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September 29, 2023

Tax Planning

Luxembourg Leaks All Over EY’s Tax Planning

Last month, we learned about a trove of documents that revealed a creative tax planning strategy on the part of PwC. Now, we're learning the Luxembourgian manuevering wasn't limited to just one Big 4 firm. From The Center for Public Integrity: A new leak of confidential documents expands the list of big companies seeking secret […]

People Are Having Babies Earlier to Max Out Tax Benefits

Naturally. Williams’s Sara LaLumia, the University of Chicago’s James Sallee and the Treasury Department’s Nicholas Turner took it upon themselves to figure out if policies like the Child Tax Credit (CTC), the dependent exemption and the Earned Income Tax Credit (EITC, which is more generous for families with more children) are pushing mothers with due […]

Maybe Mitt Romney Can Recommend a Savvy Tax Planning Professional for Al Gore

Former Vice President Al Gore recently became a very wealthy man (well, wealthier). Good for him, right? This is America after all, where the rich are important and the important are rich and if you're neither then, well, you're probably not working hard enough.   Anyway, if you're wondering how Vice Prince Albert made his […]

Marcum LLP Proudly Launches Interactive Same-Sex Marriage Map

They said it loud and proud in a press release yesterday: The map enables users to view the status of same-sex marriage unions in individual states by hovering their computer cursors. A pop-up chart for the highlighted state reveals a variety of data, including whether same-sex marriage or rights similar to marriage are recognized in […]

Stop with All the Sensible Tax and Financial Planning Advice for Mega-Jackpot Lottery Winners, You Idiots

With every ginormous lottery jackpot comes the inevitable stream of articles discussing the tax implications of such a windfall. Yes, someone who wins a gazillion dollars will probably need a small platoon of financial advisers to make the best decisions possible with regard to their dumb fucking luck, but the best part about winning a […]

All of Mitt Romney’s Fancy Schmancy Tax Planning Strategies Should Serve as a Reminder That We Really, Really Need Tax Reform

Yesterday, we told you about Jesse Drucker's stellar report on Mitt Romney's "I Dig It" trust and how it allows his family to pass along wealth to the younger generations with relatively little taxes being paid. It was the latest of many reports and scoops on Willard's finances and really, we shouldn't be surprised. He […]

All This Focus on Mitt Romney’s Taxes Could Ruin Things for All the Wealthy People

Today, a Bloomberg article by Jesse Drucker called attention to Mitt Romney's "intentionally defective grantor trust" aka "IDGT" or "I Dig It" trust. For the seasoned estate tax planning or wealth preservation professional, this is old hat, but for many people this is quite exciting. And by exciting I mean, "Holy shit, they can do […]

BREAKING: Multinational Corporations Engage in Complex Planning Strategies to Avoid Taxes

Who knew?  U.S. companies with offshore operations could be saving billions of dollars by utilizing apparently legal tax maneuvers, according to a new study. The Organization for Economic Cooperation and Development, in a report released Monday, found that companies around the world are using a sometimes complex series of moves to take advantage of differences in […]

(UPDATE 2) News Corp. Appears to Be a Big Fan of Offshore Tax Havens

Sure, GE may have the “best tax law firm” in house but the boys and girls working for Rupes seem to have a few tricks of their own. David Cay Johnston reports:

News Corp. has 152 subsidiaries in tax havens, including 62 in the British Virgin Islands and 33 in the Caymans. Among the hundred largest U.S. companies, only Citigroup and Morgan Stanley have more tax haven subsidiaries than News Corp., a 2009 U.S. Government Accountability Office study found.

News Corp. had nearly $7 billion permanently invested offshore in 2009, money on which it does not have to pay taxes unless it brings the money back to the United States. Meanwhile, it can use that money as collateral for loans in the United States, where interest paid is a tax-deductible expense.

This and other tax planning strategies result in a 20% tax rate for the company. And not a single phone hacked!

[via Reuters]

Via NPR’s The Two Way news blog, Reuters has posted this statement:

Please be advised that the David Cay Johnston column published on Tuesday stating that Rupert Murdoch’s U.S.-based News Corp made money on income taxes is wrong and has been withdrawn. News Corp’s filings show the company changed reporting conventions in its 2007 annual report when it reversed the way it showed positive and negative numbers. A new column correcting and explaining the error in more detail will be issued shortly.

As of now, Johnston’s post remains unchanged and what I blockquoted above doesn’t seem to be in dispute but the situation appears to be fluid.

Here’s a portion from Johnston’s new column:

Readers, I apologize. The premise of my debut column for Reuters, on News Corp’s taxes, was wrong, 100 percent dead wrong.

Rupert Murdoch’s News Corp did not get a $4.8 billion tax refund for the past four years, as I reported. Instead, it paid that much in cash for corporate income taxes for the years 2007 through 2010 while earning pre-tax profits of $10.4 billion.

