
Hacking the IRS with gold coins - Gibbon
http://www.lvrj.com/news/46074037.html#blogcomments?submitted=y
======
patrickg-zill
Here is the conundrum that the IRS is in..

The US Government has placed a face value on the coins, a 1-ounce gold coin is
marked 50 US Dollars. The intrinsic value of that coin today is right around
$1000.

IF they argue that intrinsic value should be the determining factor, then what
is the intrinsic value of a paper $20 bill (really about 5 cents of paper and
ink)?

IF the IRS states that face value of the $20 bill is established by the US
Government, then the face value of the $50 gold coin must also be taken at its
face value - after all, the face value of the coin was established by the same
government that established the paper bill's value.

I hope I have explained this right... the IRS cannot argue intrinsic value vs.
face value without falling into a ditch. I think this is what the defense is
counting on.

~~~
sethg
I don't see any conundrum. I don't know what the actual IRS rules are, but
common sense tells me that if I am paid with some commodity (dollar bills,
silver coins, buckets of crude), then my income for tax purposes is the
_market_ value of that commodity. A $20 bill has a market value of $20. A one-
ounce gold coin marked "$50" has a market value of about $1000. If aliens
shower us with free gold, and the price of gold drops to $40 an once, then we
can start caring about the face value of the one-ounce gold coin.

~~~
stcredzero
The problem is the nebulousness of "market value." What if someone finds out
that one of their payroll bills has a highly sought-after printing error that
makes it worth 100X the face value? Then, what if it's subsequently discovered
that it's not a real example of the printing error, but that the error was
faked? How are you going to determine market value? Most of the time a
regulation or a contract will name some widely-used index. Unfortunately, the
most widely used index for legal tender is "multiplicative identity."

~~~
jerf
There is no intrinsic value. There is no unchanging market value. There is
only the market value now, and the market value it used to have, and for that
matter the definition of "market" isn't terribly obvious either, though the
only ones that matter are "people I can actually sell the thing to" and "the
average of the market for some purpose or other".

This is the way it is. Complaining about it doesn't change anything. Market
value may be nebulous, but it's the least nebulous meaningful definition of
"value" there is for commerce.

(This is why I can't even be a "goldbug". The idea that gold has intrinsic
value is patently absurd, because there is no such thing as "intrinsic value".
And once you are reduced to arguing that "Well, _historically_ it's been a
good investment" it is simply one commodity amoungst many and the argument is
over, because now gold isn't special.)

~~~
stcredzero
I never commented in support of "intrinsic value." Specifically, the "market
value" of legal tender is arguably problematic. There are well established
instruments that can be used to determine the market values of things like
cars and electricity and the metals in coins. However, "legal tender" status
has a clear precedent for confounding this. A penny is a penny, and an
employer who pays with older coins whose copper and nickel content is worth
more than their face value wouldn't be liable for additional tax.

~~~
jerf
'I never commented in support of "intrinsic value."'

I know, it was part of a larger point. You did seem to imply the existence of
some sort of "real market value", though, which would somehow transcend
transient fluctuations, but those transient fluctuations are all that exist.
Even money doesn't have a real market value; a dollar is only worth what
people will give you for it.

My point is that the nebulousness can be fixed by anything I said; my point is
that the nebulousness is irreducible, and all attempts to make it less
nebulous, no matter how necessary they may be for things like tax law, will
inevitably be a leaky abstraction to the underlying chaos. So, complaining
that a particular abstraction is leaky isn't very useful, they _all_ will be.

------
tptacek
If you pay someone a nominal $2500 in $50-denominated gold coins, and that
someone sells the coins on the open market for $50,000, haven't they just
incurred taxable income?

~~~
gojomo
Clearly the IRS prefers the interpretation that your 'nominal' payment was
actually $50K (or included a $47.5K gift) -- so tax is owed even if the
recipient sits on the coins.

If in fact someone immediately sold the coins and reported the nominal payment
plus the short-term 'investment gain', it might push the matter below the
level of IRS concern. My understanding is that when the net tax effect is
about the same from alternate accountings, the IRS is unlikely to quibble
about the particulars (but IANAL or tax accountant).

~~~
tptacek
I understand the competing preferences here, but even in this guy's best-case
scenario, he hasn't avoided income tax; he's just shifted it from payroll tax
(which is FICA eligible) to capital gains.

You can do a similar thing as an independent contractor just by forming an
S-Corp and claiming your income as profit sharing instead of salary. And of
course the outcome is similar: you enjoy a nominal benefit for awhile, and
then you get audited and taken to court.

I don't think the IRS is shaking in their boots over this.

