Superheroes of Tax

Last weekend, Hollywood made history. Disney's three-hour popcorn epic, Avengers: Endgame sent box-office records scrambling in panic, grossing $350 million here in the U.S. And $330 million in China. And $600 million more in another 43 countries. It's the first movie to top a billion dollars in its opening weekend. Endgame still has a long way to go before it catches Gone With the Wind, which made $3.4 billion in inflation-adjusted dollars. But did Scarlett O'Hara gross a single dollar in action figures, video games, or happy meals?

This isn't going to be one of those stories where we say, "Hey, let's look at taxes in the Marvel Universe!" We have no idea how payroll works in Wakanda. We couldn't tell you the first thing about import duties on Vibranium. And we don't really care if Thanos of Titan is reporting all his income to the proper taxing authorities. (He's not our client!)

Surely, though, there were plenty of tax collectors in the audience swelling this weekend's box-office gross. And they should be as happy as anyone, because they'll be claiming a pretty nice share of it all!

Start with the real stars of the movie. We're talking about the CGI artists who generated over 3,000 visual effects shots. (Director James Cameron's company even created an entirely new facial-capture application called Masquerade specifically for James Brolin to play Thanos.) VFX work is time and labor intensive, so most of that budget goes to the animators, directors, and other technicians who work behind the scenes to make the magic happen. Much of that money, in turn, finds its way into Uncle Sam's pocket, and far faster than it takes Thor to find his way back from Asgar.

Unfortunately, producers were forced to hire pricey people for situations like "dialogue" and "character" where special effects wouldn't cut it. Robert Downey, Jr., who earned just $500,000 for his first Iron Man movie, will take home north of $50 million. Middle-tier stars like Chris Evans, Chris Hemsworth, and Scarlett Johansson earned a reported $15 million each. All of that is taxed as ordinary income, with 37% going to Uncle Sam, 3.8% going to Social Security and Medicare, and 13% going to California.

Disney spent $356 million to make the movie, along with millions more to market and promote it. In Hollywood, the accountants are nearly as creative as the directors and writers, so the studios usually find a way to show a loss. But $1.2 billion in a single weekend may be a little harder to defeat than the usual gross, and if Endgame does show a profit, the studio will pay the usual 21% corporate tax.

At the end of the last Avengers movie, Thanos collected all six of the Infinity Stones and snapped his fingers to wipe out half the Universe's population. (Not a spoiler . . . you've had time!) Google celebrates that moment today with a Thanos "Easter Egg." Just go to Google, type "Thanos" in the search bar, and hit "enter." Then look for the jewel-covered glove, called the Infinity Gauntlet, in the upper-right corner. Click it, and you'll see half the search results magically disappear from the page.

But . . . and we're just spitballing here . . . what if you could "Thanos snap" your fingers and make half your taxes go away? Well, we may not have any Infinity Stones in our pockets. But we do have an ensemble cast of concepts and strategies to put to work to help you pay less. A captive insurance company can be every bit as good as the Power Stone, for the right business, and a charitable remainder trust can be as illuminating as the Soul Stone. So call us after the movie lets out, and take a look at our special effects!

Pied-a-Terrible!

When it comes to raising revenue, governments usually find it most efficient to follow the immortal advice of bank robber Willie Sutton and go "where the money is." They turn to income, payroll, property, and sales taxes to fund most of their operations. They'll throw in the occasional gas tax or sin tax for fun. Most of the time, those "nuisance taxes" don't amount to much. But that's not always the case.

In 1989, New York state imposed a so-called mansion tax, a flat 1% on home sales of $1 million or more. Now the state has "remodeled" that tax, adding seven new brackets for sales in New York City beginning January 1, 2020. The rate increases to 1.25% on sale amounts from $2-3 million, 1.75% on amounts from $3-5 million, and steps all the way up to 4.15% on amounts over $25 million. Officials expect the new tax to raise $365 million per year, and plan to use it to finance $5 billion in bonds for public transportation.

So far so good, right? Well, for starters, should a tax on million-dollar homes really be called a "mansion" tax in the first place? Maybe that was true when the Empire State first levied it in 1989. But these days, a million bucks isn't even "mansion-adjacent," especially in Manhattan. Right now, you can pay $1,499,000 for a 52nd-floor alcove studio in Hell's Kitchen. (Hell's Kitchen!) There's no separate bedroom, of course. Not even a bathtub! But the bathroom has a very nice marble-lined shower.