For the first time in my 45-year-old career I am writing a skinback. That is what journalists call a retraction of the premise of a piece, as in peeling back your skin and feeling the pain. I will do all I can to make sure everyone who has read or heard secondary reports based on my column also learns the facts and would appreciate the help of readers in that cause.

Johnston goes on to explain in detail how the error occurred. He also states that a number of the facts originally reported, including the number of News Corp. subsidiaries in tax haven (that we blockquoted above), remain.

General Electric Is Good at Things Other Than Tax Planning

While everyone has basically forgotten how bent out of shape they were at GE for their tax savviness (all legal!), the company’s CFO mentioned today that earnings are looking decent regardless.

At the company’s shareholders meeting Keith Sherin said “This is the best earnings outlook we’ve had in the last 10 years,” which indicates that tax planning might not be everything. [Reuters]

GE Seems to Have Its Tax Planning Figured Out

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And by “figured out,” I’m referring to “worldwide profits of $14.2 billion, and […] $5.1 billion of the total came from its operations in the United States,” combined with a grand total $0.00 in taxes. “In fact, G.E. claimed a tax benefit of $3.2 billion,” reports the Times.

Sure the Internal Revenue Code is complex but if you’re aggressive, have a few lobbyists at your disposal and your tax department is “often referred to as the best tax law firm,” the IRC is a cakewalk.

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

G.E.’s Strategies Let It Avoid Taxes Altogether [NYT]
See also:
On GE’s Pathological Aversion To Paying Taxes [ZH]

Questionable Tax Deduction of the Day: Engagement Cruise and Wedding Expenses

Every tax professional has run across questionable expenses provided by their clients. Maybe you’ve got a used car-lot proprietor who insists that his hairpiece is crucial to his business appearance and, thus, his ability to put people behind the wheel of their dream ride. Perhaps you’ve got a sociologist that is conducting weekly research in the champagne room of a local gentleman’s club. Or maybe you’ve recently concluded that the process of, and expenses related to, tying the knot have been such a burden that it is completely acceptable to ram it onto your 1040:

Dear Caleb,

I have now figured out why the divorce rate is so high in America. Apparently, according to one of my taxpayers, wedding expenses and cruises for celebrating your engagement are now considered “write-offs.” Unfortunately, I cannot find this particular subject in THE CODE – but I think I’ll take my taxpayer’s word for it.

Maybe you should pass on this tidbit – I sure wish I had known about this obscure write off before I got married, but obviously, it’s time for me to start planning my next one. It’s going to be HUGE!!

– One of the many tax preparers currently wishing they remembered what their home looks like.

Our tipster insists that her client provided the receipts but didn’t want to forward them (something about client confidentiality). Of course, if you’ve got something that tops this, you’re invited to share it with us. In the meantime, any tax sages out there that wish to advise/debate the credibility of including the cost of sheet cakes from Costco, amateur photographers and invitations that may or may not kill you on a Schedule A (or wherever) are free to do so.

Memo to the Wealthy: Death Is Looking Like a Good Option

“I have no confidence that this Congress will address the estate tax.”

~ Joe Kristan has a morbid outlook.

Should Derek Jeter Be Asking for a Stake in the Yankees?

Fay Vincent is making the suggestion that sports stars, like DJ, should be negotiating for shares of their respective teams.

My question is why sports figures are not taking steps to generate tax-favored income by bargaining to get ownership interests in their teams. Imagine how much better off old timers like Mickey Mantle and Roger Maris would have been if they had been able to obtain even tiny shares of the Yankees franchise in 1961. In today’s context, it is true enough that the tax rate on capital gains income may soon rise to 20%—but that’s still far below the rates levied on top income earners.

Since Vincent – a former entertainment lawyer – has been around the block with big-time earners, he might be on to something here, although maybe the Steinbrenners aren’t interested, being the shrewd business family that they are (George died in a year with no estate tax for crissakes). Since neither Jeets nor the Yanks are budging in the negotiations, this idea could work. It’ been floated in the Times so it’s not like this option is a huge secret. Make something happen, people.

By most accounts, Jeter wants to finish his career in New York and the man has been the franchise for over the last decade. Forget the cash, ask for shares and save on some taxes. It’s not complicated.

Okay, maybe it’s a little complicated.

S Corporations are Entity of Choice; 68% of S Corps Misreport

A recent IRS study shows that S corporation return filings (Form 1120S) increased dramatically and continue to be the most prevalent type of corporation filing. For Tax Year 2006, almost 2/3rds of all corporations filed a Form 1120S. The total number of returns filed by S corporations for Tax Year 2006 increased to nearly 3.9 million, from nearly 3.2 million reported in Tax Year 2002 and 722,444 in 1985. In 2006, there were 6.7 million S corporation shareholders. S corporations became the most common corporate entity type in 1997.

According to IRS data, about 68% of S corporation returns filed for tax years 2003 and 2004 (the years data were available) misreported at least one item. About 80% of the time, misreporting provided a tax advantage to the corporation and/or shareholder. The most frequent errors involved deducting ineligible expenses. Even though a majority of S corporations used paid preparers, 71% of those that did were noncompliant.

