Predatory Taxation

The U.S. Code is divided by broad subjects into 53 titles. Title 26 is the Internal Revenue Code,  commonly referred to as the tax code.

The tax code is unique among all codes. The other 51 codes stand as they were written, one code is reserved and 50 of these codes are stable. The tax code is the exception. No other code is continually interpreted by government agencies (IRS) or court cases. Only the tax code. The tax code is unique in this respect. It’s a living, breathing body of law continually reinterpreted administratively and by the courts.

To a lesser extent, state tax codes are subject to the same phenomena.

That is not a bad thing. The constantly changing nature of tax codes opens the door for strategists like me to legally keep your taxes under control. But predatory practices sometimes make temporary advances. But so far, they have always been stopped.

Even if a tax professional would learn the entire 77,000 page to the tax code, in a year there would be so many subtle changes, they wouldn’t recognize it. That means everybody has to be very careful how they deal with federal & state tax authorities.

Predatory taxation happens from time to time.  Here is an example of how the Supreme Court responds. Our republic is safe.

Every tax authority, at one time or another, takes a predatory stance. When that happens, people without hundreds of thousands of dollars to fight a hostile and predatory stance can be destroyed. This happens more than it should.

Personal animus for clients or professionals defending their clients causes predatory behavior more than you might expect. The IRS took a dislike to one of my clients for some unknown reason. I didn’t even let him talk to the IRS. Never-the-less, they disallowed a $100,000 deduction and wouldn’t back off. We pushed the issue all the way to the courthouse steps before the IRS relented. Finally, outside the tax court doors, ten minutes before the case was to be heard, the IRS attorney relented. Had it been the revenue agent, that never would have happened.

Our strategy was to drop the case rather than spend hundreds of thousands of dollars fighting to save $100,000 in tax. That’s the position predatory taxation puts you in. And believe me, every IRS revenue agent knows all about how the game is played.

Our only defense against that treatment, is the Supreme Court.

As far as I can tell, revenue agents aren’t subject to disciplinary action for being overly aggressive with taxpayers. They may claim they are, but I’ll never believe them. Your only recourse is court, and most taxpayers can’t afford that option.

A recent decision on predatory taxation reassures us the Supreme Court has our backs against predatory taxation.

States can be predatory just like the IRS. In my mind, the state of California is the most predatory.  It is so bad that the CA tax authorities have been losing cases in the CA Supreme Court over CA’s attempt to push more & more into interstate taxation. This particular Supreme Court case does not involve CA, but it does close a loophole that predatory states were using to push more into predatory areas.

Everyone should read the article to understand the predatory nature of tax authorities when they are not kept reined in by close observation and regulation.  Predatory taxing authorities are very powerful and very scary.

Here’s the link to Forbes. The Forbes article is well written, interesting and even brings Roman law into play as the originators of the NEXUS issue that interstate taxation is based on. As it turns out, NEXUS is a Roman word. Subsequent quotes are from the Forbes article.

“Typically, a state government will enact a statute that identifies who it will tax and what it will tax.  When it comes to taxation of trusts, there are several moving parts. There is the person who created the trust.  There is the beneficiary. There are the assets and income of the trust. And, there is the trustee. Each might be located in a different state.  It would seem that four different jurisdictions are licking their chops for tax revenues. This is where “nexus” comes into play.’

There were several long standing Supreme Court rules the states were ignoring. I’m not going to repeat them here, but you can read the article. I am going to continue quoting from the article below.

“In spite of these long-standing rules — upon which there is about 150 years of US Supreme Court rulings — some states attempt to tax without sufficient NEXUS.  Unless a taxpayer protests and asserts there is not sufficient NEXUS, the state gets away with it. And, often, the dollar amount in play is too little to fight for.  But, occasionally, there is enough money in play and the taxpayer victim fights. (I use the harsh term “victim” because these states offend our cultural sense of fairness and equity when they pull this stuff in light of the US Supreme Court’s long standing position.)”

“In recent years, taxpayers who have asserted a lack of nexus and due process have won . . . with their own states’ supreme courts overturning the states’ offending statutes.  But, this has occurred one state at a time. What taxpayers and tax planners have wanted was a newer US Supreme Court ruling that left no doubt . . . involving a state that had a ridiculously weak case . . . to finally put the issue to rest.  North Carolina gave it to us.”

“And this is where predatory states got involved. Generally, trusts the taxes that were levied against trusts using inappropriate methods violating state NEXUS rules did not involve enough money to justify bringing expensive suits. And even when the tax justified a lawsuit, the case was brought in state court. So while this issue was working it’s way through state courts, other states were still being taxed in a predatory manner. ”

Finally two cases found their way into the Supreme Court and the issue was decisively decided unanimously. Sotomayer wrote the unanimous opinion.

 

 

 

Carving Your Mark On The Universe

Steve Jobs’ Secret to Carving Your Mark on the Universe.

Before Apple began their meteoric growth, they addressed the tax problem with the “Double Irish & a Dutch sandwich” tax strategy. That & Jobs’ innovations propelled them to the most valuable company in the world. But it wouldn’t have happened without the tax savings. Every dollar of tax saved drops straight to the bottom line as another dollar of cash, working capital, profits & competitive advantage created out of thin air. Without first solving the the tax problem, they would have always been watching from the sideline as other companies beat them to the prize.

The Apple miracle.

