One thing is certain, paying more tax than the law requires will not improve your chances of surviving. Re-arranging client affairs & re-organizing client businesses opens doors to extensive tax avoidance. Every dollar saved drops straight to the bottom line as another dollar of cash, profit, working capital & competitive advantage, and improves your chance of surviving the 21st century.
Business reorganizing or restructuring is an action taken by businesses to significantly modify the structure or the operations of the company. This usually happens when a company is facing significant problems and is in financial jeopardy. But it often happens to enhance it’s competitive position, to protect its assets or to get out in front of a problem. It’s another tool in their tool box. Some examples of Global 500 companies:
Global 500 Re-orgs
- Forbes announced, Jeff Bezos is unloading a billion dollars of Amazon stock.
- In 2015 Caterpillar announced restructuring and cost cutting plans right before they were hit with a $2 billion penalty for tax fraud.
- In 2018 John Deere announced realignment of leadership responsibilities.
- Humana’s CEO-founder had twice before had shifted the company’s course to a brand-new industry.
- Chase Manhattan Bank and Chemical Bank used their merger as an opportunity to both reduce operating costs and achieve an important strategic objective.
- Scott Paper‘s chief executive officer (CEO) decided to implement the layoffs quickly—in less than a year—to minimize workplace disruptions and gain credibility with the capital market.
We’ll probably never know why they reorganized. What matters is they reorganized for some reason. Despite the massive size of Global 500 companies, and despite the difficulties presented by re-organizing a massive company, they are not afraid of re-orgs.
Privately owned business re-orgs
Privately owned businesses seldom re-organize. It’s just not one of the clubs in their bag. They’ll ride their present structure right into the ground even when the company is collapsing around them.
Never fall in love with your company. You can fall in love with your business. A business has value because that’s how you make money. A company is a legal creation for operating a business. Nothing more & nothing less. Most people don’t think this through well enough and get the two confused. A few years of operating your company like it was your business can put you in vulnerable position.
If most companies lose a lawsuit, they could lose everything they’ve been building all their lives. If they win, the litigant can strip your company bare. We plug that hole through business re-org by removing everything of value from their operating company and putting it in an LLC that does no business what-so-ever. It never does anything to get itself sued. If everything of value is in the LLC, and the mothership loses a lawsuit, you can just shutter the doors and start over again with a new company the very next day with everything of value behind an impenetrable LLC barrier. The LLC just needs to license it to your new company, and you’re good to go. Since you own both of them, there are no barriers.
Business restructuring and reorganization is one of our strengths. I personally have been involved in two Fortune 500 re-orgs & countless re-orgs of private companies. Not all of them have followed the approach we describe in this post. There are many ways to re-org and many things a business wants to accomplish. Every private re-org I was involved with succeeded without repercussion. We re-org our clients frequently for tax purposes. We have significant expertise in this area.
An actual example.
A few months ago I got a call from a client who was being sued by a marketing company. They had entered into a contract and the marketing business failed to perform, so my client quit paying the marketer. But there was a contract, and the contractor sued the company, but not the individuals. There was no way to sue the individuals. Their lawyer was vigorously defending the suit. He warned them it could cost several thousand dollars to defend suit. He also warned them, they could lose the suit.
For some reason they called me.
- I questioned them and discovered they hadn’t recorded any business assets. Their company was basically a vacant shell. There were assets, but no assets had been recorded in the company. They were still owned by the owners.
- I advised them to abandon the company.
- I also advised them to simultaneously form two new companies, an LLC to hold company assets, and a corporation to operate the business.
- I then advised them to legally transfer all the business assets into the first new company (an LLC), including web sites, trade names, trade secrets, and everything essential to carrying on businesses. Since they had never trademarked their name, I suggested the do that in the name of the LLC.
- Simultaneously again. I advised them to open new bank accounts in the name of the new corporation and begin conducting business in the new corporation.
- I also advised them to run this past their lawyer. He said it would work. The only thing he suggested is to file bankruptcy on the old company that had failed. That was a good final touch.
- It did work. The marketing company, rightly or wrongly, was got nothing but legal fees.
This methodology is one of my favorite re-orgs. It is used to protect vital assets and to change the character of earnings. It can also be used to eliminate C corp taxation by removing earnings from a C corporation and turning it into royalty income on the personal returns.
That eliminates an entire level of taxation.
|Before diving into this very interesting newsletter, I want to make it absolutely clear that we don’t go anywhere near the dreaded grey areas that can be interpreted as tax fraud, or even attract an audit. We stay right smack dab in the middle of the tax code. We utilize only approaches that have already been litigated and given the seal of approval by the courts and the IRS.
Everything we do is completely legal. We probably have the lowest audit rate in the country, and we have never had a bad outcome on audit, or “lost” an audit. The first thing we consider in preparing a return, is the likelihood of audit. Nearly every one of the returns we file are doing nothing to attract an audit. If you were, we would talk to you about it.
I am not sending you this newsletter to frighten you, or for any particular purpose besides your enlightenment & entertainment.
The Importance of Evidence
An IRS agent’s decision to request an indictment for tax fraud is virtually never determined by negotiations between your lawyer or tax professional and the IRS, the Department of Justice or the United States Attorney’s office. The decision is seldom influenced by your perceived cooperation during the investigation or whether you have been a “good guy.” The decision is almost always based upon evidence and the strength of the case. In other words, whether they think they can win. The Tax Division of the Department of Justice frowns upon losing any criminal tax trial. A loss by the government does not promote their objective of voluntary compliance nationwide. So the IRS only brings cases to court that they expect to win.
Too many lawyers and accountants try to “cooperate” and treat a criminal investigation as they would a civil tax audit. The results are far too often tragic. By the time they realize their mistake, it is too late. When the IRS informs you they are opening an criminal case, pull out all your guns, close down all cooperation and go to war. It’s too late to talk. Cooperating will just be used against you in court.
