Palm trees and oak-shrouded pools hide crocodiles and moss. Palmetto hammocks surround murky Everglade pools of fetid air and swamp. Black thunderheads build. Lightening splashes brilliant exposure across a flat, gray sky. The tropical storm begins.
Highway 41, the Tamiami Trail, a thin ribbon of black that cuts a straight swath through south Florida's green. We are returning from Miami and tax meetings with international tax attorney, Leslie Share and are driving through the daily, summer squall.
Fighting the rain was worth it as I have been privileged to work with three of the finest tax attorneys in the world, Joe Cox, Leslie Share and David Melnik. Each at one time or the other has saved me from enormous costs, had I been unprepared or undefended and they are all eClub advisors you can depend on.
Though each of these advisors have saved me and many eClub members huge sums, the quality I respect most about each is their realism. In the tax environment where tens of thousands of pages of tax code contradict and confuse, we all live in a swampy gray taxation twilight zone!
This tax fogginess makes it all too easy to believe in tax avoidance schemes that appear to work and are supported by one part of a tax code. Yet my experience in dealing with tax avoidance regulations for over thirty years is that there are few ways left to avoid all tax. In most industrialized countries some part of the tax code will catch you, if you live work and earn in that country.
Yet there are plenty of promoters who will try to disillusion you. They want to lure you into tax avoidance structures that really do not work, so they can charge high fees or worse.
Their story is compelling and most of them know that one of the first things anyone does to create a cult is to create a common enemy for the group. It is so easy to make the tax man the enemy because he is usually so all-pervasive. Most tax law is unfair.
Yet it is with regret that I must write, “get real”. Death is part of life and taxes go hand in hand with wealth. We may not like taxation, but it has been and always will be with us. This session examines the risks that those who believe all tax can be avoided face. This is such an attractive thought, but it is not real! Only when we accept this fact can we seriously look at how to really reduce and defer taxation.
We have to get real if we want to be sure we will avoid trouble while getting the best tax avoidance we can. Until we accept the enormity and limitations of the law, fair and unfair, we cannot really get down to doing what will reduce the affects of punitive tax.
No one likes to write large tax checks, but when we try to avoid ALL tax we lose perspective and can get into trouble. We take imbalanced steps that can create legal problems plus seduce us into thinking that we do not have to spend continual effort to keep our tax bills down. For example here is a press release just sent to me by tax attorney, Leslie Share.
“DAY IN COURT” MAY BE COSTLY FOR FRIVOLOUS TAX CASE FILERS WASHINGTON–Getting their “day in court” has been an expensive proposition for some people who have recently faced stiff penalties from the Tax Court, Appeals Courts and District Courts for pursuing frivolous tax cases. The Internal Revenue Service warns that the courts are sending a clear message to others who may be considering such positions – they do so at their own risk. “Congress was concerned about taxpayers misusing the courts and obstructing the appeal rights of others when it enacted tougher sanctions in the 1980s,” said IRS Commissioner Charles O. Rossotti. “The courts are for resolving unclear issues of law, not a forum for repeating arguments that the courts have already rejected. Taxpayers intending to use the court as a soapbox should consider the potential cost.”
The law allows the courts to impose a penalty of up to $25,000 when they come to any of three conclusions: a taxpayer instituted a proceeding primarily for delay, a position is frivolous or groundless, or a taxpayer unreasonably failed to pursue administrative remedies. The courts' determination to use their sanctions authority to discourage the filing of frivolous tax lawsuits is evident in the case discussions that follow, which are taken from the public court records from the court proceedings:
This month, the Tax Court penalized two California residents in separate cases for trying to avoid taxes through the use of trusts. On June 21, the Court said that Charles and Francesca Sigerseth of El Macero met all three of the above criteria and fined them $15,000. The Court pointed out that the case was “a waste of limited judicial and administrative resources that could have been devoted to resolving bona fide claims of other taxpayers.” (Sigerseth v. Commissioner)
On June 7, the Court found that Andy Hromiko of Roseville, Calif., not his trust, was the true earner of income. It noted that he had made “shopworn arguments characteristic of the tax-protester rhetoric that has been universally rejected by this and other courts,” and fined him $12,500. (Matrixinfosys Trust v. Commissioner)
Last Dec. 4, the Tax Court imposed a $25,000 penalty against Hae-Rong and Lucy Ni, of San Jose, Calif. Contesting the IRS rejection of various deductions on their tax returns, the Nis were not responsive to orders for supporting records. Instead, they challenged the authority of the IRS to audit their returns and of the government to impose taxes. The Court concluded that the Nis had chosen “to pursue a strategy of noncooperation and delay, undertaken behind a smokescreen of frivolous tax-protester arguments.” The Court also imposed sanctions of more than $10,600 against the Nis' attorney, Crystal Sluyter, for arguing frivolous positions in bad faith. (The Nis Family Trust v. Commissioner)
While at the Federal Prison Camp in Duluth, Minn., for tax evasion, Darlow Madge contended that he wasn't a taxpayer, that his income from selling hospital supplies wasn't taxable, and that only foreign income is taxable. On Dec. 7, the Tax Court imposed the maximum $25,000 fine after having warned Madge that continuing with his frivolous arguments would likely result in a penalty. (Madge v. Commissioner)
Regina Davis of Cincinnati, Ohio received a $4,000 penalty from the Tax Court on April 10 for frivolous and groundless arguments, including that the IRS is not an agency of the United States and that it is a function of the Puerto Rican Bureau of Alcohol, Tobacco and Firearms. Davis persisted in her contentions even after the Court warned her that she could be fined for doing so. (Davis v. Commissioner)
The Tax Court is not the only place for arguing tax cases. Other courts are also experiencing frivolous cases and imposing sanctions.
