Tax Break

John Fisher, international tax consultant

Archive for the tag “American tax”

Men in Sepia

Nurture or nature?

Nurture or nature?

When larger than life Oscar winner Orson Welles was asked why there had been a self-destructive theme running through his career, he replied that he was like the scorpion who begged the frog to carry him across the river on his back. When the frog hesitated, fearing that the scorpion would bite him, the scorpion explained that, were he to bite him, they would both drown. Half way across, of course, the scorpion bit the frog. As they were going under, the frog asked “Why?”. “Because it is my nature”, replied the scorpion.

I realised last week why I am a tax advisor. It is “because it is my nature”. I went with two of my kids to see “Lincoln” and spent much of the, sometimes tedious, two and a half hours practicing one of my oldest hobbies – looking for continuity errors.

I got into this life-long obsession in 1969 when I noticed a modern skyscraper block in a scene from the World War I extravaganza “Oh! What a lovely war”. I eagerly pointed this out to my ever-indulgent grandfather who had participated in the tail end of the First World War and had taken me along to the film  for company. He could have said to me there and then: “When (if?) you grow up you are either going to be a tax adviser dedicating your life to finding loopholes in the law or a cynical social misfit, or both.” In the event, he just suggested kindly that I keep my voice down because some of the other patrons were staring disapprovingly at us.

Now, in contrast to that Oscar-winning travesty from 2011:”The Kings Speech” which – while George VI and Logan incontrovertibly existed – galloped roughshod over  history, Mr Spielberg seems to have taken his subject quite seriously. With sepia and grey alternating as prime colour and an abundance of talking heads and paucity of action, it gave the impression that the great director was trying to tell it as it was. Well, almost. Having successfully avoided, for a full 140 minutes, that awful melodrama reserved for Egyptian Soap Operas and Hollywood Blockbusters, Spielberg finally succumbed to his Hollywood urges. As Lincoln dropped his gloves on the table and sauntered out of the White House en route to Ford’s Theatre (SPOILER ALERT: if you were off sick the morning they taught American History at High School, the following information could seriously affect your enjoyment of the movie and life in general), the camera focused in on his misty-eyed black servant sadly watching him leave. He was going to the Theatre, for heaven’s sake, not – as far as anyone other than John Wilkes Booth knew – to his own funeral.

Daniel Day-Lewis he wasn't

Daniel Day-Lewis he wasn’t

My interest in Lincoln perked up when Tommy Lee Jones thundered onto the screen. Fully expecting him to end the film fighting off aliens blitz-bombing the Capitol, I was immediately confused by Thaddeus Stevens’s Republican credentials. There was no way that Al Gore’s college roommate and nominating speaker at the 2000 Democratic Convention was going to play one of Satan’s Own for any amount of Hollywood cash. Of course, this being America (and America being Hollywood), I soon understood that back then the Republicans were the good guys and this old curmudgeon was a super-liberal for his day.

What the movie did not consider important to tell us (possibly because it’s title was “Lincoln” rather than “Stevens”) was that old Thaddeus was one of the most important politicians in US history. As chairman of the quaintly named House Ways and Means Committee, he presided over the birth of two of the most important tax headaches of the American condition.

Taxation of Americans on the basis of citizenship rather than residency, an approach only shared today by Eritrea (whose capital, Asmara likely resembles the DC of Spielberg’s movie) was a civil war atrocity as was the first real US Estate Tax (although, it may be argued, that the atrocity in the latter case has been committed by successive generations of tax advisers).

What is clear is that neither measure has brought in much money to the  US Treasury. Expatriate Americans who report their income often have little income tax to pay while expatriate Americans who do not report their income are often turned into unwitting fugitives. Estate Tax (the current version of which  dates back to the First World War) nowadays only affects couples with more than $10.5 million in assets on death and people with that kind of spare stardust usually sprinkle it liberally into the hands of tax accountants and lawyers who magically make the problem go away.

An old favourite, the Dynasty Trust, which helped families like the Rockefellers shelter their assets from multi-generational Estate Tax  is still around, albeit with less spring in in its generation-skipping step than in John D’s day.