In a scant 14 short years, Steve Jobs single-handedly pulled Apple from the brink of bankruptcy and propelled the company he founded into the most valuable company in the world.

Following a long struggle with Apple CEO John Scully for control of Apple, jobs was demoted and resigned in 1985. After a hiatus of twelve years, during which he founded Pixar & Next, two similarly valuable companies, Jobs returned to Apple in 1997. He died in 2011 with Apple on the brink of becoming the most valuable company in the world.

Steve talked a lot about his goal to carve his mark on the universe. The study of Jobs provides a number of lessons about growing companies for every CEO, if they can follow them. 

Addressed the tax problem

Before Apple began its phenomenal growth, they first addressed the tax problem with The “Double Irish & a Dutch sandwich” tax strategy. That & Jobs’ product innovations propelled them to most valuable company in the world. Without first solving the the tax problem, they would have always been an also ran, despite the phenomenal products.

Billions of Dollars

Over the next two decades, Apple harvested billions of dollars in tax savings which quickly added massive amounts of cash to their balance and profits to their income statement, and advantage over competitors. Apple’s stock value grew steadily along with Apple’s profits, cash balance & competitive advantage. Every dollar a company drops straight to the bottom line as another dollar of cash, working capital, profits & competitive advantage created out of thin air. Apple’s billions in cash, harvested from their tax strategies, steadily built Apple’s Balance Sheet and pushed their value higher & higher.

Innovation leads to competitive advantage

Jobs’ innovation wasn’t limited to Apple products. He was genuinely & completely innovative. He was always looking for a better way to do it. Whatever “it” was.  Without those tax savings, it’s unlikely Apple would have achieved the competitive advantage necessary to thrive. .

So, are you having trouble carving your mark on the universe? Give us a call to get started on the right foot.

IRS Reform

“President signs IRS reform bill, the Taxpayer First Act”

“On July 1, President Trump signed the IRS reform bill, the Taxpayer First Act. The Act changes the management and oversight of IRS with the aim of improving customer service and the process for assisting taxpayers with appeals; modifies IRS’s organization; and provides some new safeguards to taxpayers in their interactions with IRS.” (Thomson Reuters)

The IRS is cyclical. Every decade or so, Congress passes a law requiring the IRS to quit pushing taxpayers around and become a nicer & gentler IRS. That starts fine, but generally deteriorates over time. Today, we start the process again.

That’s one reason. But, never-the-less, this is at least partly in response to the Obama administration using the IRS to hassle conservative organizations.

Frivolous Tax Arguments

Frivolous arguments. A frivolous argument is an argument that has no substance but it’s being argued to save face when you are caught with your pants down. Just don’t do it with the IRS. The IRS has a long list of frivolous arguments used against them.

“Tax Court fined independent contractor $1,000 for frivolous argument.”

“The Tax Court imposed a $1,000 frivolous argument penalty under Code Sec. 6673 on an independent contractor who argued that his independent contractor commissions were not taxable income, but loans. The Tax Court warned the taxpayer several times that the argument was frivolous and a penalty might be imposed if he continued to advance it, but he continued to advance the argument anyway. (Staples, TC Memo 2019-75)” Thomson Reuters.

“Have you recently read somewhere or heard someone claim that you don’t need to file a tax return with the IRS? Don’t fall for it—frivolous tax arguments are a scam. The IRS is concerned that people may fall victim to con artists and promoters who sell these schemes and then leave the taxpayer to fend for themselves once they’re caught; they therefore include frivolous tax arguments within their “Dirty Dozen” warning list of known scams.

“Whatever your sentiments may be, frivolous arguments against income tax are null and void in the eyes of the law. Don’t let someone talk you into thinking that taxes are optional or unnecessary; if you owe income tax and choose not to file, you are breaking the law. If you’re confused and asking yourself, “What is a frivolous tax return?”, keep reading to learn more. Without making yourself aware, you could get duped by a scammer and face some serious consequences.” Community Tax.

 

Wayfair

A Year After ‘Wayfair,’ Revenue Uncertain, Legal Issues Coming

Wayfair

It’s just about a year since the U.S. Supreme Court ruled on what many tax professionals have deemed the “tax case of the millennium,” but legal challenges may start arising soon as state online sales tax programs get underway in earnest.” Bloomberg.

Wayfair is not settled law. It will not be settled for years as legal challenges mount.

This will be interesting.

Every business doing interstate business has a stake in the outcome

https://news.bloombergtax.com/daily-tax-report-state/wayfair-week-kickoff

Scaling a Business

Lessons on Scaling Business from Bain.

“The most successful companies retain the ability to build businesses by acting like the scale insurgent in their industry. Scale insurgents capture the benefits of size while maintaining a strong sense of Founder’s Mentality, which we define as a clear insurgent mission, a frontline focus and an owner mindset. Their greatest advantage is the ability to compete on both scale and speed.

“How can incumbent companies reinvigorate their Founder’s Mentality and become fast-moving scale insurgents? They can launch micro-battles. In micro-battles, small, cross-functional teams take a bold strategic initiative and translate it into a prototype that can be tested in the marketplace. They turn a winning prototype into a repeatable model that can be scaled across the organization. Senior leaders, who manage the full portfolio of battles, work to amplify the impact of individual teams and recognize patterns across the board. This process challenges bureaucratic behaviors and prods executives to embrace a new way of working.”

Read the entire post.

https://www.bain.com/insights/how-to-identify-great-scalers-fm-blog/