Of course, some pads really do qualify as "mansions." Hedge fund manager Ken Griffin just dropped $238 million for a penthouse at 220 Central Park South, an oligarch-friendly tower on "billionaire's row." Griffin's new pad includes 23,000 square feet sprawling over four floors, with 16 bedrooms and more bathrooms than your mansion. It's the most expensive home sale in U.S. history — and Griffin plans to use it as "a place to stay when he's in town" for business. (How's that for "let them eat cake" moments in American history?)

The extra tax would have cost Griffin $7.2 million if he had waited until next year to buy. Sure, that sounds like a lot to you. But Forbes estimates Griffin's net worth at $11.8 billion, meaning it probably wouldn't have stopped the deal. (The place comes unfinished, meaning he'll have to spend tens of millions more before he can unpack his toothbrush!)

Griffin isn't the only plutocrat buying pricey real estate he won't be occupying. So many deep-pocketed foreigners have decided to stash part of their gains in Manhattan condos, without ever moving in, that some high-end buildings stand nearly dark at night. The city even floated a "pied-a-terre" tax for those part-time residents using those condos as safe-deposit boxes without pouring anything else into city goods and services.

Pied-a-terre tax fans pointed out the politically convenient fact that part-time residents don't vote in New York, which makes it easier to pluck them without making them squawk. But ultimately, real estate insiders shot it down as class warfare. They objected that it would be too hard to determine which owners are truly absentee and deserve to get hit with the tax. And they argued, quite reasonably, that out-of-towners buying $5 million condos aren't taking up space on city buses and subways.

We don't care if you live in a mansion, an apartment, or a van down by the river. We're pretty sure you don't want to pay more than your legal fair share. That's where our tax planning service comes in. So call us and see how much you might save. You might free up enough to spend some seriously fun weekends in the city!

A Song of Fire and Taxes

Sunday night, millions of Game of Thrones fans who waited breathlessly for 20 months finally got rewarded with their next installment what's become the biggest TV show on the planet. Cersei discovered (redacted). Jon Snow learned that .... (sorry, no spoilers here). And that guy with the eye patch and flaming sword probably does great on Tinder. (Seriously, what fair maiden wouldn't swipe right on him?)

Last week, we speculated about how taxes work in Game of Thrones and concluded there are two groups of winners, at least as far as taxes are concerned. The first are the governments collecting taxes from the show's creators, cast, and crew. The second are those collecting taxes from tourists visiting the show's spectacular filming locations, like Spain's Alcazar Palace or Gaztelugatxe. (Remarkably, not a typo.) But there's another important lesson worth spending a second week on. (If you're not a fan, don't worry, we're not turning this into the Westerosi Weekly Tax Journal.)

Thrones creator George R.R. Martin modeled his fictional Seven Kingdoms after England during the Wars of the Roses. So taxes probably work in conventionally feudal ways. Smallfolk kick up to their lords in the form of currency, crops, or labor. The lords kick up a share to the great houses, and the houses kick up a share to the crown. If it all sounds like something out of "a certain Italian-American subculture," it should — remember, Thrones producers originally pitched their epic as "the Sopranos in Middle Earth."

But can taxes alone be enough to sustain a group of squabbling kingdoms against a more existential threat? Martin's characters spent seven seasons fighting amongst each other to make it to this week's premier. (Well, at least the few dozen who survived the first 67-episode slugfest of death.) Now they're facing a common enemy from the north. The Army of the Dead has lain low for thousands of years. Now they're marching south, and the night is dark and full of terrors. A man wants to know, how do you kill an army of soldiers who are already dead? (This isn't going to end well, is it?)

The Westerosis are going to need everything they can find to battle those enemies. They know that Valyrian steel, dragonglass, and actual fire-breathing dragons can destroy White Walkers. They've also got wildfire, the deadly green liquid that can engulf an entire navy or a portion of an ancient stone city with the spark from a single candle. We don't know for sure if wildfire kills the undead, but it certainly can't be good for them.