All you need to know now is what President Tyler looked like

All you need to know now is what President Tyler looked like

Somebody who might have gone for a Dynasty Trust had he not died a few months before the first Estate Tax came into force in 1862, was the 10th President of the United States, John Tyler. Tyler, who had 15 children, left the White House 16 years before Lincoln took up residence there. The reason I mention him is because, almost beyond belief, as of last year  he still had two living grandchildren (one of whom – at around 85 years old – looks remarkably like him).

Apart from that nonsense at the end, Lincoln is, by all accounts, a good film. I am now eagerly awaiting  a blockbuster about B-Actor President Ronald Reagan. Whoever directs it will be able to let his or her hair down and use every Hollywood cliché and device in the book without risk of criticism from a discerning public. My beloved grandmother, who did not attend war movies with her husband and grandchild (we also saw “The Charge of The Light Brigade” together), really could not stand Reagan. I can still see her talking with derision about the comment he made to Nancy when he met her as he arrived at the hospital after being shot: “Sorry, honey, I forgot to duck”.

One day the late Reagan may win the Oscar that eluded him in life. It is just that, when they announce “And the winner is…Ronald Reagan” the Academy Award will be for Best Picture rather than Best Actor.

I did it their way

What a glass is for

What a glass is for

Less than a month after my rare downing of a beer in an English pub, I was at it again – this time in New York. Served an ice-cold bottle of lager, I looked around furtively for the glass. Then I remembered:  John Wayne didn’t do glasses.  Swigging from the bottle – a practice I have rarely resorted to since being weaned off formula milk in the winter of 1959 –  I leaned back in my seat and drank in  the glorious jazz performance at the world-famous Blue Note Club in Greenwich Village.

This was no ordinary night. 75 years to the day after Benny Goodman played Carnegie Hall and, with that groundbreaking event, brought jazz into the American mainstream,  we were treated to a selection of the music played that evening. The glassless beer and the gently syncopated version of my personal favourite  of the night – Gershwin’s “The Man I Love” –  brought home to me what I love about America.

It is the syncopation.  America is always offbeat, playing to an unexpected rhythm.  The American way is rarely anybody else’s way (unless that anybody is copying American culture).  Americans are unencumbered by European or Japanese mores. They derive conclusions from first principles. For better or for worse.

Don't worry. It runs on battery

Don’t worry. It runs on battery

Only in America could a college dropout, along with others of his ilk, conduct an Information Technology Revolution from his garage.  But what was truly amazing was that Steve Jobs managed it using medieval 110 volt electrical circuits. As recently as last week, I held my breath as I inserted the adapted two-pin plug of my laptop into the miniscule wall socket of my Manhattan hotel room, fully expecting the whole caboodle to blow up in my face. In the event, all passed peacefully although, when I later tried to remove the plug, the entire socket launched  out of the wall .

Then, in the country that leads the world in financial innovation, there are those one-size-fits–all dollar bills. Convinced that, if a thief could not estimate how much cash his potential prey was holding, he would not make a grab for it, the Americans decided – in contrast to just about every other country in the world – not to distinguish between the sizes of the various denominations of their banknotes. While there is no apparent evidence that America is less into aggravated theft than the rest of the world (this sarcasm is going to kill me one day), this lunacy drove me out of my mind the night following the jazz concert.  Desperate to make an exit  from a Comedy Club where I had been exposed to the cream of New York Stand-up (the sarcasm just killed me), including a famous comedian’s daughter (unfortunately for her, and us, she inherited his looks rather than his sense of humour), I fumbled in the dark for at least ten minutes looking for the right cash to pay for my colleague’s and my FOUR bottles of beer (no glasses) that had been, in addition to the tickets,  a condition of entry.  Mind you, I have to be thankful that it at least took my mind off the show.