Here’s another problem. Incompetent lawyers.
It is estimated that 90% of all criminal lawyers have never won a criminal tax jury case for the defense. For this purpose “win” means the jury found the taxpayer NOT GUILTY on ALL COUNTS. Many lawyers claim they have won cases but, when you look closely at the cases they cite you will find that they won a few counts but lost the remaining counts in the indictment. Often their clients were sentenced to serve substantial amounts of time in jail. This is hardly a victory for the taxpayer client. A true win for the taxpayer only occurs when all counts are either dropped by the government, dismissed by the Court, or result in not guilty jury verdicts.
IRS Conviction Statistics
The IRS published statistics reveal that approximately 80% of criminal tax investigations result in an indictment. More than 90% of indictments against taxpayers result in a conviction. Investigations are conducted by highly trained criminal division special agents.
During the past 18 years (1999 through 2016) only a modest number of taxpayers won their criminal tax trial and were found NOT GUILTY on all counts. The number of taxpayers acquitted during the past 18 years is as follows:
56 in the Northern Region
62 in the Western Region:
81 in the Southern Region:
Another consideration is this: sometimes your lawyer or tax professional helps you cheat. Sometimes your lawyer or tax professional even comes to you with a tax scam.
A Big 4 firm fell into that trap a few years ago. They actually marketed something that turned out to be illegal. Several partners went to prison. Just remember this, if it sounds too good to be true, it probably is.
There are two ways to select a tax professional: by relationship or by results. Most businesses select tax professional according to relationship because tax firms that regularly deliver better results don’t grow on trees. That is where we try to operate, in the rarefied air of easily measured concrete results.
Watch this. It’s an hour, but whatever you think of it, it’s well worth your time.
- Trade secrets
- Web sites
- Customer database
- Social media accounts
Among the devices most overlooked by privately owned businesses for tax planning, estate planning & asset protection is the use of Intellectual Property.
This Act that made it all possible.
“Today, President Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”) into law, bringing trade secrets alongside trademarks, copyrights and patents as intellectual property rights protected under federal law.” May 23, 2016.
Intellectual property is a term for intangible creations of human intellect. In businesses that often takes the form of patents, copyrights, web sites, trade name, business name, URLs, copyrights, trade secrets, customer lists, etc. Privately owned businesses seldom recognize & value them. Every business has unrecognized intellectual property. Failing to recognize your intellectual assets puts it at risk, makes you more susceptible to audit and increases your income tax. Most businesses never recognize or value intellectual assets. As a rule of thumb, we often recognize & value intellectual assets for tax planning, estate tax planning and asset protection. Generally we move the specific assets, now documented, out of the operating company and place then in another company which is less at risk of lawsuit & seizure by a hostile actor. Your personal name and your operating company are both bad choices to hold intellectual assets.Done right, it is possible to suffer a debilitating lawsuit and open up the next day with little more than a hiccup.
- We will use intellectual property for tax savings
- We will use intellectual property to protect vital business assets
- We will use intellectual property for greater maneuverability.
- We will identify your intellectual property
- We will formally recognize your intellectual property
- We will move intellectual property from risky operating entities to safer property holding entities’
- We will document intellectual property.
- We will value intellectual property.
- We will establish royalty rates.
The goal is, even if you lose a tremendous lawsuit, you will be able to open up the next day with all your vital assets in place without missing a beat. This is also a great estate planning tool & a great tax planning tool.
Few private businesses are structured effectively.
There are something like 33 different entities from which you can operate a business. The most commonly used are personal individual schedule C business, partnership, LLC or corporation. Each of these are taxed differently and can take deductions the others can’t. We use all of these except the schedule C business frequently. Plus we use the other 28 when circumstances dictate.
Private businesses are poorly structured. That makes them vulnerable to unnecessary tax, dangerous lawsuits & getting caught by competitive forces without the ability to maneuver. All of which can be disastrous. As businesses get larger, the more sophisticated they become and the more they will turn their attention to structures. At one time Caterpillar had 350 separate subsidiary companies in the Luxembourg alone. But private businesses generally go through their entire existence as a single structure.
We are expert at business structures. We will restructure your business to its best structure to achieve goals in tax, asset protection & maneuverability.
- A great structure achieves myriad valuable goals easily and effortlessly.
- A bad structure constantly interferes with business goals & exposes your vital assets to lawsuits & litigation.
- A bad structure is a trap because it’s inflexible, cumbersome & poorly conceived. Plus it adds to tour tax burden & puts all assets at risk needlessly.
- A bad structure is a lead weight around your shoulders.
- A bad structure makes it more difficult to survive & thrive in a competitive environment
If you’re like most businesses, you don’t see accounting firms as an integral part of your success. You’re more likely to see them as a third wheel; a necessary cost that never contributes a dime to the bottom line.
That’s certainly not the ideal situation.
Here’s the scenario you should aim for.
In little more than a decade, Apple pulled itself from the brink of bankruptcy and propelled itself to the most valuable company in the world by cutting taxes & weeding out waste. Both of these are accounting functions. Apple funded that explosion in growth partly by saving $400 billion in taxes, partly by weeding out the waste that nearly drove them into bankruptcy, and partly with the iPod, the iPhone & the iPad.
This is the ideal relationship to expect from your accounting firm.
You can add competitive advantage out of thin air without spending an extra dime just by hiring the right accounting firm. The right firm will save you money, and every dollar saved puts distance between you and your competitors.
Read more about Apple Tax here: http://www.elliscpa.us/apples-tax-strategy/
Read about Ellis here: http://www.elliscpa.us/about/.
Call us and we can discuss what we can do for you.