Legal techniques the rich use to avoid paying taxes | Hacker News Reader

Legal techniques the rich use to avoid paying taxes

businessweek.com

71 pointslazyjeff41 comments

Having been pitched a few of these schemes by CPA's and trust attorneys after selling a business I had one conclusion:

It's just not worth the incredible complexity that will ensue to do most/all of these things. I think especially in light of PG's post about avoiding conflict and big transactions to keep focus.

Maybe if I were retired and done with the "game" I would have more willingness to try these... or maybe if my wealth was in the billions, I might view these strategies as sport or some kind of contribution to CPA employment levels, but overall pursuing complex strategies like these for anyone under 60 without a penchant for paperwork and dull conversations with lawyers is suicide.

Also, there's always the risk of an audit from hell. Imagine trying to focus on your startup with that hanging over you.

Technically, if after paying the lawyers and CPAs, you turn a penny of profit, it's a profitable move.

More to the point, if you work for someone, and can point to that penny of profit after paying your own salary, you just justified your own employment.

ah, but no. it depends on your "cost of capital" -- attention and time are the most costly things in my life, so anything that consumes them need produce much more than a penny of profit.

That holds if you're a dynamic startup. Most of the money, and certainly most of the money to be conserved by avoiding taxes, isn't going through dynamic startups.

How about paying 2.3% tax? [0]. Google's open about it because it's the industry standard (eg Facebook is owned by Facebook Ireland Limited).

[0] http://www.theregister.co.uk/2010/10/22/google_double_irish_...

The key to understanding this is to knowing that only foreign profits (earned from non-American customers in non-American jurisdictions) are subject to the lower taxes through this scheme. This is income that, strictly speaking, the US government does not truly have a right to tax since it has only the most tenous nexus to an American taxpayer.

The money Google makes in America is still subject to the normal American tax rates applicable to corporations.

If you buy Microsoft software outside the US, you'll be talking to Microsoft Ireland, even if you are in the UK and the software you bought was fully developed in the UK (or in the US).

Either way, the only reason to do that for Microsoft is because of Ireland's tax.

And, if you follow the stock market, you'll see that many companies raise money by selling bonds backed up by money which will pay 30% to be repatriated (if they need to give it back), without taking those 30% into account.

Many of them are betting on a "repatriation holiday". And they're probably going to get one because they own the legislation.

I learned a cunning (probably UK-only) technique the other day.

In the UK you have to pay "stamp duty" when you buy property. On a property over £1m in value, it's 5%. So if you have a fancy £5m apartment in London to sell, that's a not so fun £250k stamp tax for your buyer to pay. What to do? People are transferring the ownership of such properties into corporations and then the "homeowner" only has to sell the shares of the corporation to transfer the property rather than the property per se (stamp duty on shares is significantly lower than on property). Someone then obviously pockets the difference.

In Honduras, foreigners can't own more than 3/4 acre of property. The way around this is to have a corporation own the property, and you own the corporation. The system is setup for this purpose.

Even smaller properties are owned by corporations to make the paperwork easy, and to avoid the same types of taxes.

The downside is that mortgages aren't available for buying corporations, so financing is trickier

I know someone who did this same type of thing in Panama, except even the corporation can't be majority controlled by foreigners. So the Board of Directors of the proxy corporation is a bunch of locals who are paid to essentially quit at the behest of the foreign owner.

The problem is that any appreciation in value will attract tax at sale. Buy for £5m, sell for £8m and there will be tax to pay on the £3m profit. If this was your only home, you wouldn't have to pay any tax.

On the flip side, if you have multiple properties it makes sense. You can also write off any maintenance, refurbishments, etc as tax deductible expenses.

A cunning plan, as cunning as a fox who's just been appointed Professor of Cunning at Oxford University.

Some of these sound pretty shady, but many are just deferring taxes, not avoiding them. "The Bountiful Loss" technique in particular will reset your cost basis so you'll end up paying more tax later when you sell for real.

That can work well, depending on the amount of income you need every year, due to the progressive tax system.

e.g. you earn $3M one year, but only need $170k a year for the rest of your life.

If you pay taxes now, you are hit at nearly 35% rate. If you defer the money to your future non-earning years, you'll only pay a ~25% rate on the income.

Yes, but you earn interest on the deferred tax. Look at a tax rate of 35%, take your 8% gains take 35% off of that and you're left with 5.2% compound 5.2% against 8% for 40 years and look what you're left with. I'd much rather pay a higher tax rate later than now.

