We Bring Good Things to Boston

Way back in 1889, the inventor Thomas Edison and the financier J.P. Morgan put their heads together to create the Edison General Electric Company. Just seven years later, it was one of the original twelve companies listed on the new Dow Jones Industrial Average. Today, GE is the fourth-largest company in the world. It's the very model of a modern "multinational," with 350,000 employees generating $150 billion in annual revenue from jet engines, financial services, clean energy, life sciences, appliances and lighting, and railroad equipment.


Naturally, all that money sloshing around attracts the tax man's attention. GE files literally thousands of tax returns every year, for every country in the world (or at least every one that requires a tax return), every state in this country, and more cities than you can name. Their federal Form 1120, which is the corporate equivalent of your Form 1040, runs over 50,000 pages — and it gets audited every single year. So naturally, GE works hard to avoid paying anything more than it has to. The New York Times reports that the company's tax department "is often referred to as the world's best tax law firm," and its staff of 975 lawyers takes advantage of every trick in the book to pay the legal minimum. And all that work pays off — from 2008 to 2012, the company paid zero federal corporate income tax.

40 years ago, GE moved its headquarters out of Manhattan to suburban Fairfield, Connecticut, a WASPy town on the coast of Long Island Sound. But last year, Connecticut legislators adopted a budget that raised taxes by $1.9 billion statewide. The very next day, GE chairman Jeffrey Immelt stamped his little foot and said "I'm taking my ball and playing somewhere else!" Who would have expected him to wind up in the commonwealth formerly mocked as Taxachusetts?


That's right, GE has announced they're moving their headquarters and 800 jobs to Boston's Seaport District neighborhood. (No word yet on whether the company's Yankees fans will be expected to start rooting for the Sox.) The city's concentration of elite universities and innovative tech firms was the main draw. But city and state officials seasoned that chowder with one of the richest incentive packages in Massachusetts history, too.


It seems that old "Beantown" offered up to $25 million in property tax breaks. Massachusetts state officials have added up to $145 million in grants, infrastructure improvements, and help with real estate acquisition costs. But the brightest light of all is a special discount on state corporate taxes.


Massachusetts imposes a corporate excise tax of $2.60 for every thousand dollars of Massachusetts tangible personal property or taxable net worth, plus 8.0% of net income attributable to Massachusetts. But the state offers what they call a "single sales factor apportionment" break to three specific industries: defense contractors, mutual fund managers, and manufacturers. That break lets eligible companies pay tax solely on their in-state net income. The state's Department of Revenue reports that this break saved qualifying companies over $3 billion in tax from 1996 to 2011. GE has confirmed that they plan to cash in on the same break moving forward.




Now, you probably don't have the option to simply pull up stakes and move just to save some tax dollars. The good news is, you don't have to move to pay less. You just need a plan — the same sort of plan that lets GE minimize its tax burden. So call us when you're ready to pay less, and keep rooting for the home team!

Spinning Garbage Into Gold

Centuries ago, medieval alchemists used all the technology at their disposal to try to transform base elements like lead into precious substances like gold. Occasionally they even succeeded! Alas, in most cases, transmutations that seemed too good to be true turned out to be just that, and alchemists who tried to pass off their fools' gold as the real thing could count themselves lucky if jail was all they got.

Today, a new breed of financial alchemists use all the resources at their disposal to turn ordinary financial transactions into tax-advantaged gold. Occasionally they, too, even succeed! But alas, in too many cases, transactions that seem too good to be true also often turn out to be false — or even fraudulent — and our intrepid schemers are glad that the worst they face is jail.

Joseph Furando, of Montvale New Jersey, is a thoroughly nasty piece of work who came up with a can't-miss business idea. Biodiesel fuel is made from renewable resources like soybean oil and used restaurant grease. It qualifies for two valuable tax credits — a "blender's tax credit" of $1 per gallon, plus a "renewable identification number" that manufacturers can use to show compliance with federal renewable fuel obligations. It's not especially glamorous, but the tax credits make it a predictably profitable proposition.

