Don't Count Your Chickens...

A couple of weeks ago, we wrote about the great toilet paper shortage of 2020. It gave us a great opportunity to indulge in the sort of lowbrow humor that made MAD magazine such a hit with 10-year-old boys. The problem turns out to be simple. Toilet paper makers produce two separate products for two separate markets: the plushy stuff we use at home and the scratchy stuff we find at offices and businesses. With coronavirus stay-at-home orders keeping us housebound, we've upset that usual balance of supply and demand.

But toilet paper isn't the only commodity with a scrambled supply curve right now. This week's story involves a much-loved delicacy invented by Teresa Bellissimo at the Anchor Bar in Buffalo, NY, and an odd tax that has nothing to do with her creation. That's right . . . coronavirus has created a national chicken-wing glut, at a time when politicians and economists are fighting over a "chicken tax" you've probably never heard of!

First, the glut. Why are there so many wings? The problem here stems from the same imbalance that emptied toilet paper aisles. Most people don't get their wing fix at home. They chow down at bars and restaurants, usually in front of TV sports. Suppliers were "locked and loaded" for March Madness. But now we're all cooped up at home. Restaurants, bars, and even March Madness itself have all gone dark. Demand for the tasty snack has plummeted. The wholesale price of wings has dropped over 20%, from $1.60 to $1.25 per pound. And commercial packaging won't fly for home kitchens.

(While we're on the topic, and don't get us started on so-called "boneless" wings. There's no such thing as a boneless wing. It's just something menu planners hatched up so grownups wouldn't be embarrassed ordering chicken nuggets. As if there's something wrong with chicken nuggets to begin with. Also, do you dip your wings in blue cheese? Or do you prefer ranch dressing because you think blue cheese smells like feet?)

Now for the tax. After World War II, "factory farming" turned chicken, which had been a delicacy in Europe, into a staple. We were producing enough of it here to satisfy demand in Europe, too. But overseas governments naturally wanted to protect their own farmers. So, in 1961, Germany and France slapped a tariff on American chicken. Deep-fried diplomacy failed to resolve the dispute, dubbed the "chicken war." In 1964, President Johnson retaliated with a 25% tariff on imported chicken — and, among other things, light trucks and vans. (Definitely not chicken feed!)

Of course, just like every party has a pooper, every tax has a loophole. (In trade, it's called "tariff engineering.") In 1972, Ford and Chevy realized they could import foreign-built trucks with no cargo bed or box at a 4% tariff, then finish the vehicles here to avoid the remaining 21%. (Jimmy Carter closed that loophole in 1980.) Today, Ford imports Transit Connect vans from Turkey with rear seats to avoid the tax, then strips them out before sale. Mercedes imports parts for its Sprinter vans to assemble in South Carolina, then sells the final product as "made in America."

That same tariff is still in effect, 55 years later. Donald Trump, never one to walk on eggshells, has even tweeted praise for it, arguing that if we had it in place on passenger cars, General Motors wouldn't have had to close factories in 2018. (Right now it may not matter, considering coronavirus has run new car sales off the road along with chicken wings.)

Today it looks like most of the excess wings will wind up frozen for a day, hopefully not too far away, when they can be served at your favorite local pub. Until then, we'll be keeping an eye out for any sort of tax planning developments to help ease your way through the crisis!

Something to Celebrate

Our calendar is full of "Hallmark holidays": meaningless commemorations and celebrations, usually created by marketers and publicists. Just this month, there's National Talk Like Shakespeare Day, National Hug a Plumber Day, and National Wear Pajamas to Work Day. (That last one may not feel like a celebration right now). Food fans have National Burrito Day, National Chocolate Covered Cashew Day, and Lima Bean Respect Day. (Two out of three ain't bad.) Literally every day marks a holiday of some sort. Think of them as participation trophies for the days that can't be real holidays.

This week marks a special day for those millions of you who found the love of your life, married him or her, and then discovered maybe they weren't the love of your life after all. That's right, Tuesday, April 14 is National Ex-Spouse Day. Reverend Ronald Coleman of Kansas City created it in 1987 with the laudable goal of encouraging us to come to terms with our divorces and forgive our exes so we can move on. In our hands, of course, it's just another excuse for some snarky commentary layered in a thin veneer of tax talk.