Are you one of those fans who likes guessing what comes next? (Who's going to sit on the Iron Throne when the series closes forever on May 19? Danaerys? Arya? Hot Pie?) If so, you've probably guessed we're using all of this to draw a metaphor. Taxes are like the White Walkers, advancing from the north to slow down your financial progress. And if you're like Jon Snow, you know nothing about strategies to pay less. You don't have Valeyrian steel, dragon glass, or wildfire.

But what we can give you is an ever-expanding menu of concepts and strategies to slow or stop the White Walkers of unnecessary taxes. If you want to pay the legal minimum, you need someone who speaks "taxes" as fluently as Danaerys's translator Missandrei, who can say "loophole" in 19 different languages. Are you selling a business and looking at a seven-figure tax bill? We've got the dragonglass for that. Looking to maximize your real estate depreciation deductions? We've got your Valyrian steel. So when you're done watching Thrones, call us to put our wildfire to work!

Game of Taxes

On April 14, millions of fans will gather around the biggest screen they can find for the start of one final season in Westeros, the setting of George R.R. Martin's epic Game of Thrones. The show, which producers pitched as "The Sopranos in Middle Earth," has leaped from television into the broader culture. In 2013, 241 babies were named "Khaleesi" after the title Danaerys Targaryen takes by marrying the Khal Drogo. UC Berkeley offers a class in "invented languages" featuring Dothraki, which sounds like what you'd get if you mixed Spanish and Arabic and ran it through a wood chipper.

Martin doesn't tell us much about how taxes work in Westeros. And HBO certainly isn't interested in exploring those details — how would they find time between introducing 257 major characters in Season One and killing most of them off in increasingly cringeworthy fashion through the next six seasons? But fortunately for us, the series leaves occasional bread crumbs to help us understand whether the show's tax collectors worship the lord of light or the lord of darkness.

The Iron Throne's principal tax man is Lord Petyr "Littlefinger" Baelish, the King's urbanely oily Master of Coin. (Picture Treasury Secretary Steven Mnuchin, but with chainmail and some super-sketchy side gigs.) Apparently, collecting taxes is just another entrepreneurial opportunity for Littlefinger. In Clash of Kings, Martin writes, "Ten years ago, Jon Arryn had given him a minor sinecure in customs, where Lord Petyr had soon distinguished himself by bringing in three times as much as any of the king's other collectors."

Sadly, Littlefinger's greediest efforts aren't enough to satisfy King Robert Baratheon's lust for wine and tournaments. Baratheon spends down the surplus left by the Targaryens, then borrows millions of golden dragons from the House of Lannister and the Iron Bank of Braavos, Westeros's version of the International Monetary Fund. We don't know how much interest Braavos charges — but if you default, they don't just send swordsell goons to break your legs. They finance a rival power, then collect when the rival overthrows you!

As for those scheming Lannisters, we know "a Lannister always pays his debts." But do Lannisters always pay their taxes? Or do they cleverly avoid them? In Season Three, Lord Tywin Lannister imposes a penny tax on brothels, called "the dwarf's penny," to boost public morals and pay for Joffrey's upcoming wedding. Now, come on . . . is there any idiot in any village in Westeros who doesn't see through that blatant attempt to shift the burden from the 1% to the commoners? Discuss.

In the end, the show's biggest winners may be the real tax collectors across the world. Series creator George R.R. Martin earns a reported $25 million per year from HBO and book royalties. Thrones tourists have pumped millions more into the show's real-life filming locations, including Northern Ireland and Dubrovnik — a Croatian city most fans had never heard of before they saw it standing in for King's Landing. We can assume that all of their governments are happy to collect their share of all those Thrones dollars raining down like flaming arrows.

If you're like most "Thronies," you'd love a dragon of your own to ease your path to the top. (Or do you worry the King would find a way to tax them, too?) Fortunately, you don't need a fire-breathing reptile to keep more of your golden dragons. You just need a plan. So call us when you're ready to escape the King's yoke, and see how glorious a castle you can build with the savings!

Nobody's Perfect

Nobody really likes to pay taxes. It’s no surprise, then, that so many people work so hard to avoid them. As humorist Fran Lebowitz once said, “a dog who thinks he is man’s best friend is a dog who has obviously never met a tax lawyer.” Truly proactive tax professionals like us understand that you don’t just want to know how much you owe. You want us to use the ins and outs of the tax code to help you pay less.

