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Showing posts with label price. Show all posts
Showing posts with label price. Show all posts

Sunday, June 24, 2018

Cincinnati Reds, Tax And Bobbleheads


Did you hear about the recent tax case concerning the Cincinnati Reds?

It has to do with sales and use tax. This area is considered dull, even by tax pros, who tend to have a fairly high tolerance for dull. But it involves the Reds, so let’s look at it.

The Reds bought promotional items - think bobbleheads - to give away. They claimed a sales tax exemption for resale, so the vendor did not charge them sales tax.


Ohio now wants the Reds to pay use tax on the promotional items.
COMMENT: Sales tax and use tax are (basically) the same thing, varying only by who is remitting the tax. If you go to an Allen Edmunds store and buy dress shoes, they will charge you sales tax and remit it to Ohio on your behalf. Let’s say that you buy the shoes online and are not charged sales tax. You are supposed to remit the sales tax you would have paid Allen Edmunds to Ohio, except that now it is called a use tax. 
The amount is not insignificant: about $88 grand to the Reds, although that covers 2008 through 2010.

What are the rules of the sales tax game?

The basic presumption is that every sale of tangible personal property and certain services within Ohio is taxable, although there are exemptions and exceptions. Those exemptions and exceptions had better be a tight fit, as they are to be strictly construed.

The Reds argued the following:

·      They budget their games for a forthcoming season in determining ticket prices.
·      All costs are thrown into a barrel: player payroll, stadium lease, Marty Brennaman, advertising, promotional items, etc.
·      They sell tickets to the games. Consequently, the costs – including the promotional items – have been resold, as their cost was incorporated in the ticket price.
·      Since there is a subsequent sale via a game ticket, the promotional items were purchased for resale and qualify for an exemption.

Ohio took a different tack:

·      The sale of tangible personal property is not subject to sales tax only if the buyer’s purpose is to resell the item to another buyer. Think Kroger’s, for example. Their sole purpose is to resell to you.
·      The purpose of the exemption is meant to delay sales taxation until that final sale, not to exempt the transaction from sales tax forever. There has to be another buyer.
·      The bobbleheads and other promotions were not meant for resale, as evidenced by the following:
o   Ticket prices remain the same throughout the season, irrespective of whether there is or isn’t a promotional giveaway.
o   Fans are not guaranteed to receive a bobblehead, as there is normally a limited supply.
o   Fans may not even know that they are purchasing a bobblehead, as the announcement may occur after purchase of the ticket.

The Ohio Board of Appeals rejected the Reds argument.

The critical issue was “consideration.”

Let’s say that you went to a game but arrived too late to get a bobblehead. You paid the same price as someone who did get a bobblehead, so where is the consideration? Ohio argued and the Board agreed that the bobbleheads were not resold but were distributed for free. There was no consideration. Without consideration one could not have a resale.

Here is the Board:
The evidence in the record supports our conclusion that the cost of the subject promotional items is not included in the ticket price.”
The Reds join murky water on the issue of promotional items. The Kansas City Royals, for example, do not pay use tax on their promotional items, but the Milwaukee Brewers do. Sales tax varies state by state.

Then again perhaps the Reds will do as the Cavaliers did: charge higher ticket prices for promotional giveaway games.

This is (unsurprisingly) heading to the Ohio Supreme Court. We will hear of The Cincinnati Reds, LLC v Commissioner again.

Saturday, November 12, 2016

You Got Repossessed And The Bank Says You Have HOW MUCH Income?


I ran into a cancellation-of-debt issue recently.

You may know that – should the bank or finance company cancel or agree to reduce your debt – you will receive a Form 1099. The tax Code considers forgiveness of debt to be taxable income, as your “wealth” has increased - supposedly by an amount equal to the debt forgiven. There are exceptions to recognizing income if you are insolvent, file for bankruptcy and several other situations.

Let me give you a situation here at galactic headquarters:

Married couple. Husband is a doctor. Husband buys a boat. He puts both the boat and the promissory note in the wife’s name, presumably in case something happens and he gets sued. They divorce. It is understood that he will keep the boat and make the bank payment. He does not. The boat is repossessed and then sold for nickels on the dollar. Wife (who was never taken off the note) receives a Form 1099-C. She has cancellation-of-debt income, which is bad enough. To make it worse, income is inflated as the bank appears to have sold the boat at a fire-sale price.

Our client is – of course – the wife.