However, for me the daddy of them all is the insidious Sales Tax. Upward of 140 countries in the world have adopted a form of Value Added Tax, a highly efficient indirect tax that is charged and refunded throughout the supply chain until finally being imposed on the poor consumer.  Not in America. Over the years, I have listened to CPA’s, businessmen, politicians and other otherwise intelligent Americans, literally rant against a VAT.  In a country that considers Socialism a word only fit for New York Comedy Clubs (where alcohol filled audiences inexplicably guffaw with laughter each time an expletive is uttered), they scream that, as a regressive tax,  it would discriminate against the weaker elements of society who tend to consume a higher proportion of their income. Yeh, right. Their real reason is that it would make it easier  for Washington to raise more taxes.

In the meantime, the majority of the States and their subdivisions charge Sales Tax, which is normally only charged at the point of supply to the consumer. At each stage of the supply chain recipients of goods have to produce a government exemption certificate to avoid being charged the  tax. There are a myriad of exemptions and, to make things more complicated, in the case of supplies made interstate, a seller without a nexus in the recipient State does not need to account for the tax at all. There is enormous risk of Sales Tax fraud (VAT frauds tend to be restricted to international transactions) as well as “cascading” – the possibility that sales tax will be charged twice (as, say, the sale and resale of a second hand car – though, I suppose, there the risk is not greater than it being paid once).

But none of that is what bothers me about Sales Tax. What bothers me about Sales Tax is that, in New York at least, they NEVER tell you what the full price of anything is. I get caught off balance on every single trip. I see something advertised  for fifty bucks. I use  my  mental calculator to compare it to the price back home and then when I get to the point of no return at the till, they slap tax on top. Then I see shirts advertised 3 for $99. By now I am wise to these Americans’ tricks and I  work out  the tax in my head concluding  it is still worthwhile. Arriving at the till, I am charged $99. Like a moron, as I  fumble with the dollar bills stuffed  in my wallet trying to piece together the required amount, I  ask why  the price is  not higher. There is no sales tax on individual items of clothing under $110, dummy.

He made a mistake calculating the tip

He made a mistake calculating the tip

I have a theory that the reason for Sales Tax not being included in the price of things is because, when people go out to restaurants, they can avoid complicated calculations of how much tip to leave by giving “twice the tax”.  My proof is that when they go into supermarkets, because they do not need to tip, there is no Sales Tax on the same uncooked food sold there. Simple, really.

I was in New York last week for 4 days. I stayed in the same hotel room throughout (despite fears that electricity was going to jump out and kill me in my bed).  I did not use the mini-bar or room service. My only “luxury” was 4 days of access to the internet so that, following the demise of my already geriatric Blackberry on Day 1 of my trip, I could stay in contact with my office. The bill ran to an incredible two pages. While every day was charged separately, as is the custom in many places, it was the  4 types of tax charged on each item that did it.  The good news was that they only charged me for 2 days of internet use (despite my very honest protestations). It seems that it is all a matter of priorities. It doesn’t matter if  they  screw up the billing– just as long as the sales tax is right. God bless America.

Beating about the Bush tax cuts

Keep it simple

Keep it simple

I believe it was  John the Baptist  who coined the  phrase, “In the beginning  was the Word”. Whatever your creed, words have definitely had a pretty serious effect on the world from time immemorial. For me, the mere mention of the word “War”, in all its mono-syllabic, animal-like simplicity, is enough to strike fear into my cowardly heart. Some years ago, speaking at a conference about Investment in France –  in the presence of the French Ambassador and other dignitaries – I put paid to any ambitions I may have fostered to advise French nationals by telling an apocryphal Churchill story. Asked why he considered his 1940 speech, “We will fight them on the beaches….”   his most effective of the war, Churchill  is reputed to have explained that it was because, with one exception, his main vocabulary had been ancient Anglo-Saxon –  short and bold. That one exception – from Norman French – was “Surrender” . Nobody (and I mean,  n-o-b-o-d-y)  spoke to me at lunch.

It is interesting that two words uttered in an obscure speech nearly a year ago by an individual not normally known for his oratorical prowess,  managed to grip the entire American nation  in fear. While Joe  Public calmly went about his daily business ignoring the real nuclear threats coming out of Iran and North Korea, any mention of Ben Bernanke’s “Fiscal Cliff” would bring beads of sweat to his brow as he  imagined watching helplessly while his wife, children, home and SUV tipped over the edge of a mountain into the abyss.

