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Comment by microtherion | Hacker News Reader

Not just royalty obligations, you could apply this principle to any corporate acquisition and say that you're merely acquiring the assets and have no interest in acquiring the liabilities.

This is by no means a novel idea; the concept of fraudulent conveyance is frequently litigated: https://en.wikipedia.org/wiki/Fraudulent_conveyance

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If corporations are entitled to some of the rights of persons, then I'd like some of the rights of corporations.

I'll take the asset of my house, without the liability of the outstanding mortgage balance.

You probably also want to be able to deduct all of your expenses from your taxes.

Ah yes. Good old "Your Name Inc." that also charitably houses and feeds its only employee in their office space.

I'm only half joking because I'd like to see that tested in court.

It's already been tested in court - in several jurisdictions. It's fine for your (or any) corporation to house you, but you can't get a material impact from it. Either you have to pay market rent, or claim the taxable benefit.

You jest, but as an unincorporated sole proprietorship (aka if you do random freelance work on the internet without making a company) you can deduct all your business expenses (including the part of your apt rent that you used for doing the profit making activity) just as a normal individual.

Sadly (or not), the deductable changed and it's not as worthwhile unless you really go for the gold. I heard maybe it changed with recent laws?

This is obviously not tax advice, but I think the earlier poster is referring to reductions to AGI that are on "schedule C" titled "profit or loss from business". Some tax language seems to refer to these as "deductions", but they are distinct from the "itemized" or "standard" deduction. Schedule C goes to Schedule 1 goes to 1040 line 7a. The standard or itemized deduction is on line 9. The Qualified Business Income Deduction on line 10 is another AGI-reducing gimme for people who get 1099-income distinct from the standard or itemized deduction. And don't forget, your eligibility for Marketplace plans including subsidies is based on your (Modified)AGI, not your gross income, which can be a costly mistake (Based on what I understand now, in 2020 my household would have been able to get a marketplace plan with subsidy but we didn't due to not understanding the income guidelines).

(note: I may have mixed referring to 2019 and 2020 tax forms here, particularly wher I cited line numbers)

Not tax advice, iana accountant, etc.

I think in canada (where i live), you can just deduct all the business expenses (things that are part personal like rent have to be the reasonable porportion related to the business). You can't deduct more than the income from the business in a year, but you can carry over your expenses to the next year if you have more expenses than income.

you declare your daughter a consultant and deduct all the money you pay to her as consulting fees. She uses the money to get haircut, lunch, dresses, etc. and deducts it from her consulting income as business expenses.

In the UK, had an accountant who did something similar for us. Want to avoid a bunch of taxes on large landscaped property? Get a few cows and goats and classify it as a "farm" property. Transportation charges and date-night dinners? Business expense.

Western tax laws were a joke to me as an outsider, heavily geared towards the haves. But hey, I was contributing to the economy too.

Gotta be careful with that sort of thing these days, HMRC has pretty strict rules on stuff like dinners and entertainment expenses. One of the rare positives of a decade of Tory rule is that they know all the tricks their chums are using, so they know how to close a few loopholes whenever they need more pennies in their coffers. But yes, some dodging is still fairly trivial.

From what I know of the Tories (since I've attended quite a few B&Ws) and even Labour (whose conventions are such a mind-numbing affair in comparison), they never touch donors. I found it quite funny that I could buy access to UK ministers for a pittance, while if I had to do the same in India, I would have had to consistently fork over a lot more and sell my kidney along with it. It's funny how you could get access to the PM for just 50k GBP a year, even less if it's a Labour PM, or how you can get access to Rishi for 25k GBP a year. It's also the reason why a lot of donors are Russian or Arab.

> It's funny how you could get access to the PM for just 50k GBP a year, even less if it's a Labour PM, or how you can get access to Rishi for 25k GBP a year. It's also the reason why a lot of donors are Russian or Arab.

If you could actually buy anything but an ear for your complaints access would be a great deal more expensive. That’s not to say this petty corruption of the democratic process is right but it’s like how a Russian would burst out laughing at the idea of a politician with bricks of cash in the freezer. In Russia the Chief of Police lives in a palace he obviously can’t afford on his salary and it’s very public, not something he tries to hide. In the US or UK if you have a freezer full of cash the police are going to get you eventually.

Take no small or secret bribes.

I wasn't talking of bribes, but Leader's Group and Treasury Group. Donations to parties are more than enough to move mountains.

Does move mountains mean something illegal or does it mean you can get a minister to get a civil servant to look at something? Because £50K a year will pay for a journalist/PR person who can also eventually get a civil servant to look at a thing. Access isn’t corruption, even if it is unfair.

If you mean form a cohort with other like-minded donors to influence policy, yes. Does it mean tiny favors here and there from time to time? Yes. Does it mean you can expedite yourself into a citizenship? No.

fakedang, that won't survive an HMRC audit.

