From Russia With Love

The former Soviet republic of Ukraine has become the world's hottest military and diplomatic flashpoint as Ukrainian nationalists face off against pro-Russian separatists. Russian President Vladimir Putin courteously waited until after the Sochi Olympics to seize Crimea, then position troops throughout eastern Ukraine. Now he's announced he'll withdraw the troops he denied dispatching in the first place. But sabers are rattling, and the situation is so volatile that combat could explode before you finish reading this email.

The United States obviously wants to avoid that possibility. But Secretary of State John Kerry's best efforts appear to be having little effect. We're certainly not going to involve our own military anytime soon. Even James Bond himself would be hard-pressed to parachute in with a solution. So, who can we turn to?

Well, how about those stalwarts of democracy at the IRS?

Back in 2010, Washington passed the Foreign Account Tax Compliance Act ("FATCA") to stop tax evaders from parking assets in secret foreign accounts. (Add another "t" to that acronym and you'll see who it's aimed at!) That law requires all foreign banks to spill the beans on American accounts with more than $50,000. If they don't, starting July 1, they'll have to withhold 30% of the interest and dividend payments their clients earn on most U.S. stocks and bonds.

Almost 50 countries have agreed to let their banks participate and avoid that penalty. That list includes traditionally "sunny places for shady people" like the Cayman Islands. But guess who still says nyet? That's right, Russia. What's worse, Russia's bank secrecy laws prevent banks from going around the country and working directly with our Treasury. And even worse, at least for Putin and his henchmen, our Treasury suspended negotiations entirely when Russia rolled into Crimea.

At this point, then, it looks like law will make it way more expensive for investors to use Russian banks to invest in the U.S. And private investors who use Russian banks to facilitate trades are also subject to the law. It gets worse in 2017 — if there's still no agreement in place, banks will have to withhold 30% of the gross proceeds of stock and bond sales, on top of the interest and dividends they earn.

FATCA may not be the only way to marshal the power of taxes against Russia. Putin's cronies — the billionaires who own Russia's biggest oil, gas, mining, and retail companies — have moved tens of billions of dollars of assets out of Russia and into western jurisdictions like Luxembourg, the Netherlands, and Switzerland. They did so to dodge Russian taxes (apparently, ex-commies resent paying them as much as any other capitalists). But now they find their assets exposed to possible U.S. sanctions and vulnerable to freezes. It's probably too soon to break out the balalaikas and celebrate — but we can hope that the risk of losing their assets motivates the oligarchs to pressure Putin to pull back.

Closer to home, we help you pay less tax on your investments. Fortunately, you don't have to risk international sanctions to do it! You just need a plan. So call us for that plan, and save a bunch of rubles on your bill!

Hit 'Em Where It Hurts

When people misbehave — badly enough — they go to jail. But when corporations misbehave, they can't go to jail. So they pay fines instead. Recent years have brought a wave of enforcement actions for various corporate offenses, from banks ripping off customers, to investment managers trading on inside information, to drug companies poisoning patients, to energy producers polluting public waters.

Corporations usually find a little bit of silver lining in those monster settlements. They get to deduct the payments on their taxes! You like that? You and I get to help pay the freight for their cheating!

Now, Section 162(f) of the Internal Revenue Code states that "no deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law." But defining a "fine or penalty" isn't as obvious as you might think (and it gives corporate tax lawyers the chance to bill a lot of hours arguing about it). Few of those settlements, especially in the Wall Street arena, require offenders to admit wrongdoing, and most include some form of restitution or disgorgement of profit. Those amounts aren't considered a fine or penalty, so they remain deductible.

What does that mean for our friends at the IRS? Well, when Exxon-Mobil paid $1.1 billion to settle claims over an oil spill in Alaska, it actually cost them just $524 million after tax. When Bank of America agreed to pay $335 million to settle charges that they had discriminated against black and hispanic borrowers, they got back up to $117 million of it in tax savings. Similarly, when credit card giant Capital One paid $210 million to resolve charges that they had duped customers into paying for credit monitoring and other add-on services, they saved millions in tax.

But now it looks like Uncle Sam is getting fed up with subsidizing the settlements by cutting off those juicy tax breaks. Now he's working to hit 'em where it really hurts!

