Thursday, June 23, 2011

Repatriation - Another Opinion

The June 22, 2011 edition of the Salisbury Post printed an opinion from Jim Rogers, CEO of Duke Energy, titled “Let’s repatriate overseas profits”. The article discusses corporate profits “trapped” overseas, and how that money can be brought back to the U.S. to help rebuild the economy.

What is meant by “repatriation”? Corporations with earnings from foreign subsidiaries must pay income taxes on that profit to the foreign host country. On the corporation’s U.S. tax return, income from all sources is taxed, but a foreign tax credit is allowed for taxes paid to a foreign country, so the same income isn’t taxed twice. When foreign income that has not yet been taxed by the U.S. is brought back to the United States, or “repatriated”, tax on that income is then due at the current corporate rate of 35%.  So in theory, at the end of the day, the corporation pays 35% tax (and no more) on earnings of all operations, foreign and domestic.

As Mr. Rodgers states, the U.S. corporate tax rate is the second highest in the world. Multi-national companies go to great lengths to “offshore” as much profit as possible. Google, for example, is reported as saving $3.1B in taxes through the use of sophisticated tax shelters called the “Double Irish” and the “Dutch Sandwich”, which involves foreign subsidiaries In Ireland, the Netherlands and Bermuda.

The proposal, creatively named the Freedom to Invest Act and contained in H.R. 1834, would “refresh” IRC Section 965 to temporarily provide a 5.25% tax on earnings distributed by a controlled foreign subsidiary to its U.S. parent, rather than the normal 35% rate – essentially a “tax holiday” for repatriated corporate earnings. The bill is sponsored by Rep. Brady of Texas and 10 others, including Sue Myrick, and has been endorsed by Sen. Hagan.

The use of foreign subsidiaries can dramatically lower effective tax rates. The problem is in returning those profits to the U.S. so they can be spent in the U.S. Current U.S. repatriation law negates any deferred tax rate gains, so the corporate goal becomes repatriation at minimal tax cost. Currently, most tax-minimizing repatriation shelters are based on IRC Section 368(a)(2) which governs tax-free reorganizations of corporations. For example, the “Killer B transaction”, so named because it is based on Section 368(a)(2)(B), is a cross-border triangular reorganization that has the effect of repatriating foreign earnings of a subsidiary to the parent corporation without a corresponding dividend to the parent that would be subject to U.S. income tax. The “Deadly D”, named for IRC Section 368(a)(2)(D), is another repatriation strategy involving a reorganization that allows one U.S. company to transfer to a foreign subsidiary the assets of another acquired U.S. company, enabling the foreign subsidiary to kick offshore cash back to the U.S. company parent without incurring repatriation taxes. “Outbound F”, is another reorganization-based shelter.

The temporary repatriation “tax holiday” was created in 2004 to entice corporations to repatriate foreign earnings. Reasons given by multi-national corporations to repatriate in 2004 are the same as now, to altruistically boost the economy. Sen. Hagan said “A repatriation holiday can encourage economic activity at a fraction of the cost of fiscal policy”.  Jim Rogers states “At a time when our country’s economy needs a shot in the arm and our federal government can no longer afford stimulus funds, American businesses stand ready to step up and inject $1 trillion trapped overseas by punitive federal tax law” and “We need congressional action now to unlock this cash so it can be put to work here at home to spur our economic recovery in the U.S.”

Similar arguments were made during the last repatriation holiday in 2004, called the Homeland Investment Act. So how did that work out? According to a study released by the National Bureau of Economic Research, "Repatriations did not lead to an increase in domestic investment, employment or R&D, even for the firms that lobbied for the tax holiday stating these intentions”. An estimated $300B was repatriated, of which 92% was used for share buybacks and corporate acquisitions.

Michael Mudaca, the assistant secretary for tax policy at the Treasury Department, stated “In 2004, when the U.S. enacted a repatriation holiday, the goal was to encourage U.S. multi-nationals to pay bigger cash dividends from their overseas subsidiaries and use the cash to make investments in the United States. Unfortunately, there is no evidence that it increased U.S. investments or jobs, and it cost taxpayers billions”.