Easily did for 4 years. A lot of it was perfectly legal as long as it wasn't overboard (funding grocery shopping as business expenses for example), wasn't recurring and wasn't too high without reason (funding your wedding as a business expense for instance).

The UK tax laws are a joke. As told to me by multiple HMRC auditors, and my accountant (who is funnily a former HMRC auditor). The US' laws are an even bigger joke. After incorporating on the mainland, I've found that Swiss/Liechtensteiner/Luxembourgian tax laws are actually pretty decent and exacting, in spite of them being criticized as a tax haven and all.

Also, was neighbours with a ton of Arab guys in Knightsbridge who used to offset the risk of being caught (since they were into active money laundering), by donating to the Tories. Disgusting, but it is what it is.

Don't know about the UK, but at least in Canada setting up a fake farm is easy and popular https://www.bclocalnews.com/news/too-easy-for-fake-farmers-t...

My dogs featured in a viral YouTube video and generated some income. I asked my CPA if I could deduct my dog food expenses. He said no. But I mean, if those dogs don't eat, they don't keep generating viral content!

huh! i'm in no way a CPA, yet my understanding from just occasional reading of the 1040 instructions is that in US you can deduct hobby expenses from that hobby income, it is just that the expenses can't be more than that income (for the expenses to be more than income it should be a "business", not a hobby. I personally find it pretty funny, something like a joke Q:"guess what is the difference between hobby and business?" A:"if you lose money than it is a business, if you make the money - it is a hobby!")

And her mom is a hair stylist, cook, and seamstress.

Just going to set up a double Irish with a Caiman sandwich to avoid paying any taxes.

I'm honestly quite surprised that someone hasn't already set up to offer "Tax Havens As A Service" long ago. Click a button, pay $100, and you're incorporated in what's commonly known among the .01% as a "tax-proof structure". Why hasn't this been done yet?

Like most "exploits as a service", this only works if your volume is small enough to not make it worth shutting you down. The 0.1% get their privileges by being small in number and well-connected enough to deal with legislative retaliation. Once everyone starts bending the rules the rules bend back.

This happened in the UK: it was very common for IT contractors to set up companies to get preferential tax rates, until the "IR35" reforms targeted that. Lots of the Crown Dependencies and Overseas Territories make their livings from tax avoidance; the Paradise Papers caught out a lot of celebrities using their services. https://www.theguardian.com/news/2017/nov/14/after-successiv...

Look down https://thebanks.eu/compare-countries-by-banking-sector and do a rough division of size of assets by size of country, and you can estimate which countries have the biggest tax avoidance industries.

Nearly a trillion Euro sitting in the Cayman Islands? Bank soundness "n/a"? Seems legit.

Jersey (pop 97,000) and Guernsey (pop 67,000) more assets than Romania (pop 19,000,000)? Seems legit.

I don't think it's solely/mainly a question of volumes/numbers and being sufficiently well connected, though no doubt it is a factor. In my experience the 0.01% are privileged to play by the book, but have an advantage over the rest of us in having access to a whole library of books to choose from, and the money to hire experts in book-selection and lackeys to manage the whole affair on a day-to-day basis. That's the stuff a Tax-Haven-As-Service outfit would have to solve behind the scenes.

Most of these tricks involve entities-in-cahoots across multiple (usually at least three) jurisdictions, so I imagine it might take quite a LONG time before the various legal authorities in all relevant jurisdictions get sufficiently coordinated to have effective regulations in place. The evidence that this is the status-quo is that it exists, and has not, to date, been "solved" by any one government. Unfortunately it's just too expensive a solution to justify itself for us proles.

eta: Also Alderney (pop. 2000-ish)

I have looked into what it might take to pull off some of these tax avoidence strategies for an average, upper middle income person. And the issue isn't just the knowledge, it's that you need a certain size before things actually start to meet the threshold of what the IRS and other foreign tax agencies consider legitimate.

One specific issue I remember running into was the strategy of offloading intellectual property to an offshore entity.

That entity needs to have staff and be at least doing something in regards to the business. I don't think you could get by just having an employee less or even shared entity holding the intellectual property. Because just an empty shell company is going to be seen purely as a tax avoidance play with no other purpose.

A guy here in Aus does pretty much that.

https://inqld.com.au/insights/2020/09/22/how-a-gold-coast-je...

Yes! I remember that being suggested in the Panama Papers discussion and adding that it’s an ideal startup idea.

https://news.ycombinator.com/item?id=11418909

Question still remains: why hasn't it been done yet? ;)

Yeah I'd love to know the experiences of anyone who has explored this.

