
Legal techniques the rich use to avoid paying taxes - lazyjeff
http://www.businessweek.com/magazine/content/11_16/b4224045265660.htm
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a5seo
Having been pitched a few of these schemes by CPA's and trust attorneys after
selling a business I had one conclusion:

It's just not worth the incredible complexity that will ensue to do most/all
of these things. I think especially in light of PG's post about avoiding
conflict and big transactions to keep focus.

Maybe if I were retired and done with the "game" I would have more willingness
to try these... or maybe if my wealth was in the billions, I might view these
strategies as sport or some kind of contribution to CPA employment levels, but
overall pursuing complex strategies like these for anyone under 60 without a
penchant for paperwork and dull conversations with lawyers is suicide.

Also, there's always the risk of an audit from hell. Imagine trying to focus
on your startup with that hanging over you.

~~~
jbooth
Technically, if after paying the lawyers and CPAs, you turn a penny of profit,
it's a profitable move.

More to the point, if you work for someone, and can point to that penny of
profit after paying your own salary, you just justified your own employment.

~~~
a5seo
ah, but no. it depends on your "cost of capital" -- attention and time are the
most costly things in my life, so anything that consumes them need produce
much more than a penny of profit.

~~~
jbooth
That holds if you're a dynamic startup. Most of the money, and certainly most
of the money to be conserved by avoiding taxes, isn't going through dynamic
startups.

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Joakal
How about paying 2.3% tax? [0]. Google's open about it because it's the
industry standard (eg Facebook is owned by Facebook Ireland Limited).

[0]
[http://www.theregister.co.uk/2010/10/22/google_double_irish_...](http://www.theregister.co.uk/2010/10/22/google_double_irish_tax_loophole/)

~~~
rprasad
The key to understanding this is to knowing that only _foreign_ profits
(earned from non-American customers in non-American jurisdictions) are subject
to the lower taxes through this scheme. This is income that, strictly
speaking, the US government does not truly have a right to tax since it has
only the most tenous nexus to an American taxpayer.

The money Google makes in America is still subject to the normal American tax
rates applicable to corporations.

~~~
beagle3
If you buy Microsoft software outside the US, you'll be talking to Microsoft
Ireland, even if you are in the UK and the software you bought was fully
developed in the UK (or in the US).

Either way, the only reason to do that for Microsoft is because of Ireland's
tax.

And, if you follow the stock market, you'll see that many companies raise
money by selling bonds backed up by money which will pay 30% to be repatriated
(if they need to give it back), without taking those 30% into account.

Many of them are betting on a "repatriation holiday". And they're probably
going to get one because they own the legislation.

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petercooper
I learned a cunning (probably UK-only) technique the other day.

In the UK you have to pay "stamp duty" when you buy property. On a property
over £1m in value, it's 5%. So if you have a fancy £5m apartment in London to
sell, that's a not so fun £250k stamp tax for your buyer to pay. What to do?
People are transferring the ownership of such properties into corporations and
then the "homeowner" only has to sell the shares of the corporation to
transfer the property rather than the property _per se_ (stamp duty on shares
is significantly lower than on property). Someone then obviously pockets the
difference.

~~~
tomfakes
In Honduras, foreigners can't own more than 3/4 acre of property. The way
around this is to have a corporation own the property, and you own the
corporation. The system is setup for this purpose.

Even smaller properties are owned by corporations to make the paperwork easy,
and to avoid the same types of taxes.

The downside is that mortgages aren't available for buying corporations, so
financing is trickier

~~~
r00fus
I know someone who did this same type of thing in Panama, except even the
corporation can't be majority controlled by foreigners. So the Board of
Directors of the proxy corporation is a bunch of locals who are paid to
essentially quit at the behest of the foreign owner.

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tedunangst
Some of these sound pretty shady, but many are just deferring taxes, not
avoiding them. "The Bountiful Loss" technique in particular will reset your
cost basis so you'll end up paying more tax later when you sell for real.

~~~
fleitz
Yes, but you earn interest on the deferred tax. Look at a tax rate of 35%,
take your 8% gains take 35% off of that and you're left with 5.2% compound
5.2% against 8% for 40 years and look what you're left with. I'd much rather
pay a higher tax rate later than now.

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gojomo
Ten out of the 11 techniques mentioned – all except 'deferred compensation' –
involve avoiding either _capital gains_ or _estate taxes_.

So here's a simple solution: abolish capital gains and estate taxes.

The mega-rich manage to get around them, anyway. They have the accounting
tricks, and the government not only can't keep up, the legislature can easily
be tricked/lobbied into adding new loopholes in the future. The taxes mainly
catch the slightly-rich, and spawn a giant negative-sum industry of tax
manipulation.

Get the revenues instead from other taxes, that are both broader-based and
harder-to-avoid-via-symbolic-manipulation. Consumption taxes and property
taxes, for example.

~~~
nitrogen
_The taxes mainly catch the slightly-rich_

Perhaps that's the point? This is just a devil's advocate argument, but maybe
those with the power to actually change the status quo don't, because they
want to keep a nice buffer between the old money with billions and the nouveau
riche with millions.

 _Consumption taxes and property taxes, for example._

The primary problem I have with property taxes is that my first emotional
instinct is that property rights should allow a person who outright owns a
property to live on and benefit from that property indefinitely, even if they
later become too poor to afford a property tax (or the tax is raised to try to
force a farmer off his/her land, for example). I haven't yet given enough
thought to the other sides of the argument to claim that we should get rid of
property taxes, though.

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markklarich
As is evidenced by this and the GE story some weeks ago, it is clear that good
(as in thoughtful, experienced, and very legal) guidance in taxes is almost
always worth the cost--IF there are big bucks on the table.

In my experience, many of the techniques used with the rich can be used (after
a little tinkering) with struggling startups. Its just that the wealthier
clients are willing to pay more. There are only so many hours in the day.
Thus, the professional, by default, doesn't choose to end up earning 1/2X when
they could just as easily earn 2X.

There must be a way to leverage technology so that these expensive folks get
paid the market rate and micro companies can afford it.

Not cookie cutter forms, but real, specific, thoughtful solutions that fit.

Maybe its in the interface.