To paraphrase Tolstoy, "all happy marriages are alike; while each divorce is unhappy in its own way." Maybe there were religious differences. (He thinks he's God; you disagree.) Sometimes it's like junior-high algebra. (You look at your X and wonder Y.) Joan Rivers quipped that "half of all marriages end in divorce. And then there are the really unhappy ones." Not to be outdone, Zsa Zsa Gabor once bragged "I'm a marvelous housekeeper — every time I leave a man I keep his house." (She was divorced eight times, so she got lots of practice.)

In all seriousness, divorce is rarely easy or cheap. Does the tax code offer any relief? Well, it used to be that if alimony was involved, the spouse who paid it could deduct it from their income and the one who got it would report it on theirs. This had the effect of shifting the tax burden on that money from the higher-income income payor to the lower-income recipient. Sadly, the Tax Cuts and Jobs Act of 2017 eliminated that small comfort, effective January 1, 2018. (#Bummer.) Was the Treasury really losing that much money on alimony?

It also used to be true that you could deduct whatever part of your legal fees went towards determining that alimony. The 2017 Act shot that down too, by eliminating an entire category of breaks called "miscellaneous itemized deductions, subject to the 2% floor." Now, divorce is even more expensive because you're paying your lawyer with after-tax dollars along with your ex. (Of course, as the classic joke goes: "Why is divorce so expensive? Because it's worth it.")

Finally, what about all of those houses, retirement accounts, and other assets changing hands? (There may be more than a few cynics and sociopaths eyeing the recent stock market collapse and thinking "hmmm, if we pull the plug now, it'll cost me 20% less.") Finally, some good news! Transfers "incident to divorce" are gift-tax and income-tax free. The tax code also includes something called a "qualified domestic relations order" that lets you divvy up your retirement accounts tax-free. Of course, any gain on that property, including during the marriage, is taxable when you sell.

OK, so, your friends in Washington aren't interested in making divorce any easier. Hey, at least you aren't quarantined with your ex!

The Great Toilet Paper Wipeout of 2020

Coronavirus has turned millions of Americans who used to laugh at the doomsday preppers on National Geographic into converts. Your neighborhood supermarket is working overtime to keep shelves stocked as panicked shoppers rush to settle in for stay-at-home orders. And the first item to disappear was . . . (checks notes) . . . toilet paper. Your grocery store aisle is probably still bare, and even Amazon ran out. But why? Is it because, as some psychologists say, bringing home the sheer bulk of a jumbo pack gives shoppers a sense of control in uncertain times? Or something more nefarious?

The answer will be a disappointment to conspiracy theory fans. (Speaking of which, Epstein didn't kill himself.) The toilet paper market is divided into two parts. There's residential paper — the soft, plush stuff those smarmy bears advertise on TV. (Apparently, they don't all do it in the woods.) And there's commercial paper — scratchy rolls the size of truck tires or, even worse, those uselessly tiny folded squares you find in disgusting gas station "rest" rooms. With all the "business" we're doing at home, we've simply upset the usual balance of supply and demand.

Now, if you were to sit down and draw a Venn diagram with circles representing "toilet paper" and "taxes," you probably wouldn't expect there to be much overlap. But there is, and it has to do with the trees that the toilet paper (and tax forms, for that matter) come from.

It turns out trees don't just grow on trees. You have to plant them, manage them, protect them, and harvest them. That process takes at least 10-20 years, and sometimes 40-50. So the tax code gives you plenty of breaks to encourage such long-term investment. Naturally, you can deduct your day-to-day operating expenses. Your sales will taxed at lower long-term capital gain rates so long as you own your stand for more than one year. And you can take a special "depletion deduction" for standing timber you buy or inherit that breaks out a "basis" in the trees from the rest of the property.

Toilet paper farmers (OK, "timber producers") can also profit from going green. Trees sequester carbon, which helps combat climate change. Growing trees can help you earn and sell carbon credits. These are especially valuable for new forests, sustainably-managed forests, and timber for long-lived wood products like houses and furniture (as opposed to cheap pulpwood for paper or pallets). You can also donate land-use rights for valuable charitable deductions, including "working forest conservation easements" that let you keep profiting from harvesting timber on your land.