~~~
gojomo
Right -- the only significant gain is if the coins are held longer (for long-
term gains treatment of the phony appreciation) or sold in an unreported
transaction (which itself compounds the illegality).

And my point was: while any combination of stunts leading to less taxes paid
is of interest to the IRS, if you instead engage in bizarro accounting but the
end result is you wind up paying about the same amount of taxes, just via
different line-item -- no "net tax effect" -- they may as a practical matter
ignore you. They care about the money, not the principle.

------
grandalf
Impressive. It puts into perspective the ceremonious folly of making the gold
and silver coins legal tender.

~~~
jam
Really? My takeaway was the difficulty of trying to uphold otherwise-worthless
paper as legal tender.

~~~
ubernostrum
And gold has some intrinsic value?

Gold is worth what the person who buys it from you says it is worth.

Paper is worth what the person who buys it from you says it is worth.

As "money", both are valueless in and of themselves, and merely stand in for
things of actual value (goods and services).

These are the fundamentals. Forget them at your peril.

~~~
Kadin
This is true, but gold at least has a several-thousand-year history of use as
a currency, and as a stable source of value.

The US dollar that we use today has a history going back to exactly 1971 and
the end of Bretton Woods.

I think people get a little too worked up over the evils of "fiat currencies,"
but they do have a point that from a historical perspective they are basically
an experiment. It's entirely possible that people may look back from a few
centuries hence and look at floating national currencies (which are
essentially backed only by the backing government's power to tax a particular
economy) and think "what a really terrible idea." The very power that a fiat
currency gives a government over its money supply might turn out to be more
temptation than even the most honest government can withstand in the long run.
We don't know, because there just hasn't been enough time to tell.

There's two orders of magnitude difference between the amount of time gold has
been in use and the amount of time the current un-pegged dollar has been
around. While it's true they're both given value by what other people will
trade for them, it's a bit disingenuous to say they're the same.

~~~
ubernostrum
I invite you to read my reply to ghshephard.

------
byrneseyeview
How is this a hack? He failed. It would be a great article if he won, but it
looks like he rather transparently ignored the rules on the IRS website, and
got busted.

"Hacking the War on Drugs: I put weed in my sock drawer, which worked until my
roommate called the cops on me as a prank."

~~~
stcredzero
According to the article, the IRS only has instructions dealing with
collectible coins that are _out_ of circulation. The coins he used were still
in circulation.

~~~
byrneseyeview
Uh, yeah, but if all he did was place a low value on the coins, then his
business is going to have artificially high profits, so the net result is that
he goes to court over paying corporate income taxes instead of payroll taxes
plus paying his people enough for their Federal taxes.

For example, if he earns $60, and his expense is paying someone $50, either:

a) He pays them $50, they pay taxes on that $50, and he pays taxes on the $10,
or

b) He does his coin trick, they pay taxes on, say, $5, and he pays taxes on
$55 (because he gives the coins a low value).

If all he's doing is buying something at one price, writing down its value,
and giving it away, then anyone can do this. Try it with shares of a
privately-held company, or golf club memberships, or anything that doesn't
freely trade.

~~~
stcredzero
Yes, but legal tender _does_ freely trade. So, what if you decided to pay your
workers in cash? You contract a company to handle this for you, and hauling
all those bills is a huge pain in the butt, so they charge you $X over the
value of the bills that get handed out to your workers. What if you had each
stack of bills individually wrapped in a satin ribbon, resulting in an even
higher service fee? Aren't you doing the same thing?

~~~
byrneseyeview
I'm sorry, but I don't understand what you're trying to say. In the case you
mentioned, there's an extra cost, but neither the business nor the employees
are paying it. In the case I'm talking about, all he ended up doing was making
the choice to pay corporate taxes instead of paying approximately the same
amount in higher wages.

It's like breaking into a store in order to steal something, and then leaving
behind enough money to pay for it. Pointlessly flouting the law.

~~~
invisible
What's you seem to be missing (I think) is that you do not pay taxes on buying
a coin for $950 even if it's only worth (face value) is $50.

~~~
byrneseyeview
That's not the transaction for which you would be taxed. But if you're paying
your workers something that you claim is worth $50, for which you spent $950,
that $900 difference is money that would be an expense if you paid them
normally. Instead, it's profit, and you owe $300 in taxes on it -- even though
you have the negative cash flow from your $950 coin.

That's what's missing from the story. Either we're reading it wrong, or what
he committed was a conventional tax fraud with a gold-bug spin.

------
MaysonL
I wonder how he accounted for the cost of the gold coins? Did he attempt to
write it off as a business expense?