Furando's lightbulb idea was to take biofuel that had already qualified for those credits in New Jersey, truck it to a different blender in Indiana, then re-certify it to qualify for the credits a second time. Naturally, he dubbed his scheme "alchemy." And for two years, life was good. Furando sold 35 million gallons of his fraudulent fuel and spun $56 million in profits. He poured that money into a Ferrari and other cars, a million-dollar home, artwork, a piano, and two biodiesel-fueled motorcycles. (He probably had an enviable pinky-ring collection, too.)

Unfortunately for Furando, his scheme attracted the wrong sort of attention, from people like the FBI, the IRS Criminal Investigation unit, and the EPA's Criminal Investigation Division. (I bet you didn't know the EPA even has a criminal investigation division.) No need to bore you with the Court TV details — last week, Judge Sarah Evans Barker sentenced Furando to 20 years in the pen and ordered him to pay $56 million in restitution.

And why do we call Furando "a thoroughly nasty piece of work"? For starters, prosecutors claim he threatened to kill anyone who ratted him out. He also has a history of casual violence, like denting a wall with one employee's head and telling another employee's mother, "Young guys like your son are found dead in ditches all the time in New Jersey." When law enforcement officials executed a search warrant on his home, they found 46 firearms, two sets of brass knuckles (because, hey, you can only use two at a time, right?), and three switchblade knives.

Surely Furando must have had a mother who loved him. Surely she must have told him "crime doesn't pay." Unfortunately, some of us have to learn our lessons the hard way.

The good news is, you don't have to be a sociopath to take advantage of valuable tax credits. You just have to know where to look. So call us when you're ready to make sure you're not missing out on your fair share of these opportunities!

Golf Course Owners Go for the Green

Golf courses may be some of the most beautiful manmade environments on earth. Millions of Americans actually hate the game itself, but tolerate topping their drives, shanking their wedges, and losing $2 Nassau bets by missing three-foot putts just because they get to do it all on a golf course. But while most of us can appreciate the serene beauty of the links, that lush green doesn't always translate into financial gold. (As Rodney Dangerfield told us in Caddyshack, golf courses and cemeteries are the two biggest wastes of prime real estate.)

A "conservation easement" is a gift of a partial interest in real estate to a publicly-supported charity or government. If you own a historic building, for example, you might donate the right to make changes to the façade, to keep its historic character. If you own a farm at the edge of town, you might donate development rights to keep the space green. In 2012, 1,114 taxpayers claimed conservation easement deductions. That might not sound like a lot, but the average amount claimed was $872,250. So we're talking real money here — and the IRS is paying attention and cracking down on inflated appraisals.

Golf course owners love to save some green as much the next guy, so of course they've worked to hop on the conservation easement bandwagon. In 2009, the owners of Kiva Dunes, on Alabama's Gulf Coast, won a Tax Court case letting them deduct $28.7 million for limiting their property's use to a golf course, park, or farm. In that dispute, the Court took the "conservation" aspects for granted, and focused solely on the value of that gift. But sometimes the Court takes a closer look at the validity of the gift itself which brings us to this week's story.

Back in 2003 and 2005, the operators of St. James Plantation, a pair of North Carolina courses, deducted nearly $7.9 million for easements on their properties, located in exclusive gated communities. They claimed the gifts would help preserve fish, wildlife, plants, and the overall ecosystems of the properties, located in the Cape Fear Arch "biodiversity hotspot" and the Boiling Springs Lake Wetland Complex. Both properties provide travel corridors for the Red-Cockaded Woodpecker (although there have been no reports of actual sightings of the elusive bird), and the 2005 easement area houses the "significantly rare" Eastern Fox Squirrel.