The person who signs on the note receives the 1099 and reports any cancellation-of-debt income. If the debt “belongs” to your spouse and not to you, you better have your name removed from the debt before you get out of divorce court. The IRS argues that – if you receive a 1099 that “belongs” to your ex-spouse - you should seek restitution by repetitioning the court. This makes it a divorce and not a tax issue. The IRS is not interested in a divorce issue.

It all sounds fine until real life.

The wife received a $100,000-plus Form 1099-C from that boat.

Let’s reflect on how she there:

(1)  The wife doesn’t have a boat and never did. Hubby wanted a boat. She signed on the note to keep hubby happy.
(2)  The wife’s divorce attorney forgot to get that note out of her name. Alternatively, the attorney could have seen to it that wife also wound up with the boat.
(3)  For whatever reason, husband let the boat be repossessed.
(4)  The bank issued a Form 1099-C to the wife. The income amount was simple math: the debt less whatever the bank received for the boat.

Let’s introduce real life:
  • What if the bank makes a mistake?
  • What if the bank virtually gives the boat away?

The IRS has traditionally been quite inflexible when it comes to these 1099s. If the bank reports a number, the IRS will run with it.

You can see the recipe for tragedy.

Fortunately, the IRS pressed too far with the 2009 Martin case.

In 1999 Martin bought a Toyota 4-Runner. He financed over $12 thousand, but stopped making payments when the loan amount was about $6,700. The Toyota was repossessed. He received a Form 1099-C for the $6,700.
… which meant that the bank received zero … zip… zilch… on the sale of the 4-Runner.
Doesn’t make sense, does it?

The IRS did not care. Go back to the lender and have them change the 1099, they said.
COMMENT: Sure. I am certain the lender will jump right on this.
Martin did care. He told the Court that the Toyota was worth roughly what he owed on it when repossessed, and that the 1099-C was incorrect.

Enter Code section 6201(d):
(d) Required reasonable verification of information returns In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary under subpart B or C of part III of subchapter A of chapter 61 by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return. 

Normally, the IRS has the advantage in a tax controversy and the taxpayer has the burden of proof. 

Code section 6201(d) provides that – if you can assert a reasonable dispute with respect to an item of income reported on an information return (such as a 1099-C), you can shift the burden of proof back to the IRS.

The Tax Court decided that Martin had shifted the burden of proof. The 4-Runner had to be worth something. The ball was back in the IRS’ court.

Granted, Martin was low-hanging fruit, as the bank reported no proceeds. The IRS should have known better than to take this case to court, but they did and we now have a way to challenge an erroneous 1099-C.  

In our wife’s case, I am thinking of getting a soft appraisal on the value of the boat when repossessed. If it is materially different from the bank’s calculation (which I expect), I am considering a Section 6201(d) challenge.

Why? Because my client should not have to report excess income if the bank gave the boat away. That was a bank decision, not hers. She had every reasonable expectation that the bank would demand and receive fair market value upon sale. Their failure to do so should not be my client’s problem. 

Which will be like poking the IRS bear.


But she has received a questionable $100,000-plus Form 1099-C. That bear is already chasing her.

Tuesday, June 4, 2013

A Slice of Apple And A Double Irish, Please



Apple has been dragged before Congress for interrogation over its tax planning and practices. Let’s talk about some of them.


Apple’s headquarters are in Cupertino, California. It also has an office in Reno, Nevada, 200 miles away. California’s corporate tax rate is 8.8%. Nevada’s corporate tax rate is zero. Here is a pop quiz: what would you do if you were Apple’s state tax advisor?

You would try to move income otherwise reportable to California to Nevada, that’s what you would do. How would you do this? Would you move employees, lease an office, manufacture iPhones there? Nah. Think along other lines. Apple has cash. Boats and barges of it. It has to manage and invest that cash. Where are you going to advise them to manage it?

You got it: it’s going to happen in Nevada. Let’s set up a subsidiary called Braeburn Capital (get it?). Apple has earned approximately $2.5 billion in interest and dividends since opening Braeburn. What has Apple accomplished? It has saved 8.8% California state tax on that $2.5 billion, that is what it accomplished.

California has of course whined and sputtered and complained. What about their roads and schools and hospitals? Well, Nevada also has roads and schools and hospitals. There is a price point to everything. I may like an iPhone, but I am not going to pay thousands of dollars for it. Sounds to me like California priced itself out of the market.

