Is Warren Buffett a hypocrite?

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Are Warren Buffett has chided rich America for not paying taxes. Two companies that he controls not only sued the government claiming that taxes passed by Congress didn’t apply to them, but further seem to be hit with a counterclaim over other unpaid taxes totaling over $300 Million.

The operative Sections of the IRS Code are Sections 4261 and 4262. There is an excise tax on “taxable transportation” assessed in Section 4261. In Section 4262, “taxable transportation” is defined as follows:

“(a) Taxable transportation; in general
For purposes of this part, except as provided in subsection (b), the term “taxable transportation” means –

(1) transportation by air which begins in the United States or in the 225-mile zone and ends in the United States or in the 225-mile zone; and
(2) in the case of transportation by air other than transportation described in paragraph (1), that portion of such transportation which is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if such portion is not a part of uninterrupted international air transportation (within the meaning of subsection (c)(3)).

(b) Exclusion of certain travel
For purposes of this part, the term “taxable transportation” does not include that portion of any transportation by air which meets all 4 of the following requirements:

(1) such portion is outside the United States;
(2) neither such portion nor any segment thereof is directly or indirectly –

(A) between (i) a point where the route of the transportation leaves or enters the continental United States, or (ii) a port or station in the 225-mile zone, and
(B) a port or station in the 225-mile zone;

(3) such portion –

(A) begins at either (i) the point where the route of the transportation leaves the United States, or (ii) a port or station in the 225-mile zone, and
(B) ends at either (i) the point where the route of the transportation enters the United States, or (ii) a port or station in the 225-mile zone; and

(4) a direct line from the point (or the port or station) specified in paragraph (3)(A), to the point (or the port or station) specified in paragraph (3)(B), passes through or over a point which is not within 225 miles of the United States.”

A key rule of tax law interpretation is that unless there is a specific exclusion, an item that is within the definition of a taxable transaction is taxable.

Net-Jet charges for tickets for rides on private jets. The question is what is Net-Jet getting out of the deal. Is it acting as kind of a facilitator (like a travel agent), thus in reality the transporter of the passenger owes the tax. However, the language of the statute is clear that the person who uses the transportation pays the tax. Thus, when Net-Jet collects for the ticket, it was supposed to collect the tax from the ticket purchaser.

Section 4263 reads: “(c) Payment of tax
Where any tax imposed by section 4261 is not paid at the time payment for transportation is made, then, under regulations prescribed by the Secretary, to the extent that such tax is not collected under any other provision of this subchapter, such tax shall be paid by the carrier providing the initial segment of such transportation which begins or ends in the United States.”

Thus, the carrier is supposed to pay the tax.

The word “carrier is defined in 49 USC 41762 as follows:
” In this subchapter, the following definitions apply:
(1) Air carrier. – The term “air carrier” means any air carrier holding a certificate of public convenience and necessity issued by the Secretary of Transportation under section 41102. ”

So the question of fact does Net-Jet hold a certificate of convenience and necessity from the Secretary of Transportation. If it does, then it probably should have collected the tax, if not, then the “carrier” the person who was paid the fare should collect and pay over the tax.

NetJets would counter that it is selling not tickets on a plane but in fact fractional ownership interests in a fleet of planes and that the “ticket” is really just a cost of ownership (like a timeshare). The question is whether NetJets is deemed a carrier by the FAA and the DOT, if it is then passengers would owe the tax. Some NetJets entities have certificates of convenience, others I could not find. But the long and short of it is this. If NetJets does not owe the tax, then this is a huge tax loophole of the type that Buffett has publicly decried. So, perhaps a sign of his magnanimity it would be great if he were to say, that NetJets is willing to work with Congress to ensure there is no loophole here.