But (and there's always a "but," or there wouldn't be much of story), the easements also let the owners keep operating their golf courses. That means digging sand traps, maintaining cart paths, removing trees, and building rain shelters, restrooms, and food concession stands. It also means assaulting the turf to within an inch of its life with herbicides, fungicides, insecticides, and other chemicals, "in such manner as the owner deems appropriate" as long as they follow "the best environmental practices then prevailing in the golf industry." And of course the courses are surrounded by the usual instant mansions that developers love to crank out wherever they can drive up prices for fairway views.

The IRS teed off on the operators' deduction, which set up a playoff in Tax Court. Last month, it came to the fore when Judge Thomas Wells issued a 60-page opinion ruling that the properties didn't qualify as "significantly relatively natural habitat." That means, unfortunately for our golf course operators, their greens aren't green enough. The Judge's ruling is also likely to mean bad news for other golf courses waiting for rulings on their proposed deductions.

Smart tax planning may not necessarily score a hole in one. But it's still your best bet to stop giving the IRS too much of your hard-earned green. So call us for the plan you need, and see if we can put your next golf vacation on the IRS!

The Rich Are Different

Back in the Gilded Age, an ambitious social climber and noted toady named Ward McAllister coined the phrase "the Four Hundred," named for the number of people that Manhattan heiress Caroline Astor could fit in her Fifth Avenue ballroom. In 1982, Forbes magazine borrowed that same number for their annual "Forbes 400" list of the richest Americans. Ten years later, our friends at the IRS borrowed it again for their annual report on America's top earners. And while the IRS doesn't give us the names we really want (or tell us which ones are currently single), it's an insightful look into some of the fattest wallets in the country.

Last week, the IRS released the Fortunate 400 report for 2013. It took an adjusted gross income of $100,066,000 to join the elite group (down from $139,663,000 in 2012). But that was just the price of entry. The average income was nearly $265 million. That means the 400 as a group reported $106 billion, or 1.2% of the entire country's personal income for the year. It's also about the gross domestic product of a minor-league country like Morocco or Ecuador.

As usual, wages and salaries made up a surprisingly small fraction of these incomes — just 8.45%. That means our average winner isn't some corner-office executive raking in a nine-figure salary. Taxable interest made up 5.75% of the total, and taxable dividends another 10.78%. So we're not talking idle heirs and heiresses clipping coupons, either. The real action comes on Schedule D, where our lucky winners report capital gains. The average "Fortunate 400" reported 51.69% of their income from capital gains, or $139 million each. (That's way down from $191 million in 2012 — more on that little info-nugget in a bit.)

Brass tacks time: How much tax did our 400 supersized earners actually pay? For 2013, their average IRS bill was $60.8 million, or 22.9% of their income. That's up considerably from just 16.7% in 2012. So why was 2013's bill so much higher than 2012's? Blame changes in the tax code, especially on capital gains. The 2013 "fiscal cliff" bill raised the top rate on most long-term gains from 15% to 20%. And the Affordable Care Act piled on an additional 3.8% "net investment income tax" on capital gains, interest, and dividends. Those changes encouraged sellers to unload assets in 2012 rather than wait for 2013's higher rates. In some cases, corporate muckety-mucks (including Walmart founder Sam Walton's heirs) accelerated dividend payments into 2012 as well.

The top 400 earners could see even more changes in capital gains taxes after this year's sure-to-be-entertaining presidential election. Democratic candidates Hillary Clinton and Bernie Sanders have proposed raising rates on capital gains and investment income. On the Republican side, nearly all the candidates propose lowering those rates, while Marco Rubio has proposed exempting that income entirely.

4,474 taxpayers have joined the IRS top 400 over the last 22 years. 3,213 of them appeared just once, which reinforces the fact that most of those lucky winners make it by selling a business they spent a lifetime nurturing. (Really, isn't one hundred-million-dollar year enough?) Just 129 taxpayers have appeared on the list 10 or more times, and you can imagine they all had pretty nice holiday seasons on their private islands somewhere warm.

