Clean Tax Savings Here

Businesses generally try to get the highest price possible for their products. It's called "capitalism," and it generally works to establish "equilibrium prices" between knowledgeable buyers and willing sellers. But every so often, this mechanism breaks down and prices soar, resulting in howls of "price gouging!" from ticked-off customers. This is especially true with pharmaceuticals. In 2015, hedge fund manager Martin Shkrelli made himself the most-hated man in America when he bought Turing Pharmaceuticals and raised the price of the antiparasite Daraprim from $13.50 to $750 per pill.

Another example: in 2007, Mylan pharmaceuticals bought rights to distribute the EpiPen, a device that costs $5 to manufacture and delivers a dollar's worth of epinephrine to stop severe allergic reactions. Mylan quintupled sales, and even helped pass legislation encouraging schools to stock the devices. But they also jacked pricing from $100 to $609 per pair, which led to harmful side effects for the business. Customers revolted and sent the CEO on a Bataan Death March of bad press. Even Martin Shkrelli piled on the criticism — and when that guy calls you a price gouger, you're "Code Blue."

With sales going from $200 million to over $1 billion in just nine years, you'd think the IRS would get a full dose of the success, too. It turns out, though, that Mylan is just as clever about cutting its tax bill as it is marketing EpiPens. In 2014, they executed a controversial strategy called a "tax inversion," buying a smaller Dutch company in order to move their nominal headquarters to the lower-taxed Netherlands. And Reuters has just revealed another strategy involving huge stakes in, of all things, coal companies. Here's how it works:

    The company buys a coal-refining facility. (Mylan owns LLCs with 99% stakes in five of them, buried deep in the footnotes of the company's annual report.)

The facility buys raw coal, often from a utility, and treats it to remove the chemicals that cause the worst pollution.

The facility sells the coal back to the utility, usually at a loss.
Finally, the parent company takes federal tax credits, which were equal to $6.81 per ton of refined product in 2016.

As long as the tax credit from Step Four is more than the after-tax loss from Step Three, the parent company come out ahead! How far ahead? Reuters reports loss from the refining operations, depreciation from the facilities, and tax-savings from credits netted Mylan over $100 million last year. In fact, the company's effective tax rate for that year was an eye-popping -294.4%, which means they made far more in compounding tax benefits than they did in operating profit!

So where does that leave us? Well, you probably aren't sufficiently well-heeled to buy a coal refining plant as a personal tax shelter. But the code is full of literally hundreds of ways to avoid paying more than your legal duty. All you need is a plan. So call us when you're ready to save, and we promise no harmful carbon emissions!

This Is Spinal Tax

In 1984, the documentary filmmaker Marty Di Bergi scored a hit with This is Spinal Tap, a look inside Britain's loudest band and their 1982 Smell the Glove concert tour. Lead singer David St. Hubbins, lead guitarist Nigel Tufnel, and bassist Derek Smalls, were joined by a series of drummers who died under mysterious circumstances, including spontaneous combustion and a bizarre gardening accident that authorities said was "best left unsolved."

Of course, the whole thing was a spoof. "Marty Di Bergi" was really director Rob Reiner, and the band members were played by actors Michael McKean, Christopher Guest, and Harry Shearer. (Having said that, they really did play their own instruments — and yes, they really did turn the volume up to 11.)

This is Spinal Tap cost just $2.5 million to make. But it has become a cult classic, and grossed countless millions in ticket sales, home video sales and rentals, merchandising, and foreign rights. The four co-creators signed contracts giving them 40% of the movie's back-end profits, 50% of the the music receipts, and 5% of the merchandising. Yet they report getting just $179 in total income from 1984 to 2006. Now Harry Shearer, backed by the heavy duty millions he made voicing characters for The Simpsons, has spearheaded a $400 million lawsuit against the movie's owner, the French conglomerate Vivendi. And that got us wondering . . . do the fans at IRS have a stake in this particular fight?

