-and-eat-dinner-at-4 sense of the word. But at some point, he'll get promoted to that great boardroom in the sky. That's when his charity will really sidestep our friends at the IRS. Buffett could set up his heirs for generations to come. But with a 40% estate tax, leaving his current net worth of $58.5 billion to family would cost $23.4 billion in tax. Leaving his wealth to charity avoids that hit. And it spares the rest of us decades of reality TV about spoiled, dissolute heirs — their gilded lifestyles, their trips to rehab, and their endless Paris Hilton-esque shenanigans.

We realize you don't have billions to give like Buffett. But if you're one of the millions of Americans who admire his business wisdom, take a lesson from his tax wisdom as well. And call us before you make any sort of major gift, to your church, your college, or your community. We'll help you structure it to squeeze out the maximum advantage. You can be sure Warren Buffett would approve!