• Back in November, oil producer BP agreed to pay $4 billion to settle the Deepwater Horizon spill. Ordinarily, that might have meant a fat tax deduction to cushion the blow. But no such luck this time — the settlement included language explicitly defining the damages as "punitive," which prohibits BP from deducting any of that amount from their U.S. taxes.

• Earlier this month, Swiss bank UBS paid $500 million to settle charges they manipulated the "LIBOR" interest-rate benchmark. Again, that settlement prevents UBS from deducting the penalty on their taxes.

• Most recently, hedge fund manager Philip Falcone agreed to admit wrongdoing, accept a five-year ban from the securities industry, and pay an $18 million nondeductible penalty. Denying a tax deduction seems especially appropriate in Falcone's case, since federal regulators said his actions "read like the final exam in a graduate school course in how to operate a hedge fund unlawfully."

Tax policy questions like these can sometimes sound boring and pointless. But this one has real consequences. On the one hand, some experts argue that letting miscreants deduct settlements on their taxes encourages companies to settle out of court and avoids ongoing litigation. On the other hand, consumer advocates respond that tax-deductible settlements are a slap in the face to taxpayers, who wind up footing 35% of the tab. What do you think? Do the tax deductions still serve a legitimate purpose? Or should Washington keep up the new hard line?

Photo coutersy treehugger.com

Sentencing Reform

Back in 2007, a Los Angeles judge sentenced actress Lindsay Lohan to one day in jail for misdemeanor drunk driving and cocaine charges. California's prisons are notoriously crowded, so Lohan walked out of the joint after just 84 grueling minutes. She didn't even have time to change into an orange jumpsuit. Lohan's "sentence" drew headlines as an example of lax justice. But now comes news that a judge has sentenced a 79-year-old widow to less than one minute of probation — for tax evasion, no less. Can the punishment possibly suit the crime?

First, a little background. The Justice Department has made cracking down on secret foreign bank accounts a top priority. Those efforts got a huge boost when Bradley Birkenfeld, a banker for Zurich-based UBS, blew the whistle on the bank's efforts to help U.S. depositors avoid tax on their accounts. UBS settled the case by paying a record 780 million dollar fine and turning over information on nearly 5,000 U.S. depositors.

Around that same time, the IRS offered an amnesty program for taxpayers who had concealed their accounts to avoid prosecution by 'fessing up, paying back taxes and fines, and fingering the advisors who helped them hide their assets from the government. Since then, over 38,000 taxpayers have entered the program, paying $5.5 billion and pledging $5 billion more to make good.

Now, back to our story. In 2000, money manager Mortimer Curran died in Palm Beach. Curran left his wife Mary an account at UBS, which he himself had inherited from an aunt in Monte Carlo. Mary, who has no college education and hasn't worked outside the home in over 50 years, took the bank's advice and left the money in the account. She continued to live modestly in the same house with green and white formica countertops that she and Mortimer had bought in 1982. (OK, next door to Bernard Madoff — but still, green and white formica countertops.) And she devoted most of her time to volunteer work on behalf of the Opportunity Inc. Early Childhood Center and the Rehabilitation Center for Children and Adults.

In 2009, after the account had grown to $43 million, she contacted a lawyer. Together, they decided to report her account. Unfortunately, he didn't file the disclosure paperwork until three weeks after UBS had "ratted her out" as part of its own settlement. That meant she couldn't join the program. Uh oh.

Last November, the Justice Department indicted Mrs. Curran. In January, she pled guilty to two counts of tax evasion, paying $667,700 in back tax and a $26.6 million civil penalty. And on April 13, Curran appeared before U.S. District Court Judge Kenneth Ryskamp for sentencing. She still faced up to 37 months for the crimes she had admitted. Would she serve hard time? Get a jailhouse tattoo? Maybe join a prison gang?

No, no, and, thank goodness, no. Ryskamp sentenced the "unsophisticated" Curran to a year of probation — then immediately revoked it. He said "this really is a tragic situation," and "the government should have used a little more discretion." He even urged Curran's attorney to seek a presidential pardon for his client — then told the prosecutors it would be "spiteful" for them to oppose it!

Mary Curran's five seconds of probation may seem like the lightest possible slap on the wrist. But that $26 million penalty hurts. Too bad the Currans didn't understand that they didn't have to risk so much to pay less tax. They just needed a better plan. If you're ready to pay less tax — without risking even five seconds of probation to do it — call us for the plan that helps you do just that!