Edit: Ah, one thing I didn't think of in my praise of the idea, is that this services doesn't give you a moat -- anyone can copy your forms, structures, etc. for getting the scheme set up.

No imagination.

I'm going to be a film company, get paid millions to work in different places, then have exactly zero profit when all is said and done.

Anne McCaffery lives in Ireland because royalties are taxed at a preferential rate.

Artistic output is exempt from income tax (https://www.citizensinformation.ie/en/money_and_tax/tax/inco....)

Only up to a small amount yearly now. It used to be everything but they changed it a decade ago.

Worth nothing that this 'small amount' is 50,000 euro. Which is almost double the total income of the median fine artist or writer.

Sources:

Exemption - https://www.citizensinformation.ie/en/money_and_tax/tax/inco...

Writers salary - https://www.irishtimes.com/culture/books/the-500-a-year-care...

Artist salary - https://www.glassdoor.ie/Salaries/artist-salary-SRCH_KO0,6.h...

Sure, but for Anne McCaffrey/many famous authors who moved to Ireland it's a really small amount.

I agree with the cap, as people earning more than 50k p.a. from their arts don't need it.

As a writer I do too. There are many issues with the scheme, primarily around the elements of 'writing' which are technically essential to making a living (teaching, talks etc), but not covered in the requirement that income be primarily from writing. That said, it shouldn't be an excuse for very wealthy people to use Ireland as a tax haven. We already get enough of that with the corporate tax rate.

In a similar vein, private equity firms seem to be able to execute leveraged buyouts of companies (such as Toys R Us) saddling the company with huge debt payable to the private equity firm, which sucks money out of the company until it files for bankruptcy.

It sounds like a scam but apparently it is legal somehow.

That's not a scam; it's no different from buying a house on a mortgage. Paying down the debt sucks away your income, and maybe if you're not as successful as you'd hoped then you default and walk away. Generally companies only put themselves in that position if they're near-bankrupt already (certainly that's the case with Toys R Us - if it hadn't been for the private equity deal they'd have been bankrupt 5 years earlier).

And they're not the only retailer to collapse after a private equity buyout:

https://slate.com/business/2020/01/private-equity-retail-fai...

The first theory is interesting: "sometimes, private equity firms really are just looters."

The high bankruptcy rate is not encouraging.

https://www.washingtonpost.com/business/2019/07/24/private-e...

etc.

And some of Toys R Us' creditors aren't happy either:

https://www.bloomberg.com/news/articles/2020-03-13/toys-r-us...

Is it really a surprise that retail is in trouble? Private equity is a scapegoat for outdated business models. Covering up a non-viable business with the appreciation of your buildings is an accounting trick (and was a big factor in the 2010 crisis: a lot of companies went bankrupt not because their businesses suddenly became unviable, but because their businesses had been unviable for years but they made a profit on the value of their buildings); selling off the building while it's still worth something and letting the actual business stand or fall on its merits is a better approach.

This is all true.

The question, however, is: given that all these companies are already on the brink of bankruptcy, how is it legal (and acceptable) that a 3rd party comes in, extracts hundreds of millions from the already bankrupt company, and when the bankruptcy does arrive, it is bigger and worse than what would have happened without the PE involvement? Basically everyone except the PE gets screwed.

I have not been following this closely, but if the 5-10 PE deals I’ve looked at over the years, it was clear from day 1 whether it was structured to have a chance at recovery, (some of which succeed, and some fail) or just to enrich the PE buyer.

I wonder why this isn’t clear to the creditors - my guess would be that an early legitimate creditor only uses “other peoples money”, which legitimizes it for others.

Often a PE buyout is a bankruptcy, or a last-ditch alternative to one. Breaking the company down for parts is often what the creditors want, explicitly or otherwise, and the PE firm is just being paid to execute it. (There are definitely cases where one creditor arranges things to screw over another - but again I think blaming the PE firm for that is misplaced.)

They have their share of failures like any other industry, but IME Hanlon's Razor - or just legitimate risk-taking that doesn't pan out - applies to most PE bankruptcies.

> The first theory is interesting: "sometimes, private equity firms really are just looters."

Looting implies that the objects didn't belong to you. If I buy a cheap crappy old car to sell of the spare parts, is that "looting"

> The high bankruptcy rate is not encouraging.

That doesn't have much to do with private equity, the entire sector is in deep shit. It's not like Toys'R'Us was a model of health...

> And some of Toys R Us' creditors aren't happy either:

That's a more serious question, and will need to be resolved. Keep in mind that if the creditors aren't happy, they won't lend money again to companies owned by those PE firms. So it's not like there are no consequences

> That's not a scam; it's no different from buying a house on a mortgage.

When I buy a house on a mortgage, I (not the house) end up with the debt, and I don't get to transfer any of the assets associated with the house to myself in a way which makes them not subject to repossession if the mortgage isn't paid.

