Accounting News Roundup: EY and Facebook; Tax Exemptions for the Dead | 07.08.16

EY and Facebook

The Department of Justice sued Facebook yesterday to "enforce IRS summonses" related to the company selling its rights to intellectual property to an Irish subsidiary.

The lawsuit said that in 2010 Facebook Inc sold the rights to exploit the Facebook platform outside the United States and Canada to Facebook Ireland Holdings.

The price used for the intangible property was determined by Facebook's tax adviser Ernst & Young (E&Y).

"The IRS examination team's preliminary positions suggested that the E&Y valuations of the transferred intangibles were understated by billions of dollars," the lawsuit said.

Facebook Ireland Holdings then leases the rights to its own subsidiary, Facebook Ireland Ltd., that is the company's "main international business unit." This cuts Facebook's tax liability quite a bit, of course, as Ireland's tax rate is 12.5% compared to the top US corporate rate of 35%. But there's also a way to bypass all that, too:

U.S. technology companies sometimes don't even have to pay the 12.5 percent Irish corporate tax rate.

They frequently take advantage of a quirk of Irish tax law which allows companies to designate an Irish registered company as being tax resident elsewhere — an arrangement tax professionals have termed a "double Irish".

This involves the rights-holding company being designated as tax resident in a tax haven. However, since the companies concerned are Irish-registered, the transactions don't trigger a U.S. tax bill.

The most amusing thing, IMHO, about this tax arbitrage stuff is that this coverage basically amounts to free marketing for EY. If you're a tech company with a lot of intellectual property, you've probably heard about the structures that Google, Amazon, Facebook et al. have put in place to reduce their tax liability. If your company is the next big thing, you just ring up EY and say you want the same deal. Then when people start sniffing around and see that you're moving a lot of IP to your Irish subsidiaries to avoid taxes, you can easily claim that it's done in full compliance "with all applicable rules and regulations in the countries where we operate." It will take governments years to untangle their tax laws and close the loopholes. Meanwhile, these companies save billions year after year in taxes and EY has a solid revenue stream until the tax laws catch up. By that time, some enterprising tax partner has already found the next best thing. It's quite a cycle.

Tax exemptions for the dead

Oops:

[New York City] has lost out on $59.2 million in revenue since 2011 — mostly because the Department of Finance gave property- tax exemptions to dead people, a new audit says.

Comptroller Scott Stringer, who released the findings, said his auditors analyzed a program called the Senior Citizen Homeowners’ Exemption (SCHE), which reduces property taxes for homeowners over 65 who earn $37,400 or less a year.

Seniors who qualify for that program also qualify for the Enhanced School Tax Relief (STAR) Exemption, which exempts the first $62,200 of the value of a home from school taxes.

Stringer said the city’s Department of Finance is supposed to check every two years whether homeowners are still eligible — but went 10 years without requesting owners to certify they were alive and qualified.

Over 3,000 properties received the exemptions in error. Comptroller Stringer thinks that by the time they uncover all of them, the estimated lost revenue will be closer to $100 million.

Accountants behaving badly

Awhile back, we mentioned Billings accountant Michael Leonard Wombolt who stole more than $166k from his clients. Wombolt named his firm A+ Accounting and Consulting, which should've been a red flag, yet he was named top accountant by readers of the Billings Gazette while he was defrauding clients. Yesterday, US District Judge Susan Watters sentenced him to 5 years probation and 250 hours of community service.

“I’m very very sorry for doing what I did. It just spiraled out of control,” Wombolt told the judge.

Wombolt said he had no excuses and pledged to pay back all the money he stole.

“So why did you do it?” Watters asked him.

Wombolt answered that he was in financial trouble and needed to pay his employees. He also said he understood “the pain and whatnot” his victims are experiencing. “I truly, truly apologize. Sorry,” he said. 

Call me cynical, but how can the "top accountant" be in financial trouble? Was he not charging his clients enough? What was he paying these employees? Besides that, what is this?

The judge also said a pre-sentence report indicated that Wombolt had a pattern of mismanaging his own finances and had been repeatedly bailed out by his parents.

And while Wombolt had family support, some family members also told the probation officer that he had an attitude of entitlement for much of his life, Watters said.

If this is the best accountant in Billings, then I suggest one of you start a firm up there. Sounds like the bar is pretty low.

Previously, on Going Concern…

We kicked off the RSM compensation thread. Megan Lewczyk wrote about the cloud business model. And in Open Items: Taking the CPA exam internationally.

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