Category: Tax

Berkshire Hathaway: Wall St. Journal Is Wrong About Our Taxes on Bank of America Deal

Last week, folksy octogenarian (81 years today!) billionaire Warren Buffett announced that he was going to invest $5 billion in Bank of America. Some are questioning The Oracle’s intentions with this investment but considering WB came up with the idea in a place where all good ideas originate – the tub – it’s plausible that this investment will turn out okay for Berkshire shareholders (isn’t that the point?).

Regardless, some don’t think a guy who says that he doesn’t want to be “coddled” and needs – nay, WANTS! – to pay higher taxes shouldn’t be throwing around money and should just put his money where his Blizzardhole is. Accordingly, The Wall St. Journal published an editorial today accusing Buffett of being a little dodgy when it comes to Berkshire’s tax liability as it relates to his BofA investment.

Mr. Buffett’s recent decision to invest in Bank of America represents another tax-avoidance triumph for the Berkshire chief executive. U.S. corporations are subject to a top federal income tax rate of 35%, the second highest in the world. But the Journal’s Erik Holm notes [Ed. note: Thanks for linking!] that Mr. Buffett and the Berkshire bunch won’t pay anything close to that on their investment in BofA preferred shares.

That’s because corporations can exclude from taxation 70% of the dividends they receive from an investment in another corporation. This exclusion is intended to prevent double- or even triple-taxation as money is earned by one company, paid to another company and then ultimately paid out to shareholders. The policy makes sense; we only wonder why the exclusion isn’t 100%.

With the 70% exclusion for Mr. Buffett and his fellow shareholders, Berkshire will enjoy an effective tax rate of 10.5% on the $300 million in dividends it will receive each year from Bank of America.

So, a 10.5% effective rate. Not bad, right? Well, Berkshire says it’s wrong and issued a brief press release to rebut the Journal’s op-ed account and not so subtly suggests that they bone up on tax law:

An editorial in today’s Wall Street Journal says that “Berkshire Hathaway will enjoy an effective tax rate of 10.5% on the $300 million in dividends it will receive each year from Bank of America.” That statement is incorrect.

Virtually all of the stocks that Berkshire owns are held in its property-casualty subsidiaries, and that will be the case with the Bank of America preferred.

The tax treatment for dividends paid by U.S. corporations to property-casualty insurance companies was materially changed by a law passed in 1986. The changes were described in detail in the chairman’s letter included in Berkshire’s 1986 annual report.

A minor change in rate was made in 1993. Since that time dividends that insurers receive from U.S. companies incur an effective tax rate of 14.175%. For Berkshire, that rate will apply to dividends it receives from Bank of America.

So, in other words, suck it editorial board. If you know Buffett like you should know him, then you know that if he could save that 3.675%, he would.

Buffett’s Latest Tax Break [WSJ]
Berkshire Hathaway Inc. News Release [Business Wire (a Berkshire Hathaway Compay!)]

Deductible or Not Deductible: Bartender Refuses to Serve Drunk; Drunk Slashes Bartender’s Tires (Allegedly)

As you know, we like to check in on our friends across the pond every once in awhile to remind them about Valley Forge and whatnot and to see if they have managed to straighten up. There are problems aplenty for accountants in the UK and some of the strangest ones are shared with the peanut gallery over at AccountingWEB UK. Today’s problem is kind of fun because it may be one that many of you have been privy to.

I think I know the answer to this but will put it out there anyway.

Publican [Ed. note: that’s the landlord of a pub for the Yankees out there.] refused to serve a “customer” drink on Saturday night. The publican found his 4 tyres slashed after closing time.

Tax deduction?

To me, this seems like one of those situations that qualify as “the cost of doing business” (i.e. that’s life) and thus, not deductible. Think about it. You’re a bartender. You deal with assholes. Often times, these assholes get drunk. It’s your job as a bartender to take note when one of these assholes is drunk and refuse said asshole any further service. Since assholes don’t like being cut off (been there myself a time or two) this is usually taken personally and bad decisions end up getting made (e.g. attempt to walk to another bar, awkward sexual advances, vandalism).

Now, our publican friend would gladly trade any potential tax deduction for the chance to catch the guy who slashed the tires but that ship has sailed. My thinking is that he’s just going to have to let this one go. Other opinions? Fire away.