On Feb. 2, the Tenth Circuit Court of Appeals imposed an $8,000 penalty on Larry and Sandee Gass of Capulin, Col., for appealing district court decisions which rejected their contentions that taxes on income from real property are unconstitutional. The Appeals Court had earlier fined them $2,000 for using the same arguments in another case. (Gass v. U.S.) Michele Brashier and Richard Hembree, of Tulsa, Okla., each drew $1,000 penalties on April 13 for arguing that requiring them to file sworn income tax returns violated their Fifth Amendment right against self-incrimination. The Tenth Circuit Court of Appeals noted that sanctions were warranted because the Tax Court had warned them that their argument–rejected consistently for more than seventy years–was frivolous.
(Brashier v. Commissioner)
After losing the argument that his wages were not income and receiving a $500 penalty, Garnell McAfee, Jr., of Flowery Branch. Ga., returned to U.S. District Court in Northern Georgia to try to stop the government from collecting the penalty by garnishing his wages. On April 4, the judge stated that “bringing this ill-considered, nonsensical litigation before this court for yet a second time is nothing but contumacious foolishness which wastes the time and energy of the court system.” He then imposed a $1,000 penalty, added 10 percent to the original penalty, and ordered McAfee to pay the U.S. Marshal's costs of serving the writ of garnishment on his employer. (McAfee v. U.S.)”
Let's get real. Taxes are here to stay. There is no plan that avoids all tax. Believe otherwise at your peril! So what do we do?
The first step is to determine our individual philosophy towards tax and to assess our own unique situation to determine if there are any tax avoidance steps that we can take which do work.
Second, make sure you do not get so caught up in this tax reduction process that you fail to make money. The sad reality is that many individuals warp their entire lives to make them tax efficient. This is like chopping off your feet so you don't have to wear shoes!
Your approach to legally reducing and deferring tax should be to create a unique plan that fits your circumstances. For example I know a best selling author who receives large (six figure) royalty income. He lives in the U.S., writes in the U.S. and is paid in the U.S. He pays a very large amount of tax on that income. Since he loves how he works, earns and where he lives, he has not tried to warp his life to reduce the tax he pays. “I have plenty left ” he says. By all means he uses every deduction he can get (within the scope of his profession), but getting on with and enjoying life are more important to him than reducing his tax bill one more notch.
I have another reader who is in global manufacturing and import-export. He may earn ten times more than the writer, yet pays less tax. His way of life happens to be one that is more tax efficient than the writer. Yet again the emphasis on how he lives and works the way he does is the fulfillment he gains from his way of life.
One of the best stories on how diverse tax philosophies can be is about a successful publisher who it was said wanted to pay one million dollars in tax. His philosophy was that if after using his best shots to reduce tax, he still had to pay a million, he was earning a huge income.
The story goes that at year's end he was working with his accountant and they concluded that his tax liability that year was $978,303. He was $21,697 short of his goal. “Isn't there any way we can pay this extra $21,687 tax, he asked his accountant?
His CPA deadpanned without missing a beat, “Not unless we cheat!”
Few of us will set a goal to pay more tax, but in reality this plan has a better chance for most to increase your total wealth than others. One of the greatest risks of tax avoidance is to so bend your affairs, for the purpose of keeping tax down, that you make less.
Keeping your taxes as low as you can is healthy. Shaping your life to the health code is not and it can seriously reduce your chances of success. Having faced this reality of taxation we can look in the next courses at great loopholes that can be used to avoid tax.
This is a interactive course so send me the ideas (and or questions) you have that you think can help avoid tax. Let's take a look and see if our experts can shoot holes in them, or make them better. Until next lesson, good investing!