Tag Archives | too clever by half

Apple avoids billions in taxes, and it all looks legal; those guys really are smart

Lawmakers are using words like “gimmicks” and “schemes” to describe how Apple Corporation has used a web of subsidiaries spanning the globe to avoid taxes. There are hearings this week at which Congressmen are expected to say they are shocked, shocked, to hear of tax loopholes being exploited.

As The New York Times reported, Congressional investigators have determined that “some of Apple’s subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless — exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.”

One of Apple’s Irish affiliates reported profits of $30 billion between 2009 and 2012, but because it did not technically belong to any country, it paid no taxes to any government, The Washington Post reported. Another paid a tax rate of 0.05 percent in 2011 on $22 billion in earnings, according to the report.

It’s not expected that any of this will be determined to be illegal–just a highly proactive use of the existing tax rules. Interviewed by The Times, University of Southern California law professor Edward Kleinbard, a former staff director at the Congressional Joint Committee on Taxation, gets the Quote Of The Week Award. “There is a technical term economists like to use for behavior like this,” said Kleinbard. “Unbelievable chutzpah.”

Taxes promote creativity (otherwise known as “cheating”)

William Meyers, 66, of Cottage Grove, Oregon, took the time to file more than 70 fake excise tax returns. He’ll now have 366 days in prison (and three years of supervised release, and 100 hours of community service) to mull over the consequences.

Meyers was sentenced in U.S. District Court, and ordered to pay more than $873,000 in restitution, for filing the false returns.

Oh, he was also operating an illegal still. Busy guy. You can find the whole story here, compliments of The Oregonian.

Oops: No paperwork, no $18.5 million deduction

Does the IRS turn a laser-like eye on tax returns that claim large deductions for non-cash contributions to charity? You bet.

Will the Service disallow deductions for contributions when people don’t have all their paperwork in order? You double-bet.

The IRS and the U.S. Tax Court hammered this home in May 2012, when it disallowed an $18 million real estate contribution by a California philanthropist.

The taxpayer is a real estate developer, broker and appraiser. He donated a half-dozen properties to charity.

Now, get this:

Everyone agreed that the donations had been made.

Everyone agreed that the properties were worth millions of dollars.

However, Form 8283–which has to be used by anyone making more than $500 in non-cash contributions for the year–was filed without an independent appraisal, which is necessary for gifts of more than $5,000. (The taxpayer, being a real estate expert, figured he could value the property himself.)

Since there was no independent appraisal, there was nobody to sign the Declaration of Appraiser.

The return also didn’t have adequate information attached about how much had been paid for the properties, how they’d been acquired, and other details.

Form 8283 can be a time-consuming pill, and I’ll admit that every year I’ll have clients complain about all the information I need them to provide for taking deductions for non-cash contributions. (No, I don’t have any clients giving anything like $18 million to charity.) But this case brings home the fact that in the eyes of the IRS, you need more than just good intentions to take deductions.

If you want to read it and weep, you can go to a summary of the case here, or get The Wall Street Journal’s take on it. Or, you can read the entire 26-page decision of the U.S. Tax Court.

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Arranging a tax-deductible fire

Ever want to help support your local fire department? Several taxpayers over the years have done just that, by allowing the fire department to use their house for training purposes, including–yes–burning down the house.

Why would someone do that? Well, for the tax benefit! No kidding. The idea is that you get to deduct the fair market value of the house as a charitable contribution. And, hey, if you’ve been planning on demolishing that structure so you can build something else, well, all the better–right?

Wrong, says the IRS. Several taxpayers have been unsuccessful in trying to claim this deduction, including the case earlier this summer of Upen and Avanti Patel, who claimed a $339,504 charitable contribution for letting the Fairfax, Virgina, fire department raze their house. The Patels bought the house planning to demolish it. The IRS’s successful stance was that the Patels did not give away the property; they only allowed the fire department to have use of the structure for training purposes, which was at best a license or a partial (nondeductible) gift.

You can read law professor Paul Caron’s tax blog summary, or read the whole case yourself if you’re getting your inner tax geek on.

One interesting note: The Tax Court’s decision was 9-8, indicating that someone trying this may not necessarily see their deduction goes up in flames (sorry!) In fact, former Oregon Republican gubernatorial nominee Chris Dudley got a lot of heat (double-sorry!!) when The Oregonian reported during his campaign that he’d reported a $350,000 charitable contribution after the local fire department burned down his house back in 2004. He replaced the house with an 8,500-square-foot mansion.

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$2 million tax refund equals 66 months in prison

She could have been Turbotax‘s Poster Child For Getting Your Maximum Refund–”I used Turbotax and got a $2.1 million refund!”

The only problem is that there wasn’t much truthful about the Oregon tax return filed by Krystle Marie Reyes of Salem once you got to the lines below her name and the address where you could send her seven-figure refund.

Reyes pleaded guilty July 24 and was sentenced to 66 months in prison for tax evasion and felony theft.

The sentencing closes a case featuring someone who in recent years earned less than $15,000 annually, yet was able to get a refund of more than $2 million on a Visa debit card by filing a return showing more than $3 million in income. After she got the refund, she then reported losing the debit card twice, which finally got the attention of card issuer Intuit. (Hey, let’s put another link to our good friends at Turbotax right here.)

What’s still open, however, is how a return with such eye-popping numbers made it through the Oregon Department of Revenue. As Michelle Cole of The Oregonian, who has been all over this story, reported, four employees with the department were either demoted or subject to “disciplinary action” following an internal investigation. Names of the state employees involved were shielded under the rubric of “personnel” matters, and apparently no one is getting fired after the biggest tax fraud in state history.

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