And "The Option Option" (stock options) is not really deferring taxes since you're also deferring the income.

Since tax rates vary depending on which party is in power, deferring taxes until they are lower could save real money.

Deferral is the basic premise of tax planning. The goal is to defer taxes, not avoid them.

Ten out of the 11 techniques mentioned – all except 'deferred compensation' – involve avoiding either capital gains or estate taxes.

So here's a simple solution: abolish capital gains and estate taxes.

The mega-rich manage to get around them, anyway. They have the accounting tricks, and the government not only can't keep up, the legislature can easily be tricked/lobbied into adding new loopholes in the future. The taxes mainly catch the slightly-rich, and spawn a giant negative-sum industry of tax manipulation.

Get the revenues instead from other taxes, that are both broader-based and harder-to-avoid-via-symbolic-manipulation. Consumption taxes and property taxes, for example.

The taxes mainly catch the slightly-rich

Perhaps that's the point? This is just a devil's advocate argument, but maybe those with the power to actually change the status quo don't, because they want to keep a nice buffer between the old money with billions and the nouveau riche with millions.

Consumption taxes and property taxes, for example.

The primary problem I have with property taxes is that my first emotional instinct is that property rights should allow a person who outright owns a property to live on and benefit from that property indefinitely, even if they later become too poor to afford a property tax (or the tax is raised to try to force a farmer off his/her land, for example). I haven't yet given enough thought to the other sides of the argument to claim that we should get rid of property taxes, though.

> the legislature can easily be tricked/lobbied into adding new loopholes in the future

I'm not sure that the legislature is being "tricked"; i'm sure plenty of congressmen make use of the loopholes they provide for people like, well, themselves.

If your a non-us citizen, you do this by just moving things to a jurisdiction that doesn't have capital gain and estate taxes. The US is unique that they'll tax you even if you are not resident in the country anymore.

As is evidenced by this and the GE story some weeks ago, it is clear that good (as in thoughtful, experienced, and very legal) guidance in taxes is almost always worth the cost--IF there are big bucks on the table.

In my experience, many of the techniques used with the rich can be used (after a little tinkering) with struggling startups. Its just that the wealthier clients are willing to pay more. There are only so many hours in the day. Thus, the professional, by default, doesn't choose to end up earning 1/2X when they could just as easily earn 2X.

There must be a way to leverage technology so that these expensive folks get paid the market rate and micro companies can afford it.

Not cookie cutter forms, but real, specific, thoughtful solutions that fit.

Maybe its in the interface.

The interface has nothing to do with it. It's all about how much they can get paid for offering tax advice.

But most of the solutions that the ultrarich use require significant amounts of monetary investment to achieve tax deferral (or income nonrecognition) results.

The general wealth point at which it starts making economic sense to employ a tax advisor is $250k-$350k in yearly income (depending on whether the income is salary or from capital investments). Less than that, and you'll pay more in fees than you will save in taxes.

I think by "it's in the interface" markklarich means that it may be possible to structure the work and information in a way, possibly through the use of innovative software, that makes it economically viable to make top-tier wealth management available to the next top n% of earners, where n is greater than the proportion who can currently afford it. As a hypothetical example, if there is some tedious aspect of tax advising that can't be assigned to a lower-paid accountant but could be automated, that would free up time to apply to additional clients. Alternatively, it may be possible to design a software and paperwork system that allows the slightly-rich to pool their resources and get a sort of one-size-fits-all solution to their tax problems.

Exactly. Thanks.

Hey, thanks! My blood pressure was sagging a little tonight.

Trickle-down economics 2.0 - this time endorsed by a President with (D).

I don't know how the math works out, but where is the non-profit charity revolving door.

You found a non-profit to help poor downtrodden folk, set yourself up as a principle. Give yourself an incredible services fee for managing the non-profit.

Donate to your rich friends non-profits at glamorous charity events where you get treated like royalty. Write off those expenses.

Get your friends to donate to your charity via the extravagant gala fund-raiser with the mayor and everyone there.

Your friends donate hundreds of thousands to your charity in thanks for your donation and they write off the amount, you then take a hefty % for managing the disbursement of 5% of those proceeds.

Its hard work raising money for those self-entitled down trodden bastards too lazy to stop being poor.