As became apparent to all doubters last week, there never really was a Fiscal Cliff. The witching hour came and went on December 31 and it was only a full day later that the House of Representatives “pulled the country back from the brink” (spare me). It was a full day after THAT that President Obama, back at his “I’m as cool as a cucumber” vacation pad in Hawaii,  had it signed  into law by “autopen” with retroactive effect from the beginning of the year.  But we Old World people should remember that this is the land of Hanna Barbera where cartoon animals (an elephant and a donkey?) can go careering, horns locked, off a precipice and belatedly realizing their predicament, raise dust in the air as they do panic bicycle-riding motions with their feet regaining dry land. Ever the miserable rationalist, I prefer to think of  the blinded Duke of Gloucester in King Lear being deceived by his son into attempting suicide by jumping over a harmless bump, rather than the White Cliffs of Dover as he intended.

With the Fiscal Cliff  receding from view, we are being told that  all that happened was that “the can was kicked down the road”. Holdonasecond! Where did the  road come from? For the last year America has been hurtling towards a precipice across virgin green fields and rock formations, with the nation ending up dangling over the edge. Now, all of a sudden, there is a road. On the edge of a cliff?  No – there has simply been one of those sudden scene changes that typify Hollywood action movies and Washington speechwriters.

An open tin can with a dangerously serrated edge is now bumping down the stairs of the Capitol heading for the Mall, where it will roll happily along until it veers right two months from now at the Washington Monument and comes to rest on the White House lawn.  Then, with Washington required to negotiate deeply wounding spending cuts, the President and Congress will have to come up with something new and scary. How about  “The Great Mowing”? Frankly, they are more likely to go for something less consistent but more direct. “Washington Chainsaw Massacre”  is the sort of thing that should really give Ol’ Joe Public the willies.

If the branches of government still can’t find their common trunk, “the can will be kicked back  into the long grass” eventually reaching the end of the Mall at the foot of the Lincoln Memorial, where President, Senators and Representatives will be reminded that “Government is for the people”. If the greatest political speech in American history doesn’t do the trick, nothing will.

Tea Party Caucus

Tea Party Caucus

Meanwhile, the US is floating irreversibly up towards the “Debt Ceiling” – a rather gentle phrase that conjures up Nash terrace houses with high ceilings, Chippendale furniture and heavy scarlet curtains (not to mention scenes from Mary Poppins and Harry Potter). In reality, if the Tea Party Republicans lose all radio contact with Mission Control and vote not to increase the ceiling, that  really could plunge the entire planet into crisis overnight as the US starts to default on its liabilities.

On January 2, the Fiscal Cliff behind him and free to pursue the Republicans on the Debt Ceiling, President Obama released the safety catch on his mouth and turned it to semi-automatic: “We can’t not pay bills that we’ve already incurred”. Apart from being a candidate for unforgiveably worst line of 2013, it was a brilliantly awkward double negative that indiscriminately strafed  House Republicans. Unlike his predecessor, Obama normally manages to  place one word in front of another, and I am tempted to believe the sentence  construction was intentional.

Metaphor, idiom and daft constructs aside, it is  clear that both sides have got it wrong in this debate. Republican reluctance to raise more tax revenue in an acute deficit situation is barmy while Democrat insistence on raising tax rates only on the higher echelons (even before they agreed to a raised $400k threshold from the original $250k) will hardly scrape the protective coating off the deficit.

NASCAR got a tax break - increased depreciation. Understandable really

NASCAR got a tax break – increased depreciation. Understandable really

Meanwhile, there can be no way out of the current dire situation until President Obama decides which items of spending are really important to him and then takes an industrial lawn mower (or chainsaw) to the rest. The Republicans could well be right that – if they have no choice but to agree to higher taxation – rather than raise tax rates, Congress should do away with the countless deductions that render the headline tax rate irrelevant. Even the Act passed this week quietly included tax breaks thanks to all sorts of weird and wonderful lobbies. Essentially, the Internal Revenue Code needs to be thrown over a cliff.