Texas ‘Pole Tax’ Gets Called Back to the Stage

[T]he Texas Supreme Court on Friday gave state officials the go-ahead to continue collecting a special $5-per-customer tax on strip clubs. The so-called “pole” tax, collected upon entrance to any club that features nude dancing and alcohol consumption, was ruled unconstitutional by a state district judge in Austin and the 3rd Court of Appeals. The law was passed by the Texas Legislature in 2007, and so far about $15 million has been collected. The money has not been disbursed because of the earlier court rulings. [HC via DMWT, Earlier]

A Romantic Tragedy: The Iowa Film Tax Credit Scandal

Once upon a time a little farm state was feeling sad. The state wasn’t poor. It wasn’t lonesome – strange, handsome and glamorous men were always courting her – but something was missing. What could it be?

Then a man whispered in her ear: you need glamor! And it’s in your grasp!

The little state blushed. “How can I, a little farm state, be glamorous like Hollywood?”

The man said: “You can buy glamour!” And he burst into song:

You’ve got glamor
Right here in River City!
Movies start with cash;
If I can be so brash;
Give me some tax credits!

So the smitten little state gave the man transferable film tax credits. She was so excited about glamor, she gave the tax credits away freely, and the glamor came:

We’ve relied on caucuses every four years to bring action and celebrities to town. Now, sightings are anytime, any place.

But something was wrong. The little state sensed amid the cocktail party laughter that the glamorous were laughing at her, not with her. She noticed that the glamorous people were driving away with shiny new cars that she was paying for. And she noticed that the tax credits were getting rather expensive.

So she cut off her tax credits. This made the glamorous people mad, and some of them sued her. But she caught some of the hapless glamorous people and had them locked up. She made the man who whispered in her ear about film credits confess that he had done a bad thing. She got mad at the man who handed out the tax credits for her and tried to put him in jail.

So the little state is sadder, but perhaps wiser. Which has an attraction of its own:

I flinch, I shy, when the lass with the delicate air goes by
I smile, I grin, when the gal with a touch of sin walks in.
I hope, and I pray, for a Hester to win just one more “A”
The sadder-but-wiser girl’s the girl for me.
The sadder-but-wiser girl for me.

The moral of our story? If you fund it, they will come. And loot your purse. And laugh at you.

Don’t Think You Can Just Go Around Lying About the Taxpayer Protection Pledge and Not Expect Americans for Tax Reform to Have Their Feelings Hurt

A large portion of the populace probably thinks that Americans for Tax Reform president and co-founder Grover Norquist – and by extension, all of ATR – is an ideological, tax-hating, meanie. Sure, he tracks the bagels and coffee consumption at meetings and sure, he might let terrorists have their way with our grandmothers if the chips are down but that’s just holding true to his principles of austerity. Plus, he’s down with Elmo and gives the green light to cheeky blog posts, so you know he’s got a soft spot and a sense of humor.

So when someone says something mean about ATR or the Taxpayer Protection Pledge, it cuts. It cuts deep. And when someone running for public office has the audacity to lie about the Taxpayer Protection Pledge, that’s when things have simply crossed the line to the point of no return.

Case in point – Kate Marshall, who is running for Congress in Nevada’s 2nd District said the following about her opponent Mark Amodei:

“He signed a tax pledge which basically says no tax loopholes shall be left behind,” Marshall said. “He shall never turn down a subsidy, shall never close a loophole.”

Well, this little statement got a few knickers in a twist over at ATR and they pulled a quote from Factcheck.org to prove Marshall wrong:

ATR’s tax pledge does protect corporations in general — but only from an overall increase in taxes. It says nothing about jobs at all. More important, it does not rule out an overhaul of the tax code. Signers agree to oppose any “net” reduction of deductions or credits “unless matched dollar for dollar by further reducing tax rates.” […] That leaves ample room for elimination of any number of special tax breaks so long as the overall level of taxation is not increased. To claim that this “protects” any particular provision of the tax code is simply untrue.

So now, Grover and Co. would like Kate Marshall to apologize for this blatant disregard for the truth. This can be made in the form of a written apology, public statement, sending Grover a bouquet of flowers or – here’s a wild idea – how about SIGNING THE PLEDGE? That would probably smooth things over.

Kate Marshall Urged to Apologize for Lies About Taxpayer Protection Pledge [ATR]
Four special election candidates spar over taxes [LVS]

GOP Congressman: All Tax Cuts Are Good But Some Are Gooder Than Others

The Associated Press is reporting that some Republican Members of Congress are fighting their natural inclination to extend all tax cuts to infinity. The tax cut at risk of expiration is employees’ share of the social security tax of 6.2%. Last year the rate was cut to 4.2% for one year. President Obama would like to extend this cut, while some aren’t so keen on it.

