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Thursday
Nov202014

Soda Tax: The War on Sodas Begins in Berkeley

After efforts in several cities to tax or limit the consumption of sweetened carbonated beverages, opponents of sodas have managed to pass a tax on sodas in the city of Berkeley, California. Tax attorney Rob Wood discusses the tax in this report and in his Forbes article “Death To The Soda Tax, Long Live The Soda Tax.

 

The impetus for taxing or otherwise limiting the consumption of sodas by Americans relates to the high sugar content of these drinks and the obesity problem in America. Wood says that taxes like this, often called “sin” taxes, are really excise taxes—the charge is per ounce or per unit.

Wood says that there was a bitter and hard-fought campaign to pass the tax in Berkeley. There was a similar effort in San Francisco, across the bay from Berkeley. The soda industry spent large sums of money opposing these taxes, apparently spending more in San Francisco. The tax failed in San Francisco. Wood notes that Berkeley is a smaller city and “historically very liberal.”

Wood opines that it is too early to count the tax in Berkeley as “the first domino falling.” But the tax has been a long time coming. Limiting soda consumption was tried in New York City, where Mayor Michael Bloomberg’s plan to keep large sugary drinks out of eating places was thrown out by the New York Court of Appeals. The effort was popularly referred to as the “big gulp ban.”

Wood says that there are still a lot of lines to be drawn in the regulation of sugary drinks. There are many beverages that are high in sugar content, even though they are not classified as sodas—orange juice is one example. Litigation may be triggered by future decisions about what is covered by the tax and what is not.

Another issue to be decided is what to do with the tax revenues. Cigarette excise taxes have been earmarked for a variety of purposes related to health and smoking prevention. Wood thinks that, in the long run, taxes like this will be earmarked, even though that does not mean the money will be spent productively. It also does not necessarily mean that consumption will be reduced.

As Wood says, the many ads consumers saw on television during the run-up to the soda tax election were probably confusing to anyone trying to make a reasoned decision.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Thursday
Nov202014

IRS Loses Trip Hawkins Case; Lavish Spending Is Not Necessarily Tax Evasion

Trip Hawkins, founder of Electronic Arts, has been in the news because his lavish spending lifestyle was involved in both a bankruptcy case and an IRS tax case. Hawkins’s win in the tax case is the subject of this report by tax attorney Rob Wood and also the subject of his Forbes article “IRS Loses 'Lavish Spending Is Tax Evasion' Case, Big Spenders Rejoice.”

 

The complaint against Hawkins is that, instead of paying his tax bill, he spent a lot of money on lavish living. The government’s position was that the lavish lifestyle was evidence of willfulness, something that can lead to large penalties and even prosecution. Willfulness has been discussed in reports on Lionel Messi and Dolce & Gabbana.

As Wood points out, it is not a “typical fact pattern” for most taxpayers, but the story is an interesting one. Hawkins owed a lot of taxes because of tax shelter activities. The attack was on willfulness, and the IRS lost that point.

The question here, as Wood says, is not whether someone should drive a Prius rather than a Ferrari, but whether it is bad to drive a Ferrari and fly around in a private jet plane. “Willful is a hard thing to define,” Wood says. In trials involving willfulness, most taxpayers do not take the stand because the government must prove its case. These cases are very fact specific, and the Hawkins case is likely to be very helpful for taxpayers who are in his situation.

Another issue the Hawkins case brings up is the handling of taxes in bankruptcy proceedings. Generally speaking, says Wood, bankruptcy does not fix tax liabilities. There are some specific and somewhat complicated timing rules that apply as to dischargeability of debts, perhaps including taxes. In this case, there were debts that could be dischargeable, and the government sought to prevent that outcome by the willfulness argument.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Wednesday
Nov192014

Harold Hamm’s Billion Dollar Divorce: Taxation Possibilities

Harold Hamm, CEO of Continental Resources, has recently gotten a divorce that comes with a price tag of about $1 billion. That sounds like a big divorce payment, but it could have been as large as $5 billion. As always, there will be tax ramifications depending on how the money transfers are handled. Tax attorney Rob Wood discusses the situation in this report, based on his Forbes article “Harold Hamm's Billion Dollar Divorce And The IRS.”

 

Wood notes that stories like these are interesting because the numbers are so big. However, the tax rules are the same, no matter how big the divorce. The rules are clear, Wood says but things get fouled up in a surprisingly large number of divorces.