Reasonable compensation still an issue for S corporations – The GAO report also focused attention on the loophole that allows shareholders to reduce payroll taxes by reducing wage compensation. The IRS admitted that their efforts to enforce the adequate compensation rules for S corporation shareholders have been limited. For fiscal years 2006 through 2008, the IRS examined less than half of one percent of S corporations who filed.

Misreporting of shareholder basis is also a common problem, permitting shareholders to claim excess losses averaging $21,600 per taxpayer based on IRS audits for the period 2006 to 2008.

(Note: The above information was excerpted from Vern Hoven’s manual used in CPE Link’s Federal Tax Update: Part 4 webcast.) Webcasts are scheduled November-January. In Part 4, you’ll get an update on all corporate changes, partnership changes, and IRS audit issues.

What’s New in Business Taxation, Federal Payroll, and Retirement Plans?

Feeling ready for tax season? Ready for those Schedule C’s and Schedule F’s? Here’s a quick list of the things you will want to be familiar with to properly advise your small business clients.

• New Health Bill provisions. You’ll want to understand the small employer health insurance credit and what new employer health plans look like.

• Self-employed health insurance can be deducted on the business return for the first time, which reduces SE tax.

• Health reimbursement “qualified” arrangements

• The new $500,000 Section 179 expensing allowance, a brand new $250,000 Section 179 for real property assets including leasehold improvements and restaurant property, and the unexpected renewal of the 50% bonus depreciation.

• The 2010 Federal mileage, lodging and meal per diem rates. Recordkeeping for travel, entertainment and the new rules on cell phones.

• The “away-from-home-overnight” requirement for travel expense deductions.

• How to handle the blizzard of Form-1099Cs business clients are receiving and how this cancellation of debt income can be avoided or deferred.

• The status of “hobby loss” and the office-in-home limitation rules

• The new NOL carryback provisions

• The new depreciable lives on restaurant buildings

• The new 9% domestic production activity deduction, who qualifies, what qualifies and where to put it on the return

Got it all? Need help pulling all the information together? Get the details on these and other issues related to business tax in Part 3 of CPE Link’s Federal Tax Update webcasts scheduled November-January. Course includes downloadable manual containing hyperlinks to applicable code sections.

From Traditional IRA to Roth IRA: New Rollover Rules

For years prior to 2010, only taxpayers with modified AGI of $100,000 or less generally were permitted to convert a traditional IRA into a Roth IRA. For years beginning in 2010 and after, the AGI limitation has been eliminated. Thus, regardless of AGI, all otherwise eligible taxpayers will be allowed to convert an IRA to a Roth IRA. The amount converted is includible in income as if a withdrawal had been made, but no early withdrawal penalties are assessed.

Two-year income spread if conversion done in 2010 – For conversions occurring in 2010, unless a taxpayer elects otherwise, none of the amount is includible in gross income in 2010, with half of the income resulting from the conversion includible in gross income in 2011 and h, income inclusion is accelerated if converted amounts are distributed before 2012. In that case, the amount included in income in the year of the distribution is increased by the amount distributed, and the amount included in income in 2012 (or 2011 and 2012 in the case of a distribution in 2010) is the lesser of: (1) half of the amount includible in income as a result of the conversion; and (2) the remaining portion of such amount not already included in income. The following example illustrates the application of the accelerated inclusion rule.

Example – Betty has a traditional IRA with a value of $100,000 consisting of deductible contributions and earnings. Betty does not have a Roth IRA. She converts the traditional IRA to a Roth IRA in 2010, and as a result of the conversion, $100,000 is includible in gross income. Unless Betty elects otherwise, $50,000 of the income resulting from the conversion is included in income in 2011 and $50,000 in 2012.

Later in 2010, Betty takes a $20,000 distribution, which is not a qualified distribution and all of which, under the ordering rules, is attributable to amounts includible in gross income as a result of the conversion. Under the accelerated inclusion rule, $20,000 is included in income in 2010.

The amount included in income in 2011 is the lesser of (1) $50,000 (half of the income resulting from the conversion); or (2) $80,000 (the remaining income from the conversion). The amount included in income in 2012 is the lesser of (1) $50,000 (half of the income resulting from the conversion), or (2) $30,000 (the remaining income from the conversion, i.e., $100,000 – $70,000 ($20,000 included in income in 2010 and $50,000 included in income in 2011)).

Preparer note – While you cannot elect out of the two year spread on only a portion of the conversion income in 2010 (it’s an all or nothing election), husband and wife may each make separate elections for their individual IRA accounts. For example, a wife could elect to report her conversion income in 2010 and her husband could report his 2010 conversion income in 2011 and 2012. This may result a better spread of the income. The same taxpayer is allowed to make separate elections for separate IRA accounts.