But wait a minute! Doesn’t this go against every fiber of Republican orthodoxy? Won’t Ronald Reagan be spinning in is his grave? Did Grover Norquist’s marching orders get lost in the mail?

Republicans say no, as this position is “consistent with their goal of long-term tax policies that will spur employment and lend greater certainty to the economy.”

Okie dokie, then. But if that’s the case, it’s a little strange to discover that House Speaker John Boehner hasn’t made up his mind on whether to extend this tax cut (or put another way “raise taxes”). Perhaps, that’s because he’s already said that tax hikes are off the table. So what gives?

Fortunately, we have Texas Representative Jeb Hensarling to explain it to us:

“It’s always a net positive to let taxpayers keep more of what they earn,” says Rep. Jeb Hensarling, “but not all tax relief is created equal for the purposes of helping to get the economy moving again.”

So wait…not all tax cuts are effective at “getting the economy moving”? Is that what he’s saying? Or is this simply an Animal Farm approach to tax policy? Grover needs to get involved ASAP so everyone can get on the same page. The troops seem confused.

GOP may OK tax increase that Obama hopes to block [AP via BI]

If All Corporations Are People, Should All People Be Corporations?

Ed. note: We’re happy to welcome tax sage Joe Kristan back to a regular posting spot in these pages. This is his first effort for us but insists that he won’t feel as though he’s truly returned until he’s trolled by Adrienne.

Megan McArdle ponders one of life’s great questions:

One of the main “real world” elements of the case for the corporate income tax, as I understand it, is that failure to impose such a tax would simply create an inviting method for evasion of individual income taxes.

The question I always have about this is: “Well, why don’t more people do this now?”

The biggest reason we don’t all corporations to dodge taxes is that it is unnecessary. People looking to nickel and dime their way to deductions long ago learned that all you need is a Schedule C to have a place to hide a deduction for your dog (“security expense”) or your girlfriend (“theft loss”). This idea is one of the foundations of the multi-level marketing industry, and was carried to spectacular lengths by a recently closed Iowa tax preparer. Megan senses the limits to this approach:

And the reason that it’s mostly pretty minor is that if you are obviously using a corporation to fund your lifestyle, then the IRS will descend upon you like a plague of deranged cicadas.

There’s something to that, even though the cicada analogy implies a nimbleness unlikely in the IRS; a herd of flesh-eating slugs would be more apt.

Still, a corporation does offer some tax-sheltering possibilities. One is that C corporations can normally use any fiscal year. By shuffling income between an individual and a corporation with a November tax year, you can, in theory, get 11 months deferral of income — at least until you are caught. Corporations have a 15% tax rate on their first $50,000 of taxable income, giving higher-bracket individuals possibilities of shifting income to a lower bracket. And C corporation shareholder-employees get some benefits unavailable elsewhere.

Yet these chiseling possibilities have serious limits. The fiscal year games require you to have real live business expenses. A Kansas City attorney who marketed such deals crashed against this requirement. Income of “personal service corporations” like law and accounting firms are taxed at a flat 35%, making them useless as a tax shelter. The personal holding company rules impose a special tax on corporations used to shelter income from investments.

Then there is what I call “friction” — the time and effort required to play the games necessary to juggle income between a corporation and an individual. You have to file a corporation tax return and keep corporate records. You have to compute both personal and corporate income accurately during the year to know how much income to juggle. Unless you have a lot of time on your hands, the effort may well be better spent actually making money.

Finally, C corporations have one overwhelming problem: the double-tax dilemma. Unlike S corporations, which report their income on shareholder tax returns, C corporations have their income taxed twice — first when earned, and again when distributed or recovered on a stock sale. There are games you can play to get it out as a deduction to the corporation, but these have their problems. Take cash out as compensation and you incur payroll taxes; take it out as rent and you actually need something you can lease to the corporation with a straight face. Distribute an appreciated asset to yourself and the corporation is taxed on the gain. The Bittker and Eustice tax treatise has a classic summary of the problem:

Decisions to embrace the corporate form of organization should be carefully considered, since a corporation is like a lobster pot: easy to enter, difficult to live in, and painful to get out of.