~~~
rprasad
The interface has nothing to do with it. It's all about how much they can get
paid for offering tax advice.

But most of the solutions that the ultrarich use _require_ significant amounts
of monetary investment to achieve tax deferral (or income nonrecognition)
results.

The general wealth point at which it starts making economic sense to employ a
tax advisor is $250k-$350k in yearly income (depending on whether the income
is salary or from capital investments). Less than that, and you'll pay more in
fees than you will save in taxes.

~~~
nitrogen
I think by "it's in the interface" markklarich means that it may be possible
to structure the work and information in a way, possibly through the use of
innovative software, that makes it economically viable to make top-tier wealth
management available to the next top _n_ % of earners, where _n_ is greater
than the proportion who can currently afford it. As a hypothetical example, if
there is some tedious aspect of tax advising that can't be assigned to a
lower-paid accountant but could be automated, that would free up time to apply
to additional clients. Alternatively, it may be possible to design a software
and paperwork system that allows the slightly-rich to pool their resources and
get a sort of one-size-fits-all solution to their tax problems.

~~~
markklarich
Exactly. Thanks.

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Vivtek
Hey, thanks! My blood pressure was sagging a little tonight.

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ck2
Trickle-down economics 2.0 - this time endorsed by a President with (D).

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phlux
I don't know how the math works out, but where is the non-profit charity
revolving door.

You found a non-profit to help poor downtrodden folk, set yourself up as a
principle. Give yourself an incredible services fee for managing the non-
profit.

Donate to your rich friends non-profits at glamorous charity events where you
get treated like royalty. Write off those expenses.

Get your friends to donate to your charity via the extravagant gala fund-
raiser with the mayor and everyone there.

Your friends donate hundreds of thousands to your charity in thanks for your
donation and they write off the amount, you then take a hefty % for managing
the disbursement of 5% of those proceeds.

Its hard work raising money for those self-entitled down trodden bastards too
lazy to stop being poor.

EDIT: since I was downvoted by one who clearly doesnt think this is true -
simply the latest revelation in this scheme should be illustrated: Bristol
Palin, you know - the un-wed single teen mom who started a non-profit to
educate teens on how to not become an un-wed single teen mom. She paid her
self ~$260K (Some figures put the number as high as $450K) while donating
~$35K to the cause.

[http://www.google.com/search?q=bristol+palin+pays+herself...](http://www.google.com/search?q=bristol+palin+pays+herself&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-
US:official&client=firefox-a)

Or Bono's RED charity with $21 BILLION in funds where a vast % of which are
suspected to be fraudulently funneled off:

[http://www.nbclosangeles.com/entertainment/celebrity/NATLCha...](http://www.nbclosangeles.com/entertainment/celebrity/NATLCharity-
Backed-By-U2s-Bono-Under-Fire-for-Corruption-114453359.html)

EDIT: For clarity, I do not know if Bono is, himself, benefiting from the
apparent fraud with the RED fund - though as I am a skeptic I will not rule
out the fact that _some_ financial benefit is happening here. If not, wouldn't
you, if it was your charity, be taking point on figuring this out ASAP?

SO, with that said - I know that the cases of fraud are unevenly distributed
through the various channels, but it would seem that this might be fairly
indicative that peoples greed affect efficacy of a charity especially when the
funds are in the multi-tens of billions.

~~~
tedunangst
How does your incredible services fee not count as taxable income?

~~~
phlux
As i mentioned I am not sure how the math works - but what I believe occurs is
that the manager of the charity is likely not a "person" but setup as a trust.
the money goes into that trust and is leveraged via loans / collateral just as
is spelled out in several of the methods described in the link.

The point is that the donations to charities and the income of your own
charities also offset each other.

~~~
phlux
Nice try - however did you read the whole article posted? Did you look at the
links regarding Bristol and her charity? Did you look at all at the RED fund
corruption investigations?

So, while I am making some assumptions, they are founded in reality. Further,
it is clear that there are many mechanisms for wealthy to reduce their tax
liability in creative ways (this is the premise of the article), thus for me
to speculate that some vehicle for tax reduction _may_ be to leverage some
form of trust/partnership/collateral is being very upfront with my
assumptions, further backed up by my repeated assertions that I am not sure
how this works revealing that I could be totally wrong.

Edit, perhaps my last comment was too harsh, redacted...

~~~
phlux
We may be both correct. The over-inflated-self-payment form of cheating, ala
Bristol Palin, may very well be the pedestrian 'new money' scam (for lack of
better phrasing), whereas the other modes are far too sophisticated for her
ilk and reserved for old-money to whom several hundred thousand is peasant
pay.

~~~
Vivtek
Yeah - you pretty much need a family financial advisor to get that stuff
working right. The Palins aren't at that level (yet - they sure are working
hard on it, though).