If you need guidance on answering the question, “should my client convert to a Roth?” check out CPE Link’s Federal Tax Update: Part 2 webcast scheduled November-January.. You’ll get a myriad of planning ideas and even access to a simple, but sophisticated, calculator. (Note: The above information was excerpted from Vern Hoven’s manual used in the webcast.) In addition to coverage of the IRA & Individual Retirement area, you’ll get an update on Real Estate & Investment, and Estates, Trusts & Beneficiaries.

Franken’s Monster: State Taxes for the Traveling Employee

He’s good enough, he’s smart enough, and doggone it, the state revenue departments loved Al Franken — once he paid $70,000 in back taxes.

Like many celebrities, Mr. Franken took his act on the road, making a good living on gigs in various states. Unlike many celebrities, Franken ran for office, subjecting his tax life to unnatural scrutiny. It turned out that he hadn’t filed taxes in every state wher

$70,000 of back taxes paid to 17 states later, Mr. Franken squeaked into the U.S. Senate by the narrowest of margins.

Franken has a lot of company in going from state to state without paying all of his taxes (he also has a lot of company in dumping on his accountant to weasel out of the blame). It’s a lot of work, and a lot of expense, for a traveling worker to pay taxes in every state. Every state has its own tax rules, and preparing all those returns isn’t cheap. Unfortunately, current law can make you taxable in a state with as little as one day of work.

State taxes are a compliance nighmare for glamour professions like sports, entertainment, construction and auditing. That’s why the Multistate Tax Commission is working on model legislation that would exempt workers from state taxes if they work in a state for less than 20 days in a year. That is, unless they work in sports, entertainment or construction (perhaps the only known instance where auditors aren’t abused worse than other professionals). A bill going nowhere in Congress, the Mobile Workforce State Income Tax Fairness and Simplification Act, would would create a 30-day threshold, but similarly screw entertainers and athletes, but not construction workers.

This raises the obvious question: why do they want to screw the athletes and entertainers? Presumably the states all want to pick Taylor Swift’s pocket (understandably), but for every Taylor Swift there are hundreds of struggling young musicians trying to scrape by and make a name for themselves. Yet the tax law, in all its majesty, requires the same level of tax compliance for millionairess Taylor Swift and the wonderful, but surely less prosperous, Carrie Rodriguez.

Small businesses used to be able to blow off states they only visited for a brief time. That’s becoming a bad bet. Better and cheaper data mining software makes it easier each year for state revenuers to sniff out temporary presence. If there is any publicity for your visit, you leave a Google trail. If you don’t file in a state, the statute of limitations never runs there, and you can build up a painful multi-year liability. If they catch you after the statute of limitations for your home state runs out, you lose your credit on the home state return for taxes paid in the other state — meaning you pay tax on the same income in two states.

So what do you do if you are a small business? Pay attention to which states you are doing business in. Don’t assume they just won’t notice you. Discuss things with your tax preparer. If you have sinned, most states will work out a deal through your preparer to only collect for a few years, and maybe waive penalties, if you come forward before they catch you. And remember that if you live in a high tax state, like California, New York or Iowa, you should be able to get an offsetting refund on your home state return for non-resident state taxes on an amended return for open years.

Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.

Transocean Saved Billions in Taxes by Moving Legal Domicile Offshore

While BP continues to get murdered in the press for its role in the Deepwater Horizon nightmare in the Gulf of Mexico, we bring you a new reason to hate on another big player in this mess, Transocean. Martin Sullivan writes in Tax Analysts’ Tax Notes about the billions in taxes Transocean has managed to avoid since moving its domicile offshore – first to the Cayman Islands and then to Switzerland.

For those of you not completely up-to-speed on your Deepwater Horizon cast of baddies, Transocean was the owner and operator of the De BP was the project operator (think of a general contractor) of the rig, paying Transocean $500,000 a day to drill the well.

Sullivan writes in his piece that despite Transocean being legally domiciled in Zug, Switzerland, (a transaction known as an inversion or corporate expatriation) it really does very little to change the substance of the company’s operations, “These tax-motivated restructurings occur with little or no real change in day-to-day business operations. Top executives, key personnel, and all significant business operations in the United States before the transaction remain in
the United States.”

The transactions were controversial to be sure, and companies that engaged in them were likened to Benedict Arnold by politicians when the came under fire back in the early Aughts. To get an idea of Transocean’s savings, Mr Sullivan presents data that shows the company’s preinversion average effective tax rate of 31.6% and its postinversion tax rate of 16.9%. This saved the company just over $1.8 billion in taxes over the last ten years.

Transocean consummated their inversion back in 1999, so they were far ahead of the curve, as the tax benefits for inversions were stripped out in the code effective for transactions that occurred after March 4, 2003 but the savings have added up over the years as the company saved over $750 million just last year.