These problems could be solved by taxing individuals and corporations at the same rates and allowing a deduction for dividends paid. Unfortunately, the chances of that are as likely as the chances of your brother-in-law making good pre-tax money from his Amway operation.

H&R Block Founder Reminds Reporter That’s He’s Poor, Not Sure Why He and the Rest of Middle Class Aren’t Foaming at the Mouth

Earlier this week we were reminded that Warren Buffett is tired of being coddled and paying a lower tax rate (as a percentage of his total income) than his secretary. President Obama, not one to ignore an opportunity, called attention to WB’s comments that rich people should be paying more taxes while he was on the stump in Minnesota.

On the other side, Grover Norquist, who has never met a tax he didn’t hate, offered up a Twitter rebuttal suggesting that the Oracle shut his Blizzardhole and cut the check to Tim Geithner.

Now another fairly well off dude, H&R Block co-founder Henry Bloch has come out in agreement with Buffett, telling the Kansas City Fox affiliate that “[the] current tax code gives too many breaks to the rich.” Bloch, a registered Republican also takes issue with the notion that rich people create jobs, saying that’s “baloney” and that “Rich people don’t create jobs. Companies create jobs.”

Bloch continued on his rant, wondering why the peasants are taking this so well and then reminded the reporter interviewing him that he was one of those people.

Bloch says the middle class should be furious that the rich pay so little in taxes, hiding money in trusts and with their kids. “You probably pay a higher rate than I do… and yet my income is probably many times what yours is.” Bloch said to FOX 4 Reporter Rob Low.

Unconfirmed reports have indicated Mr. Low then hung his head in shame while Bloch’s stepped away to maintain the space between them.

The Middle Class Should Be Furious, Another Millionaire Says [Fox4KC]

Analysis: Corporations May Be People But They Are Definitely Not Humans

The Iowa State Fair is going strong and because Election 2012 is in full throttle, the GOP Presidential candidates have been posing for photo-ops and making statements with varying degrees of stupidity.

One of the most logical things uttered, I dare say, was done so by Mitt Romney. By now you’ve probably heard that ol’ Mitt, in between corndogs, got into a bit of a verbal joust with a few of the fair goers. Here’s the soundbite:

The statement has been examined and debated with most intelligent people coming down on the side of Romney. That is, human beings – whether it’s shareholders, employees or customers – eventually bear the cost of the taxes paid by corporations. So while a whole host of humans, including the majority Supreme Court of the United States, are stuck on this “people” thing, it’s worth noting (mostly for the sake of stupid fun) that corporations are definitely not “humans.” Maybe that’s overstating the obvious but English is complicated language and this exercise is not without its merits.

Humans, at their best, are capable of being compassionate, loving, generous and all that crap. Corporations are not. At worst, humans are disgusting, vile creatures capable of ridiculous behavior and we know this to be true mostly because of reality TV. Corporations are certainly capable of deplorable behavior but this behavior is usually at the behest of a human being’s decision.

Accordingly, let’s examine some thing that demonstrate that don’t make corporations “human.”

• Corporations don’t flash women who aren’t the age of consent.

• Corporations don’t use your bathroom and help themselves to the Goldbond Medicated Powder to an extent that you wonder if someone left the window open during a snowstorm.

• Corporations don’t eat corn dogs (humans shouldn’t either).

• Corporations can’t sign a taxpayer protection pledge.

• Corporations don’t “try out” 18 year-old women, take them over state lines and then take money in order to “protect” them.

Feel free to volunteer other examples of “human” versus “people” below but what’s important to note here is that while both humans and corporations may be people, all humans are people and it’s clear that corporations are not humans.

And if that still doesn’t help you understand the difference, just remember this – no matter the situation, for better or worse, humans are the ones who get screwed. Got it?

Any Guesses on How President Obama Feels About Warren Buffett’s Op-Ed?

Stop me if you’ve heard this before.

Obama has often cited Buffett’s call for higher tax rates on the rich, and he seized on the Monday op-ed in the Times and the coverage it’s gotten on the web and on cable news to do so again.

“He said we’ve got to stop coddling billionaires like me,” Obama said. “That’s what Warren Buffett said.”

“He pointed out that he pays a lower tax rate than anybody in his office, including the secretary,” the president added. “He figured out that his tax bill, he paid about 17 percent. And the reason is because most of his wealth comes from capital gains.”

Not to be confused with Grover Norquist’s opinion on the matter.

Obama: Warren Buffett is right on the money [Politico]