Hits like Avatar, Titanic, and Star Wars: The Force Awakens can gross over $2 billion. Yet it's a strange Hollywood rule that as much as a movie might gross, there's never any net for back-end participants to share, never any big bottom line to share with the "talent." Return of the Jedi has earned $500 million since 1983, yet failed to show a profit. Harry Potter and the Order of the Phoenix "lost" $170 million.

How do the studios do it? Shearer and his bandmates specifically accuse Vivendi of "cross-collateralizing unsuccessful films bundled with This Is Spinal Tap." This is when a studio sells a package of films overseas that includes both stinkers and hits, and assigns the same licensing fee to each of them. It has the effect of shifting income from the hits to subsidize losses from the stinkers. Other tricks seem to date back as far as Stonehenge, like undocumented marketing expenses and other improper deductions.

Today's lawsuit isn't the first time someone has challenged Hollywood's accounting games. In 1982, humorist Art Buchwald wrote a screenplay he titled It's a Crude, Crude World. Six years later, Paramount Pictures released it as Coming to America, and credited Eddie Murphy as author. Buchwald sued for story credit and won — but Paramount argued that the movie, which grossed $288 million, still managed to lose money. Having defeated the lawyers, Buchwald wound up settling for $900,000 rather than take on the accountants.

And why would the IRS care? Well, for the most part, they don't. Studios might play accounting games that keep taxable income out of the talent's pockets — but most of that income winds up taxable to the studio or its subsidiaries. As long as the income stays here in America, the critics at the IRS still get their share.

We make no representation that we could ever help you navigate the ins and outs of Hollywood studio contracts. Fortunately, it's a lot easier to avoid wasting money on taxes you don't have to pay. Call us for a plan, and we'll see how high we can crank up the savings! 

Does Your Money Need a Passport?

Economic inequality is a hot topic in today's world. Researchers here and abroad consistently show the top 1% of earners gobbling a disproportionate share of gains throughout the world. This trend has more and more thinkers debating what to do about it. Do we redistribute the pie, so that everyone has a more equal share? Or do we grow it so that everyone can have a bigger slice? (There, we've just summed up three centuries worth of political economy in two short sentences!)
Now there's new research that shows the old research actually understates that divide. (Don't you just love when the research changes?) Last month, a team of professors published a paper that reveals another gap between the rich and the poor — the rich hide a larger proportion of their income from the tax man.
In 2015, the International Consortium of Investigative Journalists analyzed data covering 30,000 accounts and $100 billion of assets held at international banking giant HSBC's Swiss private banking department. In 2016, the same group analyzed data on 22,000 shell companies established by the Panama-based law firm of Mossack Fonseca. The professors matched the information from those leaks to population-wide tax and wealth records from Norway, Sweden, and Denmark.
Scandinavians are known for their democratic socialist philosophies, relative equality, and overall happiness. (The 2017 World Happiness Report ranks Norway first, Denmark second, and Sweden ninth.) Surely the rich people in those countries are happy to support their less-fortunate brethren through taxes, right?
Well, not so much. (With all that socialism and equality, it might surprise you to learn that there even are rich people in that part of the world.) While the overall tax evasion rate is 3% in Scandinavia, that rises to 30% for the top 0.01% of taxpayers, which includes households with more than $40 million in net worth.
How does that correlate to inequality? In Norway, previous figures had estimated that the country's wealthiest 300 families control 8% of the country's net worth. The new data suggest those families keep a full third of their wealth offshore, which means they actually control at least 10% of the country's wealth. Researchers just didn't know where it was hiding!
Over 1% of the Scandinavian families use HSBC's Swiss private banking services. Another 1% own a shell company created by Mossack Fonseca. One percent may not sound like a lot. But remember, HSBC is just one Swiss bank out of over 300, and Mossack Fonseca is just one law firm out of countless more.
The paper's authors found that, "In practice, about 95% of all the individuals on the HSBC list that could be matched to a tax return did not report their Swiss bank account." In fact, when Norway and Sweden passed tax amnesty laws letting scofflaws pay reduced penalties, over 8,000 taxpayers 'fessed up. And further, the numbers suggest that 15% of the wealthiest households have stashed at least some money abroad.
Here's some good news for those of us who live in the U.S. and don't have $40 million to worry about. Our country is actually considered a tax haven by many foreigners. That means we have countless opportunities to save taxes without sending our money on a Swiss holiday. All you really need is a plan. So call us, and see if we can help send you on vacation!