So, yeah, the deals we're talking about are very different.

Personal mortgages are non-recourse in most states. You can get whatever value you can out of the house, then walk away, and the lender gets to keep the house but they can't come after you.

> Personal mortgages are non-recourse in most states.

12 out of 50 is not "most".

https://www.forbes.com/advisor/loans/recourse-loans-vs-non-r... ["In all but 12 states, home mortgages are also considered recourse loans. If a borrower is underwater on their mortgage—meaning the outstanding debt is greater than the value of the home—the bank may not be able to recoup all of its money from a foreclosure sale. In this case, the bank can get a deficiency judgment for the difference between the debt and the foreclosure sale price and then garnish the borrower’s wages or file a lien against other assets."]

> it's no different from buying a house on a mortgage

If you find a bank that lets me pay myself a "tenant fee" for living in a house I bought on a mortgage, please let me know, I'm all ears...

That's not a scam; it's no different from buying a house on a mortgage.

It's very different. A PE firm borrows money, buys a company, transfers the debt to the company, strips the assets and then lets it go bankrupt, leaving them with all the assets and no debts. Rinse and repeat.

You can’t “transfer debt”. Otherwise I’d borrow a ton of money and transfer the debt to Bill Gates. A PE firm borrows to buy a company, attempts to make it a better money making machine by making process improvements and having it borrow to fund expansion and then sells it. The people who lend to the company know what they’re doing. They’re making a bet that the PE firm was right and they’ve made a better money making machine. Sometimes they’re wrong and they lose this money. That’s capitalism. If you make a bad investment you can lose all your money.

If you followed toys r us or hostess (or many other such cases), the playbook is that the “money making machine” takes on new debt pays dividends to the PE, and then fails to pay that debt. This is apparently legal, the question is mostly how this loophole still exists despite being (ab)used by PE so many times.

It’s not a loophole. It’s people lending money to people who can’t pay it back. That’s capitalism. You make a mistake and lose money. It’s the exact same kind of mistake as lending to a wannabe restaurateur whose restaurant fails. You lent money to someone who couldn’t abide by the terms of the loan. As the lender that is your problem.

Sorry if I am being obtuse but I don't think that Toys R Us lent the PE firm money to buy Toys R Us. But somehow Toys R Us was responsible for paying back the debt that the PE firm took on to buy Toys R Us.

The PE firm should have more skin in the game, if they take out a loan to buy Toys R Us, they should be responsible if the company fails.

> it's no different from buying a house on a mortgage.

It's very different.

The mortgage equivalent would be an investor taking out a loan to buy out the mortgage, transferring the deeds of the house to themselves. And then transferring the loan into the mortgage-payer's name and making him responsible for paying it off.

They've really done nothing except use their superior credit status as abritage to obtain a tangible asset.

It is possible to do legitimately but it is also frequently done as a profitable game for the investor, who pays for the company with a loan that they pay back out of the company once they own it, sells off assets to his friends or a shell company and then declares the company bankrupt before selling it too.

It is a well known phenomenon - the book Glass House covers the destruction of Anchor Glass this way in surprising detail.

More background: https://prospect.org/economy/last-legislation-stop-private-e...

> who pays for the company with a loan that they pay back out of the company once they own it, sells off assets to his friends or a shell company and then declares the company bankrupt before selling it too.

None of this makes sense. if the company is profitable enough to be able to pay back its entire market capitalisation, why would they sell the assets off? If the cow is making that much milk, they'll keep milking it, or float it back and make a fortune

The company is not profitable, but accounting somehow makes it possible to pay dividends to new owner.

the money has to come from somewhere... either the money was in the company, in which case it was drastically undervalued, or it comes from creditors, in which case if they want to lose their money it's their problem

Or, a loan was taken - repayment of which is supposed to take precedence over dividend distribution and dealing with related entity. And some apparently legal accounting tricks allow the loan repayment to lose its precedence, and when time comes to repay, suddenly there is no money.

It is indeed the creditors money that is lost. And AFAIK it is legal. I just wonder why it’s legal.

Much like in the subprime crisis, the original creditor knows quite well the likelihood of recovering the loan is low, but they sell it to a dumber creditor (often pension funds) who does not.

Unlike toysrus and hostess, the subprime thing included a huge mount of illegal things by many of the parties, but still hardly any enforcement - so I guess it doesn’t matter all that much if it’s legal or not.

What I don't understand is why a bank would loan money to a leveraged buyout when it so often ends in bankruptcy.

I think we have to be careful of sampling bias - nobody ever hears of the leveraged buyouts that work smoothly

PE can lend to its owned assets. Accumulation of capital is powerful in that way.

Acquiring the assets without the liabilities makes no sense. Does it legally?

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