But Transocean has largely stayed out of the spotlight in this whole shitshow and has been in CYA mode virtually the whole time, consistently citing an indemnification agreement with BP, filing to limit its liability:

As set forth under Federal Law, the complaint also asks that the companies be judged not liable on claims for certain, defined losses or damages relating to the casualty or, if they are judged to be liable, that the liability for such claims be limited to the value of their interest in the Deepwater Horizon rig and its freight including the accounts receivable and accrued accounts receivable as of April 28, 2010. The petitioners assert in the filing that the entire value of their interest does not exceed $26,764,083.

And scoffing at any notion of not paying its dividend, reminding everyone that they declared it long before explosion on the rig they were operating, “Transocean will honor all of its legal obligations arising from the Deepwater Horizon accident. The dividend proposal was announced on February 16, 2010, described in the preliminary proxy statement which was filed with the Securities and Exchange Commission on March 1, 2010, and approved by shareholders at the company’s annual general meeting on May 14, 2010.”

Throw the decade or so of tax savings and it sounds like Transocean has it made in the shade. How’s that for corporate responsibility and accountability? It’s not like we’re dealing the largest environmental disaster ever.

Transocean: Better at Tax Planning Than Oil Drilling [TaxProf]

Don’t Get Too Anxious to Stuff Just Anything into Your IRA

Individual Retirement Accounts are a taxpayer’s dream, with constraints. The income they earn isn’t taxed until you distribute it; with a Roth IRA, it may never be taxed. It’s only natural for taxpayers to stuff anything they can that might generate income into an IRA.

That can be a terrible mistake.

Not everything is tax free in an IRA. Interest, dividends, capital gains – that stuff is fine. But beyond that things can get ugly.

Most problems arise when taxpayers try to use their IRAs to finance business ventures. Because IRAs are shirttail relatives of qualified pension and profit sharing plans, many pension plan rules, like those for prohibited transactions, bedevil IRAs, with taxes that can exceed 100%.

When an IRA owns an interest in a “passthrough” entity – usually a partnership, because most S corporations can’t have IRA shareholders – another complication arises. The tax law frowns on tax-exempt competition for taxable business. The frown takes the form of the “unrelated business income tax,” or UBIT. The UBIT hits otherwise tax-exempt entities with an income tax on their “unrelated business income.”

If an IRA owns an interest in a partnership (most LLCs are taxed as partnerships) that operates a trade or business, the IRA’s LLC income may be subject to UBIT, which applies at corporate tax rates. UBIT can also apply to an IRA if it owns an interest in mortgaged rental real estate. Some IRAs even run into UBIT by investing in publicly-traded energy partnerships, like Buckeye Partners, LP. Many states also have unrelated business income taxes.

The partnership is required to break out unrelated business taxable income and report it to the IRA. The IRA in turn must provide a tax identification number to the partnership to make it easier for the IRS to follow the UBIT to the IRA.

When an IRA is subject to UBIT, it can cause some awkward moments between the IRA investor and the trustee. Most IRA trustees want nothing to do with filing Form 990-T, the UBIT return. Of course the IRA owner doesn’t like the idea either, but it needs to be done. Having income tax in an IRA is especially ugly when it’s a Roth IRA, which normally would otherwise be tax-exempt forever, inside and out.

The threshold for filing a 990-T is “gross income” of $1,000 or more. Gross income is normally higher than taxable income – it is the IRA’s share of gross receipts less cost of goods sold, not reduced for any other expenses.

So be careful what you stuff into your IRA. Just because you can put something in there doesn’t mean you should.

Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.

Accounting News Roundup:’s Financial Reporting Could Have Some Issues; Tax Planning Stays One Step Ahead Financial Reform; Accountant Denied Bail in Terror Case | 05.18.10

Can We Trust’s Financial Reporting? [White Collar Fraud]
We won’t tell you what to think but you should know that Bidz reported “material weaknesses in internal control over financial reporting” specifically those controls over “management oversight and anti-fraud controls specifically in processing of financial transactions, vendor review and payment processing,” in its most recent 10-K and 10-Q As an investor in Bidz, this should make you queasy. Unless, of course, you’re not concerned with such matters.

Sam Antar probably doesn’t care either way but he does put something out there, “ cannot effectively prevent anyone from robbing the company blind and cannot prevent material errors in paying its vendors. Yet, the company wants you to believe that its financial reports contain no material errors and comply with GAAP.” But if you’re not sketched out by such things, then by all means, invest away.

But wait, in case that doesn’t earn your skepticism, the SEC began its investigation last year after Sam pointed out inventory irregularities at the company. Shortly thereafter, the Commission expanded its investigation into “the Company’s co-op marketing contributions and minimum gross profit guarantees.” If that wasn’t enough, the company’s auditors, Stonefield Josephson, were cited by the PCAOB for “significant deficiencies in a smaller sample of one of four audits reviewed.” So, again, if you can get over all that, this is probably a fine company to have your money invested in.

Bobbing as the Taxman Weaves [DealBook]
As Congress continues to dispel its wisdom on financial reform, it’s has become the natural order of things for any regulation to be circumvented prior to the passage of any bill.