What does all of this mean for you? It means that even for us ordinary mortals, tax planning really can make a difference, especially when it comes to cashing out your gains. And now is a great time to start. Why not resolve to make 2016 the year you finally take control of your tax bill, and call us for the plan you need!

Cast Your Ballot

The 2016 presidential election is almost here. Are you excited yet? (Some cynics would say the campaign actually started as long ago as November 7, 2012 — the day after the last election!) In just a few weeks, voters in Iowa and New Hampshire will gather to cast the first ballots to determine who takes the oath of office to become the 45th President of the United States. And while we aren't here to predict the winner, we can be sure that taxes and tax policy will take center stage. So we've assembled a collection of quotes from Presidents and presidential candidates to finish up your 2015:

"Our income tax system is a disgrace to the human race."
Jimmy Carter

"The really rich people figure out how to dodge taxes anyway."
George H.W. Bush

"If our current tax structure were a TV show, it would either be 'Foul-ups, Bleeps and Blunders,' or 'Gimme a Break.' If it were a record album, it would be 'Gimme Shelter.' If it were a movie, it would be 'Revenge of the Nerds' or maybe 'Take the Money and Run.' And if the IRS ever wants a theme song, maybe they'll get Sting to do 'Every breath you take, every move you make, I'll be watching you.'"
Ronald Reagan

"Make sure you pay your taxes; otherwise, you can get in a lot of trouble."
Richard M. Nixon

"I apologize for the inequities in the practical applications of the tax, but if we should wait before collecting a tax to adjust the taxes upon each man in exact proportion with every other, we shall never collect any tax at all."
Abraham Lincoln

"I'm delighted to pay big taxes. Big taxes mean big income."
H. Ross Perot

"[The tax code] is a monstrosity and there's only one thing to do with it. Scrap it, kill it, drive a stake through its heart, bury it and hope it never rises again to terrorize the American people."
Steve Forbes

"The taxpayer — that's someone who works for the federal government but doesn't have to take a civil service examination."
Ronald Reagan

Of course, 2016 is almost here too. And that means time for New Year's resolutions. This year you could be like everyone else and promise to lose weight, quit smoking, or call your parents every week. Or you could resolve to pay less tax. If that sounds like a resolution worth keeping, call us and we'll set you up with the plan you need!

Smile!

"Bar Rafaeli" sounds like a happening watering hole in a trendy part of Brooklyn — the kind of place where bearded hipsters rocking flannel shirts and man-buns tip back craft beers and artisanal cocktails with their tattooed girlfriends. But Bar Rafaeli is actually a 30-year-old Israeli supermodel. She's appeared on dozens of magazine covers, including the Sports Illustrated swimsuit edition. She's also hosted television programs, acted in television and films, and co-founded an online underwear retailer. And yes, she even made headlines for dating Leonardo DiCaprio — but clearly she's more than just another pretty face.

Models use all sorts of tricks to fool the camera. Smearing vaseline on their teeth to keep them from sticking to their lips? Check. Stretching pantyhose over the lens to create a gauzy, soft-focus look? Check. But Rafaeli stands accused of creating some new tricks to fool the taxman instead — and her next photoshoot may be a mugshot. That's because last week, the Israeli Tax Authority questioned her mother Tzipi and her on charges they they avoided millions of shekels in taxes. (A shekel is worth about 27 cents right now.)

Israel's tax law provides that citizens who live outside the country don't have to pay tax on the income they earn outside the country. (That's not the case here in the U.S., where citizens are taxed on their worldwide income wherever it's earned.) While that's great for expatriates, it also gives the country's top earners a pretty obvious incentive to leave the country — or at least look like they left the country — to avoid those taxes, which reach 50% on income over 811,560 shekels.