An example is Dell, which promised to use the money to build a new plant in Winston-Salem. They repatriated $4B in 2004, and spent $100M on the plant (which they later acknowledged they would have built anyway), then used $2B for a share buyback. By the way, Dell also obtained $7M in local incentives to open the Winston-Salem plant, and subsequently halted production there in 2010.

Repatriated earnings of Pharmaceutical companies in 2004 went mostly towards acquisitions of other companies.

An estimated $100B of repatriations was never “trapped” offshore in the first place. Corporations, aware of the impending enactment of the 2004 Act, off-shored profits of U.S. operations into foreign subsidiaries, then “round-tripped” them back at the reduced rate.

Repatriated profits go straight to the bottom line of the corporation’s earnings at a bargain tax burden, and would provide a nice bump in profitability and resulting share prices. Although Congress is trying to provide penalties if job loss occurs within a 2 year window, the actual amount of the penalty is around $8,700 per employee, hardly enough to dissuade layoffs. Based on what the corporations actually did in 2004, rather than what they said then and now, it is likely that job creation and capital investment resulting from repatriation now would be insignificant, and the cost to the taxpayer would be the total amount repatriated multiplied by 35% minus 5.25%.

Don’t be deceived. This idea is driven by corporate greed, not corporate concern for the U.S. economy. Multi-nationals have gone to great expense to shelter the earnings at issue from U.S. tax. Denying repatriation merely puts them on a level playing field with domestic-only companies. Their earnings are “trapped” overseas by their own design and intent.

The real problem is the corporate tax rate. To compete in a global economy, we should truly simplify the tax code and lower the top rates.

Wednesday, June 15, 2011

Lap Dances are subject to Sales Tax?

Last week, the New York State Supreme Court determined that lap dances are not exempt from NY sales tax because the activity does not rise (pun intended) to the level of art. 

The Court ruled on June 9, 2011 in the matter of Loudon Corp dba “Nite Moves” vs. State of New York that lap dances are not considered choreographed artistic performances that would be exempt from sales tax.  Nite Moves has been fighting the tax law – first in an administrative hearing and then in court – following a 2005 audit by the NYS Division of Taxation that concluded the club owed $125,000 in sales tax, plus interest for door admission charges and private dance sales.  The Appellate Division of the NYS Supreme Court upheld that decision in a unanimous opinion.  A newspaper article describing this travesty of justice is here.

At least the issue of nexus in this case is clear.  In the recent battle of North Carolina vs. Amazon, nexus isn’t clear at all.  The February 2011 settlement between NC and Amazon only cleared up the matter of confidential information held by Amazon regarding specific customer purchases (which NC never wanted anyway).  Still at issue is the liability of sales tax. 

Liability for sales tax is determined by “nexus”, or connection, between the vendor and the state.  Nexus occurs when a vendor has a “presence” in a state, and a connection exists between vendor and state such that subjecting the vendor to the state’s laws is neither unfair to the vendor nor likely to harm interstate commerce – requirements stemming from the due process and commerce clauses of the U.S. Constitution. 

In the days prior to internet commerce, nexus was easy.  Does the vendor have a physical location in the state?   If they do, nexus is established.  Now, nexus is harder to pin down.  Clearly, there are no Amazon stores in the local malls.  In the Amazon case, in-state affiliates were enough to establish nexus.  This is a big deal for NC web entrepreneurs, because losing Amazon affiliate status costs a great deal of money.  It’s also a big deal for cash-strapped states.

Case law across the states doesn’t help much.  Despite similar fact patterns, a 2007 Louisiana ruling in St. Tammany Parish Tax Collector v. (05-5695 ED La) concluded that online did not have nexus, while a 2005 California decision reached the opposite conclusion in Borders online, LLC v. BOE, 29 Cal Rptr 3d176 [“Nexus Confusion: Sales and Use Tax”, Annette Nellen, CPA/Esq.].

In North Carolina, taxpayers have the opportunity to voluntarily report purchases that they should have paid sales tax on but didn’t, and pay the resulting self-assessed sales tax with their individual tax return.  No report on the success of that approach.