5 Common Mistakes by New Businesses- Part 2

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Sam started his business. He formed the corporation, and his accountant timely filed his SubS Election. He owned all of the stock and was the President. His business was general contracting. He spent his days bidding on jobs and getting new work. Paperwork was not his forte. He didn’t bother to learn the rules about how payroll taxes worked. After about 4 years, he finally opened a stack of envelopes from the IRS and finds out that he needs to file and pay these taxes. He finds out that the company owes $1 Million in payroll taxes. He doesn’t have the money, and the company doesn’t have the money. Then to make matters worse the IRS shows up and assesses him with a 100% penalty for unpaid withheld taxes which totals about $700,000. Had he just made sure what the steps were to make payroll deposits as he went along and made sure that returns were filed, his business might still be operating. Oh and by the way, the 100% penalty against him personally is non-dischargeable in bankruptcy and even worse his home is not protected even though he owns it with his wife. See, U.S. v. Kraft

Lenders

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Kids decide to buy a home. They ask mom to invest a large sum of money in the home in exchange for a percentage tenancy in common interest in the home. They agree to be wholly responsible for the loan, but mom of course agrees to pledge her 1/2 interest in the property to lender. Lender rather than being happy that they only have to lend a lesser percentage of the purchase price and acknowledging the investment status of mom, asks mom to write a gift letter. That’s right a gift letter stating that she has made a gift under oath. Now the tax lawyer in me says, “Whoa an investment in property in exchange for a percentage interest is not a gift.” But lender explains that certain governmentally supported lending agencies have “unwritten” rules that say that these types of transactions are treated as “gifts” for their paperwork purposes. So, I ask can I write a gift letter that basically says given that Lender is using the following definition of the word “gift” then Mom is making a gift. The answer back is of course “no”. Then tax lawyer asks will lender indemnify mom against any gift taxes that might be assessed by reason of having to sign this non-gift letter gift letter. The answer back is “no”. I find it interesting that a government back lender is requiring people to perjure themselves to effectuate a transaction that makes their loan more secure and is not a gift for gift tax purposes. Welcome to America.

Crummy without notice?

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In the Estate of Turner v. Commissioner T.C. Memo 2011-209 (August 30, 2011), the Tax Court held that so long as the Grantor of an irrevocable life insurance trust grants a power of withdrawal to beneficiaries, the gift is an indirect present interest gift qualifying for the annual exclusion. The import of this ruling is that it extends the rule of Crummy to include gifts with a power of withdrawal where no written notice is given to the beneficiary.

So, let’s say Clyde and his wife Jewell creates an irrevocable life insurance trust. He buys a $3 Million policy and the annual premiums are $81,000 per year. He has three children who are beneficiaries of the trust upon his death. The trust grants the children the right to withdraw any gifts to the trust or for the benefit of the trust. Clyde decides to directly pay the life insurance premiums directly from the joint checking account with Jewell in lieu of paying some trustee to get the check and reissue a new check. No letters are sent to the beneficiaries informing them of their right to withdraw the premium monies from the trust. That should be a gift of a future interest, right? Wrong says the Turner decision. The court emphasized that the power to demand withdrawals after each direct and indirect transfer to the Trust was given to the beneficiaries in the Trust. The fact that some or even all of the beneficiaries may not have know of their right to withdraw is irrelevant. Thus, it is a present interest gift.

Why is that important? Each person has a right to give up to $13,500 per year per donee. This means that Clyde could give $13,500 to each of his children each year. It also means that Jewell could give $13,500 to each of her children each year (or any other individual that she wanted to give to). That means that Clyde and Jewell could give away $81,000 each year to their three children. This does not reduce the $5 Million each that they can give away when they die. In other words it’s a huge benefit to families trying to reduce estate taxes.

I’d still recommend giving the Crummy notices to the beneficiaries. This is but one Tax Court ruling and could be reversed, revised, distinguished or ignored. But at least if there is a mistake, you have at least one arrow to fire back when assessed a gift or estate tax.

Mitt Romney’s Tax Return

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I looked at Mitt Romney’s tax return which was published in the paper. Much was made of his low tax rate. The problem is the nuances that are missed by most media. First, he has millions of dollars of “qualified” dividend income. Qualified dividends are taxed at 15%. The rub is that they’ve already been taxed at corporate rates as high as 35% before they were issued as dividends. So, in reality this income has already had a 50% tax. Long term capital gains are taxed at 15%. However, many times such gains include inflation, yet the tax basis is not adjusted for inflation. Meaning that the recipient is being taxed on inflation in addition to real gains. This is one reason given as to why there is a lower capital gains rate so that they don’t have to get into adjusting basis to inflation (or deflation). Note he also paid a alternative minimum tax of several hundred thousand dollars. I also note that in a two year period he gave over $4 Million to charity. He also apparently gave a large percentage of it to the LDS Church. Anyway, as I said, its very nuanced and not something that is clear cut.