In the case of carried interest, an incentive paid to hedge and private equity fund managers out of gains on the funds’ investments, Congress would like to tax these incentives at the ordinary rate (soon to be 39.6%). Currently, carried interest is taxed at the capital gains rate of 15%. DealBook reports that, despite threats by House to penalize those who use creative tax strategies that later fail, the maneuvering has not slowed:

The House of Representatives, aware that some titans of finance were already charting a course around any proposed change to their tax status, included a special provision in its version of the new legislation levying a 40 percent penalty for executives who invoked a loophole to cut their tax bill but were later ruled to have been wrong in doing so.

Still, that hasn’t stopped them from trying.

One of the latest machinations being whispered about in the industry goes like this: Private equity executives would sell their “carried interest” to a third party and then use the cash they received to invest directly in the deal so that any increase in value would be a capital gain.

It’s not clear whether this will work or not but it sure seems like fun.

Accountant held without bail in NYC in terror case [AP]
Sabirhan Hasanoff, a former PwC Senior Manager, was denied bail yesterday for his role in an alleged conspiracy that supported al-Qaida. He pleaded not guilty to the charges against him.

One Diligent CPA Forced the IRS to Use a ‘Staggering’ Amount of Resources

Sure, NYU has produced lots of fancy-pants tax lawyers. And many high-powered big-school tax accountants haunt the cubicles of the Final Four accounting firms. But if driving the IRS to distraction is a mark of tax distinction, an obscure Kansas City attorney/CPA, formerly of Grant Thornton and Coopers and Lybrand, is a true tax all-star.

Or was. A federal judge this week made it inconvenient for GT alum Allen R. Davison to pursue his tax practice by enjoining him from marketing some of his most creative ideas:

Davison is hereby enjoined from organizing, establishing, promoting, selling, offering for sale or helping to organize, establish, promote, se any tax plan, as addressed herein, involving sham parallel C management companies, sham 412(i) plans, sham flock contracts or any other illegal tax scheme, plan, or device, even if not specifically addressed herein. Additionally, Davison shall not organize, establish, promote, sell, offer for sale or assist in any financial or tax related arrangement without submitting in writing to an IRS designee, a detailed plan explaining the financial or tax arrangement and all steps necessary for the arrangement to be legal under the tax code.

That would all be rather inconvenient for a practitioner. Why are the feds so down on Mr. Davison? From the injunction order:

Davison’s numerous, complex, ever-changing, tax-fraud schemes and his deliberate efforts to disguise his true involvement in the promotion of these tax-fraud schemes have required the IRS to expend a “staggering” amount of resources on discovering and combating these schemes. If this outlay of resources continues – and it almost certainly will continue in the absence of an injunction barring Davison from offering tax advice without significant restraint, then these resources will not be available to service honest tax paying Americans. Nor will these resources be available to investigate other promoters of tax-fraud schemes.

What were these “schemes”? Some of them used “management fees” to shift income from taxable businesses to sham S corporations owned by tax-exempt ESOPs or Roth IRAs. Others involved improper pension plans. But good old Midwestern farm ingenuity was behind what may be his most creative plan:

Davison drafts purported flock contracts for his clients. (Tr. 398:21-399:4). He argues that by executing these agreements, his clients become farmers, who are eligible to claim deductions for the cost of purchasing a flock of layer hens during the tax year in which that cost is incurred, pursuant to Revenue Ruling 60-191. (Tr. 412:10-20; PX 165). That revenue ruling provides “that farmers employing the cash method of accounting may deduct the cost of baby chicks and egg laying hens in the year of payment therefor, provided such method is consistently followed and clearly reflects income.”

The judge found that Mr. Davison has an overly-inclusive view of what “farming” means. The judge said that a guy with dirty boots who actually fed and raised chicks might be a farmer, but a “self-employed insurance salesman,” for example, who loaned money to a real farmer, did not.

There are many fascinating threads here, but let’s just hit three for now:

• Mr. Davison began selling many of these ideas while working for Grant Thornton, and according to the court order, marketed them through a network of CPA firms set up by GT alums. Networking pays!

• The elaborate system of preparer registration, testing and continuing education that IRS Commissioner Shulman is ramming through will spend enormous resources making honest and competent preparers jump through hoops; they would have done nothing to stop Mr. Davison. Shulman’s plan will spend money on driving honest preparers crazy with paperwork rather than chasing scammers.

• The cash-basis chicken flock technique that is outrageous for an insurance salesman is hunky-dory when done by a wealthy farmer. Because America Needs Farmers!

Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.