That said, then, the first allegation against Rafaeli is that she created the false appearance of living outside the country to avoid tax. Investigators accuse her of living in apartments in Israel rented under her mother's name and brother's name. (She claims the apartments were merely convenient alternatives to a hotel when she returns to her homeland — and since she doesn't actually "live" there, why should they have been in her name?) The Tax Authority also accuses Rafaeli of failing to report over a million shekels worth of benefits she received in exchange for promotional consideration. These include a Lexus and Range Rover from a rental car company in exchange for a secret agreement to be photographed in their cars. They also include use of an apartment at Tel Aviv's chi-chi YOO Towers in exchange for "leaking" her residency there to promote it.

Finally, they claim she failed to report a million shekels she received in the form of "celebrity discounts," like the 100,000 shekels worth of interior design work she got for 40,000 shekels (and even more publicity).

Naturally, the model denies the allegations. "There is no drama," her attorney says. "In the end, this is just a civil dispute. No one cheated anyone else. It will all clear up soon." In the meantime, Rafaeli and her mother have been ordered to turn over their passports. Neither can leave the country for the next 180 days without getting government permission and posting a 750,000 shekel bond.

It's too bad the supermodel Rafaeli isn't an American citizen! She would have thousands of pages of tax law, regulations, and court cases to help her pay less tax legitimately. We could have given her a plan to use them all to her advantage. But while it may be too late for her to avoid modeling the most stylish prison garb, it's not too late for you to take steps to pay less. So call us and see how much you can save!

Tax Advice for the Grinch

The holiday season is in full swing, and we expect you're on your best behavior to make Santa's nice list. But there's one famous guy who works harder than anyone else to be naughty this time of year, and that's everyone's favorite Dr. Seuss anti-hero, the Grinch.

We don't care if you prefer the original animated cartoon or Jim Carrey's 2000 live-action remake. Either way, when you think of the Grinch, you probably think about what he steals. But have you ever thought about what he pays? You can be sure the Whos down at the IRS do! Fortunately, the Grinch can take advantage of all sorts of tax deductions to help pull off his Grinchy plot. Those include:

• Mileage. The Grinch can choose to deduct "actual expenses" (maintenance, upkeep and depreciation on his ramshackle sleigh) or the standard allowance (currently 56 cents per mile). In the Grinch's case, the short trip down from the top of Mount Crumpet to Whoville makes actual expenses his best bet.
  
• Uniforms and Work Clothes. Uniforms the Grinch provides for himself are deductible so long as they're not "suitable for ordinary street wear." This time of year it seems like everyone enjoys a red coat and hat. Still, we think the Grinch's fake-Santy Claus look should be distinctive enough to pass the IRS test.
• Meals and Entertainment. Feeding all those Whos at the end of a long day can't be cheap, even if you opt to save a little by carving the roast beast yourself. The Grinch can deduct 50% of all meals and entertainment he hosts, down to the last can of Who Hash. That's exactly the sort of subsidy that helps the Whos feast, feast, feast, feast.
• Contractor Fees It's clear that the Grinch's dog Max would prefer to just go along for the ride. But that's no reason not to deduct any payment the Grinch makes to his four-legged friend. Max isn't regularly engaged in the trade or business of helping the Grinch steal Christmas, which suggests the IRS would classify Max as an independent contractor (rather than an employee), responsible for his own employment tax and withholding. (Getting off that particular hook is sure to bring out that evil Grinch smile!)
• Medical and Dental. Speaking of the Grinch's smile, have you noticed how awful the Grinch's teeth are? With just a little planning, he could set up a Medical Expense Reimbursement Plan and deduct the cost of straightening and whitening those choppers!

Here's another reason for the Grinch to be happy that his heart grew three sizes that day — and he gave Christmas back. If he really had stolen Christmas, he would have owed tax on it! Ill-gotten gains are just as taxable as any other kind of income, right? We imagine all those flu floopers and tar tinklers would be treated as ordinary income — but who knows how an auditor would treat a set of silver jing tinglers, or a rare zu zitter carzay?

This holiday season, we wish you and your family all the best. And remember, don't hesitate to call us with any year-end finance questions!