Trigger Warning: Snakes

What scares Americans most? It's not the IRS, or public speaking, or even sharks. No, the answer, as you probably guessed, is snakes. Gallup once polled 1,016 American adults, and found that fully 51% of us are afraid of the scaly, coldblooded carnivores. Snakes have been bad guys going as far back as the Book of Genesis, when the serpent tempted Eve with an apple. And they've terrorized the rest us ever since. Who can forget Samuel L. Jackson, snapping out the only line anyone remembers from Snakes on a Plane, declaring "I have HAD it with these @#$%^ SNAKES on this $%^$@ PLANE!" or words to that effect.

If you're part of that 51%, you won't be happy to hear the latest news from Mother Nature. Last month, a scientist announced he had observed a species of snake, the Cuban boa, that hunts in packs, using teamwork to catch their prey. He watched the three-to-six foot serpents join each other to hang upside down from roof of a cave to create a "curtain" and snatch bats trying to fly out. (Last we heard, he was spotted sprinting headlong away from the cave, screaming at the top of his lungs.)

If this news hasn't sent you sprinting from the room, you're probably wondering what any of this has to do with taxes. We'll confess, we took the "snakes hunting in packs" story to test our own scientific hypothesis that we can find a tax connection anywhere. And it did take a few minutes on Google. But we did it!

So . . . halfway around the globe, the world's most populous country is struggling to stamp out a pattern of petty corruption and bribery that keeps it stuck in the ranks "emerging democracies." Mother India currently ranks 79th out of 176 on Transparency International's corruption index. This puts India just behind that paragon of transparency Turkey, tied with Brazil, and ahead of the petty crooks in Albania and Jamaica.

What does that mean for daily life? Bribery in India is everywhere. Want to open a business, get a drivers license, or schedule an appointment with a doctor? Pay up. Anticorruption campaigns have helped tame the problem, including one clever effort to post Youtube videos of ordinary citizens naming and shaming corrupt officials. But old habits die hard, especially away from the capital in New Delhi.

Hukkul Khan and Ramkul Ram are two farmers from Narharpur village in Uttar Pradash, a northern state bordering Nepal. The men wanted tax records for their land, but officials refused to turn them over without the usual bribes. And Khan is known in his village as a snake charmer. So one day, the farmers showed up at the tax office with three bags full of snakes. There were about 40 in total, all different sizes and species, including at least four deadly cobras.

One state official said they started climbing up the tables and chairs. "There was total chaos. Hundreds of people gathered outside the room, some of them with sticks in their hands, shouting that the snakes should be killed." Fortunately, no tax collectors or taxpayers were harmed during the making of the farmers' stunt. Police and forest officials rounded up the snakes, and everyone who wasn't in that office had a good laugh. (As Indiana Jones said in Raiders of the Lost Ark, "Snakes . . . why'd it have to be snakes?")

No Soup for You!

November 2nd, 1995, was a delicious day in television history. That's when Jerry Seinfeld and the rest of his gang introduced us to the "Soup Nazi", a stern-looking chef who demands his customers follow his obsessive rules for lining up and ordering. The Soup Nazi didn't win any awards for customer service, but his soup was so good that customers lined up around the block for it anyway. The episode scored an Emmy for Larry Thomas, the actor who played the character. And it led to fame and fortune for Al Yeganah, the real-life "Soup Nazi" who operated a restaurant on Manhattan's West 55th Street that the character was based on.