Closely-Held Corporations May Want to Take a Bullet Over the Pending Dividend Tax Hike

As a role model, Andrew Jackson has serious shortcomings, not least his penchant for genocide. But some of his policies are back in vogue, like the casual destruction of the national banking system. Taxpayers may be choosing to be like Andy in another way before the end of t had the bad fortune to get crossways with Charles Dickinson, one of the best pistol shots in Tennessee, when dueling was still fashionable. He met his antagonist across the state line in Kentucky, where duels were legal. Jackson was serious about this one, so he decided to take all the time he needed to do Dickinson in. Given Dickinson’s marksmanship, that meant accepting a bullet. Sure enough, Dickinson’s shot hit home:

The bullet struck him in the chest, where it shattered two ribs and settled in to stay, festering, for the next 39 years. Slowly he lifted his left arm and placed it across his coat front, teeth clenched. “Great God! Have I missed him?” cried Dickinson. Dismayed, he stepped back a pace and was ordered to return to stand on his mark.

Blood ran into our hero’s shoes. He raised his pistol and took aim. The hammer stuck at half cock. Coolly he drew it back, aimed again, and fired. Dickinson fell, the bullet having passed clear through him, and died shortly afterward.

Taxpayers owning C corporation stock might also want to take a bullet, figuratively speaking, this year. That’s because the tax rate on dividends will either leap or soar in 2011.

The increase in the dividend rate is a consequence of the scheduled expiration of the 2001 Bush tax cuts after this year. Prior to the Bush administration, dividends were taxed as ordinary income. As dividends are distributions of corporate income already taxed at a corporate rate as high as 35%, that meant a combined rate of 57.75%. The Bush tax cuts tied the dividend rate to the capital gain rate, now 15%.

When the Bush tax cuts expire, the capital gain rate is set to return to 20%. But without Congressional action, dividends will again be taxed as ordinary income. Given the size of the deficit, the poisonous election-year political atmosphere, and that the President promised to hold the dividend rate to 20%, it’s likely that dividends will be taxed as ordinary income in 2011. That would means a 164% increase the top dividend rate.

But wait, there’s more! Starting in 2013, Obamacare will tack another 3.8% to the top rate on investment income, resulting in a top dividend rate of of 43.4%, making the total tax increase over 189%.

This makes it tempting to take the bullet – a big 2010 dividend out of a closely-held C corporation. It will be especially attractive for shareholders who lack the ability to suck out corporate cash using the usual tricks of shareholder bonuses or rent payments.

Yes, it means taking a bullet. Taking dividends out of closely-held corporations breaks the rules of the C corporation tax planning crib book. Taxpayers go to elaborate lengths to avoid taking income before they have to. But a 189% tax increase might be enough to make some taxpayers take the bullet, like Andy, for the greater good.

Tax Day Countdown: Five Overrated Tax Planning Ideas

There is plenty of tax advice floating around this time of year but the problem, as you may expect, is that not all of it is useful for everyone. Sure, you can throw read every piece of advice out there but some of that advice is worth ignoring or at the very least, investigating further so you can find out for yourself if it will actually benefit you.

We asked Mike Callahan, tax director at Spicer Jeffries LLP in Greenwood Village, CO, to pay us another visit, this time with ideas or strategies that he thought were overrated so that you can sort out some of the noise.

Buying a car for the “write-off” – Mike told us that deductions related to depreciation on cars are extremely limited. He said, “If you need a new car, fine. But don’t expect a huge tax benefit.”

Maxing out your mortgage – According to Mike, borrowing as much as possible to purchase a home because of the interest deduction is not worth it. “If your combined federal and state tax rate is 30%. 70% of your interest payments are going out the door.”

Check your W-4 – Withholding a lot of taxes during the year so you can get a big refund is not the way to go. Mike puts it this way, “You just gave Uncle Sam an interest free loan. Adjust your withholding so you come close to breaking-even at tax time.”

Running up a credit card on deductible expenses before year-end – This one should be a face-slap moment but, “Using a credit card to prepay expenses before year-end if you can’t afford to pay the balance when the bill comes next month.”

Don’t sock money in an IRA away if you need it now – Mike said that saving money doesn’t do much good if you plan to withdrawal it later, “[Don’t] contribute to an IRA when you need the money. You’ll end-up withdrawing the funds andsubjecting yourself to a 10% penalty,” and more taxes. And by “need” Mike isn’t referring to your Range Rover payment. Good choices people.

More tax advice:
Six Small Business Tax Strategies for the Entire Year
Tax Day Countdown: Five Tax Planning Ideas for Individuals

Six Small Business Tax Strategies for the Entire Year

March 15th is just four days away so many of you amped for this first corporate deadline of the year. Tax planning gets a lot of attention during January – March time frame but what about the rest of the year? Should you be thinking about planning for three lousy months out of the year? Please.

But because the timing is not lost on us, we reached out to a CPA who has been around the block a time or two for some tax advice as we approach the corporate filing deadline.

Mike Callahan is a tax director at Spicer Jeffries LLP in Greenwood Village, Colorado. Mike has been sharing his tax wisdom with clients for over thirteen years with an expertise in securities taxation, organizational structure and international taxation of investment partnerships. Mike has been involved in many areas of tax research and planning, including advising broker-dealers and hedge funds, international taxation, multi-state tax planning and compliance and estate and financial planning.