Timber producers get one final break that uses the time value of money to shrink tax bills. It's an advanced strategy, sometimes called a "monetized installment sale," that lets you sell a capital asset like a business or appreciated real estate and defer the tax for 30 years. Ordinarily, if the accumulated balance of payments owed to you tops $5 million, you have to pay interest on the unpaid tax. But that doesn't apply to agricultural products. So timber producers, including giants like Office Max, have used it to defer tax on sales of up to $1.47 billion.

Here's hoping you have plenty of toilet paper stocked up to carry you through this crisis. But this is no time to flush your long-term tax plan down the toilet. In fact, tax planning, as part of your financial defense, is more important now than it was just a few short months ago. So count on us to serve as your financial first responder!

Play Ball! – Back to Biz Monday

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

The 2013 baseball season is barely a month old, and fans are already bickering over the first twists and turns. That’s because rabid fans are never content to just watcha game. They have to discuss it — among friends, at the local tavern, and on talk radio. If a pop fly drops for a single behind Cubs center fielder David DeJesus, and no one is there to argue he should have caught it, does it really make any noise?

Statisticians have always delighted in analyzing baseball — some would say, analyzing it to death. So-called “sabermetricians” (followers of the Society of American Baseball Research, or SABR) pore over arcane stats like “batting average on balls in play” (a measure of how many balls in play against a pitcher go for hits, excluding home runs, used to spot fluky seasons) or “value over replacement player” (a measure of how much a player contributes to their team in comparison to a fictitious replacement player who is an average fielder at his position but below-average hitter).

Now there’s a whole new category of relevant statistics for fans to debate. The Journal of Sports Managementhas just accepted a paper from Fordham University business professor Stanley Veliotis, titled Salary Equalization for Baseball Free Agents Confronting Different State Tax Regimes. And this one will blow the lid right off Moneyball! Here’s the abstract:

“This paper derives equivalent gross salary for Major League Baseball free agents weighing offers from teams based in states with different income tax rates. After discussing tax law applicable to professional sports teams’ players, including ‘jock taxes’ and the interrelationship of state and federal taxes, this paper builds several models to determine equivalent salary. A base-case derivation, oversimplified by ignoring non-salary income and Medicare tax, demonstrates that salary adjustment from a more tax expensive state’s team requires solely a state (but not federal) tax gross-up. Subsequent derivations, introducing non-salary income and Medicare tax, demonstrate full Medicare but small federal tax gross-ups are also required. This paper applies the model to equalize salary offers from two teams in different states in a highly stylized example approximating the 2010 free agency of pitcher Cliff Lee. Aspects of the models may also be used to inform other sports’ players of their after-tax income if salary caps limit the ability to receive adequately grossed-up salaries.”

Aren’t you glad you’ve got us to make sense of this stuff? (And this is baseball — it’s supposed to be fun.)

Taxes have always dogged professional athletes. What basketball fan hasn’t wondered what role Florida’s sunny tax-free climate played in luring superstar LeBron James to the Miami Heat? And really, who can blame golfing great Phil Mickelson for threatening to abandon California to escape a 63% tax rate?

But just imagine the debates this paper will inspire! How will interleague play affect equivalent gross salaries for NL East teams playing even more games in tax-heavy New York? Does A-Rod really come out ahead by sticking with the Yankees? Will fists fly when Canadians realize none of this has any meaning for the lowly Toronto Blue Jays?

You may think the tax code is harder to understand than the infield fly rule. (You may even be right.) But there’s one very important difference between baseball and taxes. Stats geeks can use measures like the “player empirical comparison and test algorithm” to guess how players might perform for the rest of the season. But proactive tax planners like us can use proven strategies like the medical expense reimbursement plan, S-corporation, or home office deduction to guarantee less tax. So call us when you’re ready to measure some savings that count!

~Larry Stone

Larry D. Stone,  Stone CPA

970.668.0772,    970.668.0434,

larry@stone-cpa.com – Colorado Tax Coach

Author of “The Secrets of a Tax Free Life”