One thing is for certain – there will always be dispute between those riding the gravy train, and those pulling it.

A final note for my NC readers; I have no idea if lap dances occurring in North Carolina are subject to sales tax.  The last lap dance I had was in 1973, in Florida.  

Tuesday, June 14, 2011

Is your non-profit still tax-exempt? Are you sure?

Prior to the passage of the Pension Protection Act of 2006, many tax-exempt organizations, particularly smaller ones, were not required to file information returns with the IRS.  The 2006 Act changed that, and now most tax-exempt organizations ARE required to file with the IRS.  Many smaller organizations, unaware of the change, are in danger of losing their tax-exempt status, or have already lost it.  Recently, the IRS released a list of 275,000 organizations that under the law have automatically lost their tax-exempt status because they have not filed as legally required for the past three years.  The list is here.

Filing thresholds are detailed here   Smaller non-profits, those with annual gross receipts of $50,000 or less, are allowed to file an abbreviated return, Form 990-N (commonly referred to as “e-Postcard”).  Information on the e-Postcard is hereWhile the e-Postcard is a fairly simple matter, particularly when compared to the Form 990-EZ or the full Form 990, it nevertheless has a filing deadline.  The penalty for not filing can be severe - loss of tax-exempt status.

But, all is not lost.  The IRS has published instructions to help these organizations regain their tax-exempt status.  Note that the organization will have to pay a user fee for the reinstatement.  The good news is, for smaller organizations having gross receipts of $50,000 or less, the user fee has been reduced from $400-$850 to only $100.

Many of us are involved in small non-profit organizations in one capacity or another.  Loss of tax-exempt status could threaten the organization’s very existence.  Use the resources the IRS has provided, and make sure your non-profit regains or keeps its tax-exempt status!

Wednesday, June 1, 2011


It's that time of year again when the roads are filled with motorcycles.  Of course, I hope everyone will be extra cautious.  "Look twice and save a life!"

But, chances are, they won't.  And afterwards, they will always say the same thing - I never saw the guy.

No, this time, I want to talk to the motorcyclist.  The squid on the crotch rocket with a full face helmet, shorts and flip-flops.  The guy on the harley wearing a beanie helmet the size of a small cereal bowl.  The guy in SC with no helmet at all.

I know, individual freedom.  Hey, this is America!  Do what you want!  And let's be honest, protective gear is made for low side get-offs at relatively low speeds, hitting nothing solid and taking a bit of a slide.  Anything more than that, and you're dead anyway.  I get that.

But, why ignore a risk you have some control over?  Dress for the crash, and not the ride! ATGATT - All The Gear All The Time!

In October 2006, I was enjoying a leisurely ride on an '06 Honda ST1300.  I had already put 12,000 miles on that bike in 4 months.  That day, I was close to the end of a 2 hour ride, and was less than a mile from my house.  I was forced off the road at 50 mph by an inattentive driver.  Truthfully, I was riding a bit agressively, and was surprised and completely out of position when, without signals, he abruptly turned left into a driveway that I didn't see, so I'll share the blame.  Light contact with the car, a high side into the road, then sliding off the road.  I was wearing the helmet pictured above, armored jacket, armored pants and leather gloves. Doesn't look like much damage to the helmet, does it?  Still, I got a concussion.  Also, 7 broken ribs, a broken bone in my hand, a quarter-sized road rash where the elbow seam failed, assorted bruises and a friction burn on my shoulder.  The synthetic material outside of the armor got so hot it melted the skin off my shoulder.  Five years later, and I still have a white spot there roughly 2 inches in diameter.  The ER doctor told Pam if it weren't for the jacket, I wouldn't have a shoulder. The bike was totaled.

I was lucky.  No protective clothing will prevent broken bones.  But it could have been so much worse.   A couple of months in my recliner looking out the window, a few bottles of Hydocodon, and I was fine.

There are two types of riders - those who have crashed, and those who are going to crash.  So, its your choice.  ATGATT, or not.  I will pass along a name the ER doctors have for the "or not" crowd - Organ Donors.