It appears that most of what Ms. Hamm receives will be in the form of a property settlement, and transfers like that are not taxable under Section 1041 of the tax code. Alimony, however, is taxable income. It’s important for everyone involved to clearly define the terms of the divorce settlement.

In the settlement, Ms. Hamm gets $320 million up front, with monthly payments of $7 million or more to follow. Monthly payments, as Wood explains, “sounds like alimony, or . . . spousal maintenance.” Child support payments (when there are children involved) are not taxable.

Wood suggests that, if the Hamms decided to split their assets, whether by agreement or because of a court order, there would be no tax on the property. Under the estate and gift tax law, spouses can make such transfers without tax, and the same rule applies in a divorce. However, property transferred in this way “keeps its historic basis.” Meaning, Wood explains, that shares of stock (for example) would be transferred with a low basis, so that the ex-wife would pay taxes on the higher value should she sell the stock. The same thing applies to real estate.

If the monthly payments are spousal maintenance, they are deductible by him and taxable to her. A problem can occur when the parties to a divorce do not characterize the payments in the same way and the IRS compares the returns.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Thursday
Nov132014

Dolce & Gabbana Cleared of Tax Evasion Charges

Italian designers Stefano Gabbana and Domenico Dolce were ruled not guilty of tax evasion by Italy’s highest court. The case is interesting for several reasons, including its high-profile principals. It might also be useful to soccer superstar Lionel Messi in his tax case in Spain. Tax attorney Rob Wood discusses the D&G case in this report and in his Forbes article “Dolce & Gabbana Cleared Of Tax Evasion, Could Help Lionel Messi Trial.”

 

Wood explains that, in the Dolce & Gabbana case, the designers were found guilty of tax evasion and given 18-month sentences. An appellate court affirmed the case but reduced the sentences. Ultimately, the highest court reversed the criminal conviction. Of course, Wood notes, the Italian government will collect €343 million in fines and restitution.

The D&G case involved the sale of the Dolce & Gabbana company to a Luxembourg company. There were lawyers and advisors involved in the sale, “setting up entities . . . that could be called shell companies.” In the D&G case, the lawyers were able to persuade the highest court that the principals had not willfully tried to evade taxes. They were trying to save taxes, but all within the law as they understood it.

Wood believes that the arguments in the Dolce & Gabbana case “were compelling” and would be equally applicable to Lionel Messi’s case. Wood says he has read nothing to suggest that Messi himself did anything wrong. It may be that Wesley Snipes was also “led down the primrose path” by advisors and did not himself have any evil intent. Jail time is often a bad idea in situations like these.

Wood says that clearing one’s name is an important issue for people who are in the spotlight and whose success depends on their reputation.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Thursday
Nov132014

Alibaba: The New Chinese Internet Marketing Phenomenon

Alibaba has burst into the world’s consciousness in a big way. The Chinese Internet company is a bit like Amazon and a bit like eBay, but more profitable than either one. Tax attorney Rob Wood discusses this interesting new business in this report and in his Forbes article “Alibaba Is The New Amazon In Taxes (Just Ask Yahoo).”

 

Wood explains that Alibaba is like Amazon in some ways, especially in the early days of Amazon before it started collecting and remitting sales taxes, as it now does for 23 states. Alibaba is different from Amazon in several other ways, among them that it has no warehouses. It is an entity that serves to connect buyers and sellers. It is a Cayman Islands company, but its primary place of business is China.

Alibaba has been incredibly profitable. One beneficiary of that profit-making capacity has been Yahoo, which invested $1 billion in Alibaba in 2005. It presently appears that Yahoo’s profit is somewhere between $8.3 billion and $9 billion.

Wood notes that this profit situation leads to some interesting speculation about what Yahoo will do with the money and how it might try to shield the money from taxes. If it does nothing to shield the profit, it would presumably pay taxes at the U.S. rate of 35%. Wood points out that many corporations have worked on shielding profits by strategies like the “double Irish,” offshore income, licensing, patent boxes, and other strategies.

Alibaba’s forte is putting people together, and they make a great profit doing so. Also, Alibaba is putting the world in touch with Chinese buyers and sellers. Wood suggests that the Chinese connection is one of the things that makes its stock so attractive.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.