Steve Jobs several years ago approached the city of Cupertino about a new headquarters for Apple. The city council, seeing an opportunity to get more than its fair share, inquired about Apple providing free wireless internet service. Maybe pony rides too. Steve Jobs responded that Apple paid taxes, and that the city should provide free internet service – and the pony rides. He continued:

“That’s why we pay taxes. Now, if we can get out of paying taxes, I’ll be glad to put up Wi-Fi.”

Jobs pressed on, noting that – if Cupertino did not want them – Apple could just move. Cupertino backed down. One council member complained, wondering what it would take to make Apple feel “more connected.”

COMMENT: I do not need to feel “more connected” to the government. Good grief. Has a flying saucer landed and disembarked these people?

Let’s talk next about Apple and international taxes. This has been the topic of recent Congressional hearings before the Senate Permanent Subcommittee on Investigations. Senator Levin, head of the committee, blasted Apple for using “offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere.”

One quick moment to explain – again – that the United States imposes a worldwide tax system. A U.S. person, including a domestic corporation, is supposed to pay U.S. tax, no matter where the sale occurred, whether the money was earned inside or outside the U.S. or whether the money returned – or will ever be returned – to the U.S. There are tax deferral provisions, fortunately; otherwise, no U.S. company would be able to compete internationally. Apple has aggressively used those deferral provisions, thereby provoking the senator’s wrath.

One of Apple’s subsidiaries - iTunes S.à r.l.’s – is located in Luxembourg. What does it do? It collects roughly a quarter of iTunes worldwide sales. If someone in Europe or the Middle East or Africa downloads from iTunes, the sale is recorded here. Remember: these are downloads, not an automobile or a wide-screen TV. Downloads can be located anywhere. Apple could download from a satellite circling the earth, if it wanted to. Luxembourg presents a low tax – and friendly - environment. With that, downloads are moved away from Germany, Britain - or the United States.

Senator Levin sees tax avoidance. Me? I see common sense.

BTW, note the market that iTunes S.à r.l.’s serves. We will come back to this.

Apple was one of the first to utilize a tax stratagem that has become known as the “double Irish.”  More specifically, they used a “double Irish” with a “Dutch sandwich.” This is esoteric stuff. Let’s review in general what the tax advisors did, other than think about ordering lunch.  


It takes two Irish companies to make this work (hence, the “double” Irish). The first company (Irish #1) enters into an intellectual property (“IP”) arrangement with Cupertino. Apple transferred its IP rights for Asia, African and the Middle East to Irish #1 back in 1980. At that time, Apple approached the IRS to have it review its advance pricing agreement with Irish #1, which established how the IRS would treat transactions between the two for tax purposes. The deal was favorable for Irish #1, which is to say that Irish #1 paid considerably less to Cupertino than it made selling the IP to other affiliates. 

NOTE: More income, lower expense to Irish #1. The purpose is to keep the income outside Cupertino – which is to say, outside the U.S. 

Someone has to sell the actual product: the iPods or iPhones. Enter Irish #2, which is owned by Irish #1. In fact, it is 100% owned, which allows Irish #1 to make a critical tax election with the IRS: a “check the box” election. While in place, this election means that the IRS will treat Irish #1 and Irish #2 as though they were one company. This is key, as the illusion will stop the IRS from claiming “foreign base company income.” It takes at least two companies to generate foreign base company income, and you do not want foreign base company income. It means that the U.S. will immediately tax you without waiting for you to send the money back to the U.S.  Ireland does not have an equivalent to the U.S. "check the box."

Irish #2 manufactures and/or sells the product. The product is high-tech, so Irish #2 has to pay for the IP. Who does it pay? It pays Irish #1, of course. Cupertino can “control” the amount of income left in Irish #2 by adjusting the amount it pays Irish #1. What profit remains in Irish #2 is taxable to Ireland at 12.5%.

Except it isn’t. Apple received a tax holiday for its first ten years in Ireland (this got them to 1990), and since then it appears to have negotiated its tax rate with Irish Tax & Customs.  This point is unclear, as the Irish government is prohibited from speaking on such matters. What has Ireland gotten in return? Apple now employs over 4,000 people in Ireland and is one of the country’s biggest employers.

Let’s go back to Irish #1. What does it pay Ireland? It pays nothing. Ireland looks and sees a nonresident company. Is Ireland blind? Well … Ireland will not tax nonresident operations of a nonresident company, and it considers a company to be nonresident if:

(1)            The company “controls” an Irish company that conducts a trade or business in Ireland, and
(2)            The company itself is “controlled” by one or more residents of a country with which Ireland has a double taxation treaty. 