The only serious question remaining is that of timing. Americans, having watched aghast at the austerity-induced implosion of the Euro zone, know that they need to balance the situation carefully. Paul Krugman, guru of the Neo-Keynesians, misses no opportunity to reject any quick fixes. But that does not imply  that there should not be a medium to long-term plan. Obama needs to show leadership – and leadership is not just fancy lines on the teleprompter. The recent election was totally negative as was the spat over the Fiscal Cliff. Time to think positive Mr Obama. “Yes, we can’t keep kicking the can down the road”.

The Greatest Show on Earth?

Can you still name this guy?

Laurence Spiegel was my first political hero. Never heard of him? Don’t worry – nor had Google the last time I checked. The one and only time I worked on the campaign team for a British General Election it was for Laurence Spiegel . That was an important election for two reasons: despite polls showing a clear advantage to the incumbent Labour Government, the Tories won an overall majority;  and the voting age was lowered from 21 to 18 on the grounds that if you were old enough to die for your country, you were old enough to choose the idiots that got you killed. None of this affected me. Laurence Spiegel was the no-hope third-party Liberal  candidate for Hendon South who I don’t think even bothered taking the day off work  (I didn’t see him at Campaign HQ)  and, in 1970, I wasn’t old enough to gain admittance to a cinema to see a war film let alone serve my Queen and country.

I have been following political campaigns ever since and the latest American circus was no exception. But it was too drawn out. There is a bridge in Scotland, the Forth, that is so long that, it is said, when they finish painting it they start again at the other end. In America, it used to be that campaigning for the Presidency started 4 years before polling day ie the day after the previous one.  Watching New Jersey Republican Governor Chris Christie cozying up to Barack Obama in the aftermath of Storm Sandy a week before the election, I could not help feeling that, in a piece of brilliantly cynical political manoeuvering, the world might well be  looking at Obama’s successor in the White House.

Election night was a major disappointment. That statement is clearly true for the 48% of  voters who picked Romney and did not, like so many of their countryment, exercise their constitutional right to stay  home welded to a sofa watching a ball game while trying to break records for calorie consumption. It was also a disappointment for me – and I, disenfranchised by accident of birth, actually wanted Obama to win (or, to be more precise, wanted the Republicans to lose). With the advantage of being 7 hours ahead of New York (some would say 7 light years), I was up with the lark to catch the phut of election night. What a yawn.

Within seconds of  Obama hitting 270 electoral college votes and hence guaranteeing a renewal of his Washington lease, what were the pundits talking about? Was it: what will Obama  do about the future of world peace ?  Was it: what will he do to make America  great again?  Was it: what is the future for social welfare ?  No, sir.  In fact, they were talking about tax. TAX! A subject normally reserved for discussion behind closed doors between consenting adults, was the first thing on the lips of the pros. And “reforming our tax code” even made it into Obama’s victory speech in Chicago (which sounded more like the candidate had beaten himself than Mitt Romney).

Fiscal Cliff? Who’s that?

If you have never heard of the Fiscal Cliff, I suggest you climb right back into that little boat in which you have been drifting without food or water for the last 9 months and enjoy the night sky. As everyone  knows, the Fiscal Cliff was Ben Bernanke’s term for the higher taxes and lower government spending that will kick in next January 1st if somebody does not kick Congress’s ass (“bottom” in the Queen’s English) first.

The Fiscal Cliff is, in fact, the unfortunate coincidence of a number of  economic legislative events coming together to cause an unmitigated disaster: the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers); the end of certain tax breaks for businesses; shifts in the alternative minimum tax;, the end of the Bush tax cuts;  and the beginning of taxes related to President Obama’s health care law. At the same time,  spending cuts previously agreed upon will begin to go into effect. If nothing is done, some experts are predicting a cataclysmic effect on GDP and unemployment.

The question you HAVE to ask yourself is “How did the world’s leading nation get into this mess in the first place?” You couldn’t make it up.