EDIT: since I was downvoted by one who clearly doesnt think this is true - simply the latest revelation in this scheme should be illustrated: Bristol Palin, you know - the un-wed single teen mom who started a non-profit to educate teens on how to not become an un-wed single teen mom. She paid her self ~$260K (Some figures put the number as high as $450K) while donating ~$35K to the cause.

http://www.google.com/search?q=bristol+palin+pays+herself...

Or Bono's RED charity with $21 BILLION in funds where a vast % of which are suspected to be fraudulently funneled off:

http://www.nbclosangeles.com/entertainment/celebrity/NATLCha...

EDIT: For clarity, I do not know if Bono is, himself, benefiting from the apparent fraud with the RED fund - though as I am a skeptic I will not rule out the fact that some financial benefit is happening here. If not, wouldn't you, if it was your charity, be taking point on figuring this out ASAP?

SO, with that said - I know that the cases of fraud are unevenly distributed through the various channels, but it would seem that this might be fairly indicative that peoples greed affect efficacy of a charity especially when the funds are in the multi-tens of billions.

How does your incredible services fee not count as taxable income?

As i mentioned I am not sure how the math works - but what I believe occurs is that the manager of the charity is likely not a "person" but setup as a trust. the money goes into that trust and is leveraged via loans / collateral just as is spelled out in several of the methods described in the link.

The point is that the donations to charities and the income of your own charities also offset each other.

Nice try - however did you read the whole article posted? Did you look at the links regarding Bristol and her charity? Did you look at all at the RED fund corruption investigations?

So, while I am making some assumptions, they are founded in reality. Further, it is clear that there are many mechanisms for wealthy to reduce their tax liability in creative ways (this is the premise of the article), thus for me to speculate that some vehicle for tax reduction may be to leverage some form of trust/partnership/collateral is being very upfront with my assumptions, further backed up by my repeated assertions that I am not sure how this works revealing that I could be totally wrong.

Edit, perhaps my last comment was too harsh, redacted...

Deleted mine because it was also a bit overheated and you seem to be commenting in good faith. I haven't investigated those links but it's my opinion that the vast majority of tax cheating is through means that involve fewer charities. (see GE).

We may be both correct. The over-inflated-self-payment form of cheating, ala Bristol Palin, may very well be the pedestrian 'new money' scam (for lack of better phrasing), whereas the other modes are far too sophisticated for her ilk and reserved for old-money to whom several hundred thousand is peasant pay.

Yeah - you pretty much need a family financial advisor to get that stuff working right. The Palins aren't at that level (yet - they sure are working hard on it, though).

It does count as taxable income. A charitable donation can only offset a max of 50% of the donor's total income for public charities, or 30% of total income for a donation to a private foundation charity,which is the type of charity described in the OP sample.

And of course, if you get to the point of donations and other deductions resulting in $0 tax, you get hit with AMT, which frequently results in a higher tax than you would owe if you had never made any deductions at all.

That "vast %" was in some grants, not over the whole fund:

http://www.msnbc.msn.com/id/41221202/ns/health-health_care/

Your comment, as it stands, makes it sound like Bono is siphoning off funds, which doesn't appear to be true from the evidence available.

You confused me, why not to donate to your own charity directly and not to write it off the same way? No need for revolving door.

IANACPA - but I would surmise this to be blatantly obvious tax fraud - where the other version is much easier to hide as "normal" activity.

You can't write off donations to fully offset income -- only 1/2 of your yearly income can be offset by charitable giving (or 30%, if you're stupid enough to donate to someone else's private foundation charity).

This would also not be "blatant tax fraud". Indeed, it is the transaction underlying the private foundation form of charity, which is the oldest type of charity recognized in the US.

Yeah, that's not how it works. The part that the Palin story leave out is the excise tax (courtesy of the intermediate sanctions provisions of the IRC) that Bristol Palin paid on the salary she received, in addition to the income taxes she paid on it.

Also ignored is that the majority of the corruption in Bono's charity was siphoned off by government officials in the countries where the charity was intending to offer its services.

Non-profits are not revovling doors for cash. The IRS rigorously audits charities that take in more than $50,000 in doanations in a year, and they are very zealous about levying hefty sanctions for abusive transactions. The scanrio you laid out would not qualify as a non-profit for many reasons, including the lack of public support, the lack of sufficient spending on exempt purposes, oh--and a big one--pervasive self-dealing.

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