And so this week’s episode of Beat the Tax Man takes us to David Burbach, a municipal swimming pool consultant and designer from warm, sunny Wisconsin. Now you might think that cash-strapped local governments would rather pay for sewer systems or orange barrels than swimming pools. But Burbach is clearly good at his job — he’s designed over 600 pools nationwide. Naturally, that’s led to some big personal income tax bills. Burbach had also started worrying about legal sharks feasting on his riches if one of his pool designs were to fail.

Burbach’s search for asset protection and tax relief led him to an accountant named George Eldridge, who marketed himself as more than your run-of-the-mill, numbers-in-boxes kind of guy. Eldridge presented himself as a bare-knuckle brawler, gleefully taking on the IRS on his clients’ behalf:

“Are you a Beleaguered American Taxpayer? Is the Grizzly Bear {the IRS} feasting sumptuously in [sic] your money that you have earned by work? * * * Are you ever going to use Rule of Law to stop paying maximum taxes to the Grizzly Bear? Do you have the heart to use Rule of Law through me? * * * What is your decision?”

Burbach is an engineer by training, and he probably would have done more homework if he were buying a used Volkswagen Jetta. But he dove right in and agreed to pay Eldridge $12,000 per month for his protection.

Eldridge set up one corporation to hold Burbach’s business, another to hold his real estate, a third corporation that never seemed to serve any purpose, and a nonprofit corporation to hold Burbach’s collection of historic Ford cars, trucks, and tractors. (The goal was to open a “museum” that would be open from 8AM to 10AM, weather permitting, during summer months, only. Uh, right.) Eldridge also formed a defined benefit pension plan based on “director’s fees” from his corporation.

Now, corporations, nonprofits, and defined benefit pension plans are all perfectly legitimate tax-planning tools. Unfortunately, Eldridge’s follow-through didn’t hold water. For starters, he never even bothered filing Burbach’s taxes! (Eldridge told him that corporations have six years to file.) Burbach’s empty promises led Burbach down a path that might have been funny if he hadn’t wound up in court.

Burbach had to know he was going to get doused with taxes. However, he argued he had reasonably relied on Eldridge’s advice, so he should avoid penalties for Eldridge’s failures. Tax Court Judge Holmes opened his opinion on Burbach’s claim by quoting from Professor Harold Hill of The Music Man. And you can probably guess that quoting a fictional con man isn’t a good sign for the taxpayer.

This week’s story offers all sorts of lessons. But the most important one is something you learned long before you knew about taxes: if it sounds too good to be true, it probably is. So don’t be afraid to challenge us to show you the receipts. You’ll wind up paying less tax and sleeping better, too!

Change of Address

Moving to a new home can mark an exciting transition in life. Maybe you've just gotten married and you're settling into a real house after a series of walk up apartments. Maybe your children are finally out of the house and you're trading four bedrooms and a suburban backyard for lofty downtown sophistication. Maybe you're ready to retire and opt out of snowy winters for good.

Moving is also a monumental pain in the butt. We're not just talking about packing up and sorting through years (decades?) of accumulated stuff. We're talking about the practical details of changing your address with everyone from the bank to your car registration . . . including, of course, your Uncle Sam. If you don't dot your i's and cross your t's, you can wind up in a fair amount of trouble. And so this week's story takes us deep into the weeds of something you wouldn't think the IRS needs to argue about: the all-important "last known address."

Damian and Shayla Gregory moved from Jersey City, NJ to nearby Rutherford on June 30, 2015. For some reason, they filed their 2014 tax return from their old address in Jersey City. Then they won the lottery. Unfortunately, it wasn't the Powerball, it was the audit lottery. And they didn't win the $7,000 per week for life they were hoping for — they won a demand for more tax!

While the IRS was auditing them, the Gregorys filed a power of attorney and extension to file their 2015 return from the new address. Now, you'd think that would be enough to put the IRS "on notice" that they had moved. Sadly, you would be wrong. And so, with the audit over, the IRS sent their demand to the Gregory's old address in Jersey City. (The Post Office returned it as undeliverable.) The Gregorys finally learned about the deficiency three months later. They filed a petition challenging it in Tax Court literally that same day. But the IRS told them no dice.