The Bush tax cuts (the famous bits are the lower tax rates on dividends and capital gains) could not be pushed through the front door of Congress back in 2001 and 2003 so they used something called the reconciliation process that allowed them to be imposed temporarily until the end of 2010. By 2010 the House of Representatives was resembling the battlefield at Gettysburg, and Congress extended them for 2 years. As politics go, that is kids’ stuff.

Four more years!

In the summer of 2011 the sparks were really flying. Congress needed to raise legal debt ceilings for the federal government, otherwise the US was going to default on its Sovereign Debt. The Republican controlled House of Representatives was not playing. At the eleventh hour, a compromise was reached whereby, default was avoided and  a Bipartisan Committee was established to produce a plan to reduce the deficit over 10 years by $1.2 trillion by late November. There was a  sting in the tail that either  arose from a genuine desire to get things sorted out or  the irrational hatred between the two sides of the House . The House decided that, if the Committee could not reach a conclusion, automatic, and horrendous,  cuts would start to kick in 2013. The Committee, its members too busy scratching each other’s eyes out,  didn’t make it.

All that remains for us to do now is to sit back and enjoy the fireworks coming out of the lame-duck Congress. Presumably a solution will be reached at midnight on December 31 (or, with retroactive effect, on January 1). In American politics, after a massive buildup, most things end in a Phut rather than a Bang.

Season of goodwill at the IRS ?

“And to you taxpayers out there, let me say this: Make sure you file your tax return on time! And remember that, even though income taxes can be a ‘pain in the neck,’ the folks at the IRS are regular people just like you, except that they can destroy your life”.

Thus wrote American humorist Dave Barry at the end of a column some years ago describing his frustration at having been chosen by random sample for a tax audit.

As a European (or, more correctly, after David Cameron’s recent walkout at the EU summit– as a Brit) I have always viewed with a mixture of curiosity and horror the workings of the US tax system. It is bad enough that the US is substantially the only country on Mother Earth that still insists on taxing its citizens as well as its residents due to Abe Lincoln’s pique at Americans deserting the country during the Civil War (Guys – get over yourselves, already).

But, to add insult to injury, Uncle Sam’s recent adoption of a policy of wholesale persecution of the world’s banking system (including the soon-to-smoke –you-out  FATCA regulations)  in search of  unreported assets and income of its citizens, is beyond a joke.

To sweeten the bitter pill the IRS has offered Amnesties – the latest being the 2011 Offshore Voluntary Disclosure Initiative (OVDI) which, from my experience, was less an amnesty and more a case of “Come out slowly with your hands above your heads” – the terms were so draconian that, despite the genuine fear of the IRS gradually closing in on them, many people followed Jack Benny’s response to a gun-toting gangster demanding “Your money or your life!” – “I’m thinking it over”, he said. The September deadline passed and many did nothing.

But finally, in this season of goodwill, there are signs that the IRS is softening its stance slightly. On December 7 the IRS issued a Factsheet aimed at Dual Citizens living outside the US. The IRS recognizes that such individuals may have failed to  file their Income Tax Returns and FBARs (Report of Foreign Bank and Financial Accounts) in a timely manner, the latter requiring filing by June 30 each year. The standard penalties that will generally apply are explained but, where it can be shown that there is “reasonable cause”, penalties can be reduced or cancelled. Reasonable cause normally means that a taxpayer “exercised ordinary business care and prudence in meeting his tax obligations but nevertheless failed to meet them”.

There is a list of the sort of things that need to be taken into account  when deciding reasonable cause but possibly of most interest in the  Fact Sheet are the “real situation” examples provided. There appears to be a move to finally show the milk of human kindness to the dual citizen living abroad who has not intentionally evaded US tax and who comes forward voluntarily to report. Ironically, this could mean that those who ultimately shied away from the recent amnesty could now land a better deal.

Of course, as always, there is a sting. The IRS are unlikely to entertain anonymous applications to establish whether “reasonable cause” will apply, so it would appear that there is an element of risk which needs careful analysis before making a move.

Perhaps the IRS are finally turning their backs on an attitude that HL Mencken summarized  as:  “The haunting fear that someone, somewhere,
may be happy”.

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