Mike will be paying us a visit with some tax advice or the next week or so as the we head down the stretch in tax season 2010.

Starting off, he gave us six strategies for small businesses that you can keep in mind for yourself or your clients throughout the year, just not for year-end planning:

Consider a 401(k) safe harbor – If your pension contributions are limited because your employees don’t contribute much to their accounts, contributing 3% of your employees’ compensation to their accounts allows you to maximize your contributions.

Retirement Plan Credit – Small employers are eligible for a credit of up to $500 for 50% of the administrative cost of setting up a retirement plan.

Section 179 – Deduct (instead of depreciating) the cost of equipment and furniture on up to $134,000 of additions in 2010 ($250,000 in 2009) under Section 179.

Hire your children since you give them money anyway – Of course they do have to actually work. Their tax bracket is probably less than yours, some of the income is tax free and they are eligible for traditional or Roth IRA contributions.

Watch out for the alternative minimum tax (AMT) – It impacts more and more people each year. Tax projections by your CPA are a must! It may be beneficial to defer some deductions until next year instead of paying them this year.

Work from home? – If your home office is your principal place of business for administration and management of your company, a portion of your rent, utilities, maintenance, etc… are deductible. This also helps reduce your self employment tax.

Estate Tax Planning with the Exuberant Accountant

The Exuberant Accountant isn’t the spamming type so when he sent out an email to, presumably, all of his blog’s email subscribers as a warning about new estate tax rules in 2010, it was clear this wasn’t a casual tax issue. Scott Heintzelman was kind enough to give me a few minutes to break down what this means for estates and why we should care.

Disclaimer: I took an estate tax class no less than two months ago and have since forgotten everything I learned so I needed a refresher anyway. As always, if you need advice on actually planning your estate, don’t listen to me and get yourself a CPA and/or tax lawyer. “We are accountants, ultimately we don’t draft agreements,” says Scott and he’s absolutely right. Get a trained mine-sniffer on that particular cluck mission.

Scott pointed to a recent post from his firm’s McKonomics blog called “No Estate Tax is a Good Thing, Right?” and it goes without saying he doesn’t believe this “no estate tax thing is good” by any means.

He gave the example of getting hit by a bus (awww, don’t run over the Exuberant Accountant!): If he walks out of his office tomorrow and dies, certain language in his will might leave a trust with $0 for poor Mrs Exuberant Accountant. What about the little Exuberant Accountant Jrs?! The humanity! Don’t worry, we’d start a charity drive.

Anyway, from McKonly & Asbury:

[M]any estate planners wrote wills with such language that the bypass trust would be funded with an amount equal to “the current lifetime exemption amount.” Since we currently have no estate tax, and no lifetime exemption amount, if a spouse dies in 2010, we could potentially have an unfunded bypass trust. This is especially alarming since we can all assume the estate tax will come back and we may have a taxable estate once the second [spouse passes] away.

Thanks for the heads up Scott, here’s to hoping you don’t get smashed by a bus this year. Look on the bright side, the estate tax goes up to 50% next year!

Earlier: Five Questions with The Exuberant Accountant

Review Comments | 12.09.09

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Year-end Planning: Make Sure You Have Enough Basis to Deduct Your S Corporation Losses – Despite the Biblical weather in Iowa, Joe Kristan continues with the year-end tax planning series. [Tax Update Blog]
Unleash the auditors? – We mentioned the Fed. How the hell has FASB managed to dodge the SCOTUS? [CFOZone]
Tighter controls on wireless data usage coming for iPhones and other devices, AT&T exec warns – Abuse the new toys while you can, Deloitte grasshoppers. [CT]

Review Comments | 12.08.09

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Audit Committee Comp Influences Auditor Support – “The study found that audit committee members are more likely to support the auditor, as opposed to management, in an accounting disagreement when audit committee compensation includes long-term stock options.” [Web CPA]
The Mid-Quarter Trap – More year-end wisdom from Joe Kristan. [Tax Update Blog]
GM board moving fast on CEO, CFO hires – Spencer Stuart is on the hunt if you’re interested… [Reuters]
G.M. Will Consider Lump Sum Payment to U.S. – …but you’ll have to deal with this. [DealBook]

Review Comments | 12.07.09

Thumbnail image for markcuban.jpgCourt Allows Cuban to Seek Discovery in S.E.C. Case – No one questions Mark Cuban’s patriotism and gets away with it. [DealBook]
Ohio school will return Petters’ scholarship donations – Miami of Ohio is giving back $5 million that was gifted to establish the John T. Petters Center for Leadership, Ethics and Skills Development. [Pioneer Press]
Doesn’t Sound V-Shaped to Me – The recovery that is. [Financial Armageddon]
Fixed assets and year-end planning – Joe Kristan is getting you ready for the upcoming tax prep season. [Tax Update Blog]
Nonprofit Executive Compensation Changes in 2009 – Charity doesn’t pay like it used to. [Mission Accountable]