Naturally, the IRS has miles of red tape governing all of this. 26 CFR §301.6212-2 defines "last known address" as the one that "appears on the taxpayer's most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address." Rev. Proc. 2010-16 goes on to list the forms that qualify, and states clearly that the power of attorney and extension don't count. Even the instructions for those forms say you can't use them to change your address. And so the Tax Court ruled for the IRS.

The Gregorys weren't completely off-base asking the IRS for a break. Courts have said that if the IRS knows a taxpayer has moved, they should exercise due diligence to find them, even if they haven't given notice. Having said that, last October the Tax Court ruled the IRS didn't have to sic the bloodhounds on Daniel Sadek, a California subprime lending "mogul" who racked up $25 million in tax deficiencies before fleeing his "last known address" in California to ride out an FBI investigation in Beirut. (Nothing suspicious about that move, right?)

Here's the broader lesson from this week's story. Beating the IRS starts with big-picture strategies like choosing the right business entity, finding the right benefit plans, and taking advantage of code-based savings strategies. But concepts and strategies aren't enough. Implementation is the key to putting them to work, and you can't overlook the details. So call us when you're ready to work the system and let us put those strategies to work for you!

AP Fraud

Early on a Tuesday morning, FBI agents fan out across the country to arrest dozens of people in six states on racketeering charges and other offenses. The next Gambino family mob "rollup"? No, it's "Operation Varsity Blues" — the newest celebrity scandal, featuring CEOs and Hollywood stars bribing their children's way into competitive colleges! And, like with most good scandals, there's a tax angle lurking underneath the juicy gossip.

Some of our most successful CEOs never finished college. The list includes Bill Gates, Steve Jobs, Mark Zuckerberg, Russell Simmons, and dozens more. Astonishingly, millions of Americans manage to find happiness and success in life without ever going to college at all! But competition for spots at top schools grows ever more intense (Stanford University's acceptance rate is down to one out of twenty.) That's forced striving students to up their game . . . so is it any surprise their striving helicopter parents are upping their game, too?

This week's story starts with a former teacher named William Singer, who established a college counseling business called "The Key" and a nonprofit called Key Worldwide Foundation. The Key may have been a legitimate-enough service for affluent families who wanted a regular dose of rigging the system. But parents who were willing to pay for VIP-level rigging could make "charitable" contributions to the foundation, which Singer used to bribe test administrators and college coaches. Singer bragged that he had helped 761 families open what he called a "side door" into top schools.

In one case, actress Felicity Huffman shamelessly "donated" $15,000 to Singer's foundation to doctor her daughter's SAT results. (Huffman is currently free on $250,000 bail.) In another, Lori Loughlin, who played Aunt Becky in the critically-acclaimed drama "Fuller House", paid $500,000 to market daughters as rowing team recruits at USC. Of course, neither girl would recognize a scull if you knocked her over the head with it. (Loughlin is free on $1 million bail — bigger bribe = bigger bail.) Both families should probably tell their accountants to expect correspondence from the IRS about those bogus charitable deductions.

Ironically, the Tax Code includes plenty of legitimate breaks for financing college costs. Scholarships and fellowships are generally tax-free. There's the American Opportunity Credit, the Lifetime Learning Credit, and an above-the-line deduction for student loan interest. The problem, of course, is that none of those breaks help you get in to that pricey school in the first place! (You can't even deduct your kids' SAT test-prep fees.)

As for Singer, he's been cooperating with feds since September. He pled guilty just hours after the story broke, and it looks like the Justice Department has all the receipts they need to lock down more convictions. That's typical for federal prosecutors, who don't bring charges until they have a stack of evidence tall enough to stand on and change a light bulb. Coaches and even some of the parents have been fired, too.

So, how hard are you working to get your kids into college? It used to be enough just to schlep them from soccer games to violin lessons to test-prep classes. Now you've got to start committing felonies, too? Are you sure Olde Ivy is really worth it? Fortunately, you don't have to commit any crimes to put smart tax planning to work to pay for it, wherever they go. You just need a plan. So call us when you're ready to ship the kids off to school, and let us help you save enough to throw a party when they graduate!