Fast-forward to now. The Original Soup Man, based on Staten Island, has bought the rights to the Soup Nazi's name and his recipes. The company manages three locations plus an online operation, and its stock even trades on the over-the-counter market (under the symbol SOUP, naturally). But all is not well in Soup Heaven. The company faces financial problems that no amount of Lobster Bisque or All-Natural Gluten Free Lentil can solve. So the Soup Man found himself borrowing some gold "bouillion" from our friends at the IRS.

Here's the scoop. Employers are responsible for withholding income tax and payroll tax from their employees' wages. They're also responsible for spooning out their own share of payroll taxes on those wages. Employers who find themselves in financial trouble sometimes "borrow" from the IRS by failing to make those deposits. (Just until business gets better, they tell themselves. Right . . . . ) Failure to pay those taxes deprives the government of much-needed revenue, of course. And it cheats those employees out of future social security benefits.

For those reasons, the IRS is even more obsessive about collecting payroll taxes than the Soup Nazi is about ordering his soup. When employers fail to pay, the IRS springs into action. They can hold "responsible persons" with an ownership in the business or signature authority over its accounts personally responsible for payment. They'll happily hit you with penalties equal to 100% of the tax not paid. And they have no problem souping up the pressure to hold you personally liable even if you had no idea the taxes weren't being paid. (Did you just discover your payroll service made off with the money? Stinks to be you . . . ladle up!)

You can probably see where we're heading. On May 23, federal prosecutors indicted Soup Man's chief financial officer, Robert Bertrand, on 20 counts of failing to pay. They reported that from 2010 to 2014, he paid some employees in unreported cash, and others in unreported stock awards to the tune of $2.8 million. And they alleged that his actions fleeced the government out of $593,971.52.

Bertrand pled not guilty and walked out of court on $50,000 bond. But he's stewing at the thought of five years of meals in a place where the soup probably isn't very tasty. And he'll have a hard time pleading ignorance — the indictment reports that his outside auditor warned him as far back as 2012 that he needed to report those payments. (At least you can still buy the soup on Amazon.com!)

Fortunately for the rest of us, there's no need to risk years of watery, tasteless soup in order to pay less tax. You just need a plan. That's where we come in, and we can promise better service than the Soup Nazi. Call us when you're ready to discover our recipe for Savings Gumbo!

Hitting a Tax Gapper

Summer is almost here, and sports fans across America have a lot to look forward to. Basketball's 13-month-long season is (finally) starting to heat up. Hockey playoffs are coming to a close. Baseball is in full swing, and NFLers are about to report to training camps. Stop at any bar or water cooler in the land, and you'll hear talk of wins, losses, and plays that you just have to see.
Fans and analysts have all sorts of statistics they can use to measure (and argue about) their teams' performance. "Turf investors" have relied on The Daily Racing Form for over a century. Baseball is famed for legions of "sabermetricians," who obsess over statistics like WAR (Wins Above Replacement), BABIP (Batting Average on Balls in Play), and LWCT (Largest Wad Of Chewing Tobacco). Football and basketball too, even hockey, all lend themselves to measures far beyond the mere score at the end of the game.
But there's one more sports statistic we might need to evaluate our favorite team by, and that's SITR (State Income Tax Rate).
Erik Hembre is an Assistant Professor of Economics at the University of Illinois at Chicago. He's just released a paper titled "Income Taxes and Team Performance: Do They Matter?" (He's also probably lined himself up a sweet gig with a struggling team somewhere if the whole "assistant professor" thing doesn't work out.)
Hembre started his analysis with win-loss records from the last 40 years of the "Big Four" professional sports. Next, he added data on state top marginal income tax rates. Finally, he regressed the tax rates through the win percentages to estimate their effect, using the following equation:

Y_it = β₀ + β₁π_it + β₂X_it + ε_it

So the winning percentage Y_it for team i in year t is a function of . . . you know what, just the sight of those Greek letters probably makes your head hurt too, so let's just skip it!
Here's the final score: "state income tax rates significantly impact team performance." In the NBA, where the tax effect is greatest, moving a team from high-tax Minnesota to tax-free Florida should yield 4.7 more wins per year. That's the equivalent of swapping a mediocre benchwarmer for a 2015 version of Draymond Green. In baseball, where there's no salary cap and the tax effect is lowest, the same move would still add 1.6 Ws per year. And this effect is accelerating over time as free agents gain more mobility across teams.
Why would state tax rates matter? Hembre speculates that low rates make it easier for teams to bid for players. State rates range from zero to 14%. But after players have paid agents, managers, and federal taxes, "the effective rate of state taxes may be more than twice as high as the nominal rate."
You may not think you have a lot in common with athletes weighing seven- and eight-figure contracts. But when they look at state income tax rates to compare offers, they're doing tax planning. And you can do that same sort of planning yourself, even without those offers. So call us when you're ready to play ball, and let's see if we can help you hit a grand slam!

"And the Award Goes To . . . ."

Right now, all across America, thousands of talented youngsters are dreaming of careers in performing arts. Whether they aspire to be the next Meryl Streep, or Taylor Swift, or Lin-Manuel Miranda, they understand the odds of success are long. But they still dream that one day they'll find themselves in the audience at the Oscars, the Grammys, or the Tonys, waiting with their hearts in their throats as a tuxedo-clad presenter opens an envelope and reads their name.

At the same time, thousands more Americans grow up dreaming of careers in law enforcement. These future Elliot Nesses aren't looking for the red carpets or glamour of Hollywood. But there are awards waiting for the best of them, too. And this year, our friends at the IRS are basking in those bright lights.

The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Treasury dedicated to protecting the financial system's integrity. Every year, it hosts a Law Enforcement Awards ceremony at the Treasury's headquarters. The program includes awards in six categories: suspicious activity reporting, transnational organized crime, transnational security threats, cyber threats, significant fraud, and third-party money laundering. (Six awards should make for a much shorter awards show than the Oscars, even after allowing time for the musical numbers!)

This year, incoming Treasury Secretary Steven Mnuchin hosted the awards for the first time. (No word on whether paparazzi quizzed him about his outfit, but we suspect not.) And when he opened the envelope for the cyber threat category, the it was the IRS Criminal Investigation unit that took home the trophy, for its work leading the multi-agency task force that took down the Silk Road online marketplace.

Technology has disrupted all sorts of industries. Just look at what Uber has done to taxi cabs! So it shouldn't come as a surprise that innovators have disrupted the neighborhood drug dealer, too. It all centered on a site called the Silk Road, where buyers and sellers connected to buy drugs like methamphetamines and marijuana. Buyers used "the onion router," or TOR, to mask their IP addresses. They paid in bitcoin to hide their sources and even gave dealers "star ratings" like they would praise a local deli on Yelp.

Unfortunately, the high-tech pharmaceutical retailers lining that silk road had to rely on the decidedly old-school Postal Service, founded back in 1775 by Benjamin Franklin, to deliver the goods. Postal inspectors discovered that as many as 435 suspicious packages had come from the same place. The IRS-led task force then secured the necessary warrants, intercepted shipments, and made their case. (Ruh roh.)

Ironically, the targets pled guilty to drug crimes and money laundering, not tax crimes. That's not unusual, though — IRS special agents regularly lends their expertise to non-tax investigations. It's also worth mentioning that this was the first case in this particular district where money laundering charges were based on bitcoin transactions, which shows how law enforcement keeps up with developments in crime technology.

The odds that you'll find yourself on the receiving end of a FinCen Law Enforcement Award are probably as long as your odds of someday accepting an Oscar. But if you haven't done your planning, the odds are good that you're paying more tax than you have to. So call us when you're ready to pay less. You'll be glad you did, even if there's no red carpet waiting for you!