OBSERVATION: Now you understand why this Irish has to be a “double.” One Irish company has to own another to put this plan into play.

To close the circle, let’s put the management and control of Irish #1 in the British Virgin Islands (BVI). The BVI does not levy a corporate income tax.

NOTE: Do you see what happened here? Profit is funneled to Irish #1, which does not pay tax to Ireland. The BVI has no tax. Irish #1 pays tax to nobody. Irish #2 pays tax to Ireland, but on greatly reduced profit.

And there you have a “double Irish!”

Let us step it up a notch. 

Let us introduce a third company. We will base this company in the Netherlands. We will call it “Dutch”. Why in the Netherlands? There are several reasons:

(1)            Both Ireland and the Netherlands are in the EU. EU members can move monies around with relative ease.
(2)            Holland’s corporate tax rate is 25%, not as attractive as Ireland’s 12.5%. Why would we send money there? The Netherlands will allow us to route profits through there if we agree to leave behind a small amount to be taxed.
(3)            The Netherlands will allow us to transfer money to tax havens on more favorable terms than Ireland. We intend to transfer the monies to the BVI.

We will place Dutch between Irish #1 and Irish #2. 
How do we get money into Dutch? Dutch will intercept sales bound for Irish #2. It’s not permanent: Dutch will forward those sales on to Irish #2. We will however leave some of Irish #2’s profit in Dutch for its trouble.

And Dutch will then move the profit – to the BVI.

You have just been served a double Irish with a Dutch sandwich. 

Congress blasted Apple because its subsidiaries reported approximately $30 billion in income from 2009 to 2012 but paid little to no tax. It is a fair point, but the following are also fair points:

(1)            Apple’ recent overseas sales have been approximately 60% of worldwide sales.
(2)            Apple keeps approximately $100 billion of its $150 billion cash war chest overseas. Its cash hoard seems – at first blush – in proportion to where it made sales.
(3)            Even with all this tax planning, Apple’s effective tax rate is roughly 14%. To put this in perspective, that is about the same as Samsung, Apple’s closest competitor. Where is Samsung headquartered? South Korea.

Could Apple have done even more? Yes, it could have. Remember my comment when we discussed iTunes S.à r.l.’s? This is the subsidiary that sells downloads to Europe, the Middle East and Africa. Whom does it not sell to? To the United States, Central and South America, that’s who. If Apple were truly concerned about eliminating its tax altogether, don’t you think it would have thought about this? It thought of near everything else.

It is difficult to consider the Apple hearings and not remember that Senator Levin was one of those who previously wrote the IRS demanding that it look into the tax exempt status of 501(c)(4)s, such as the  Club for Growth,  Americans for Tax Reform and Americans for Prosperity. In the summer of 2012, he demanded “why does the IRS allow 501(c)(4) organizations to self-declare?”

Uh, yeah. Thanks Carl. We know how well that turned out.

Ireland did not take well to Levin declaiming them as a “tax haven,” mentioning “Ireland” 37 times and “Irish” 29 times during Congressional hearings. The Irish Minister of State for European Affairs Lucinda Creighton travelled to Washington. She said:

“There is no doubt that some companies are taking advantage of the global legal and tax arrangements in a variety of jurisdictions.” 

“That is not something that Ireland can solve on its own. It is not something that the US or Ireland can solve together.”

Then she pointed out the obvious: the “extremely high corporate tax rate” in the U.S. is part of the problem

My take? 

Apple without a doubt pressed the pedal to the floor on its international tax planning. They are in good company, however, with Google, Yahoo, Dell, Pfizer and too many others to mention. Many tax advisors are concerned about this evolution of “stateless” income. “Stateless” means the income is not reported to or taxed by any country, and it is what Apple accomplished. It is one thing to arbitrage tax rates, as we did between California and Nevada. It is another to distill, filter and bottle the income to the extent it winds up being homeless.

I consider Apple to represent – to a great extent – the logical progression of our incoherent worldwide tax system. Congress thinks that multinationals will pay our highest-corporate-tax-rate -in-the-world just because… Well, why would they? Would you? The idiocy of this whole thing is thinking that Congress has a claim to money that someone – whether you, me or Apple - earned in Europe or Africa or Asia. The hubris and greed of Congress is stultifying.

Do you think that Irish Tax & Customs is wondering why Sen. Levin is thundering that Apple did not pay Ireland enough tax?