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Archive for September, 2012

Tax Plans Must Have A Business Purpose, and Sometimes Even Tax Attorneys End Up in Jail

Friday, September 14, 2012 @ 10:09 AM
Author: Peter Brehm

When I was in the mire of my tax education I was presented with this seemingly contradictory reality:

1. Congress creates rules in the tax code (including deductions and credits) to encourage businesses to engage in specific types of conduct (buy certain products, hire certain types of employees, or provide specific benefits); and

2. Congress (and the IRS) also creates rule prohibiting businesses from claiming those tax benefits unless there is a substantial business purpose for the transaction other than tax savings.

One of the frustrating parts of tax planning is coming to grips with the idea that Congress wants to control your behavior with rewards, but then denies you the reward if they find out that you only did it for the money. Its a bit like offering someone $1,000 to be your friend, and then refusing to pay them when you find out that they only liked you for your money. So the game becomes convincing the IRS that you love their sense of humor and just as much as (if not more than) their deductions.

Successful business owners are like gold to tax planning consultants because they have the two things that all tax planners need: taxable income and a desire to send less of that income to the government. As a result, the more successful you are, the greater the chance that you will find yourself in contact with an army of tax planners and consultants. Tax planners (and tax attorneys) range from conservative (declare all income at the highest possible tax rate), moderately creative (use the plain language of the tax code to reduce taxes within the letter of the law), aggressively creative (expand the possible meaning of the code, and fill in gaps of the code to aggressively reduce taxes), to criminally creative (knowingly engaging in planning and conduct that is contrary to the law to avoid taxes at all costs).

Its not always easy to tell which kind of adviser you are dealing with, but the line you should never cross (and a clear indication that you are entering the world of the criminal planner) is a fairly bright one: would I do this transaction if I wouldn’t save taxes? If the answer is yes, then you are probably fine. If the answer is a resounding NO, there is a good chance that something is amiss, and that you should speak with a lawyer (unrelated to the people selling you their plan) about the transaction. For example, would you take all of your liquid assets, transfer them into a trust controlled by someone you don’t know in another country, who then deposits the funds in a third world bank? If you can think of a good reason for your business to do that, and you were going to do that anyway, any tax benefits will probably be appropriate. If the primary, if not exclusive, reason was to save taxes then tough times may be ahead.

Often times these people will have already anticipated your objections, and may present you with a letter from a reputable lawyer or accounting firm to alleviate your fears. Rather than calm you, let me suggest that this is exactly the time to reach out to a qualified tax lawyer who has no stake in the proposed transaction. Why? Because some lawyers (and I am going to shock some of you here) are not particularly ethical.

Yesterday a lawyer out of Chicago pled guilty to conspiracy and tax evasion (in a scheme in which she made $1.6 Millon). Her crime? Knowingly writing false tax opinion letters. In those letters, the attorney opined that transactions without any purpose other than tax avoidance had “a substantial business purpose”. The client needed the letter to justify a transaction that was solely for tax avoidance and the lawyer was willing to write the letter for money. Now, they are all going to prison. Here is a copy of the plea agreement if you have ever wanted to see one.

There are a LOT of very good and ethical tax planners in this country, with a LOT of very good and creative tax planning ideas and opportunities. And to be very clear, the tax code is almost beyond common sense comprehension, and some of the best legal and tax minds will disagree among themselves about what the code does and should say. So nearly all tax planning, even good faith conservative planning, has some level of risk associate with it. But there are three things I want people to understand: 1. whatever planning you do should generally be tied to a purpose beyond tax savings; 2. there are professionals who will advise you to take a tax benefit you are not entitled to so that they can make money off of your money; and 3. when you enter into those kind of transactions, no matter how many letters you have saying it was OK, everyone can end up in jail.

Peter Brehm is a tax attorney practicing with the Business Law Center in Minneapolis, Minnesota and Scottsdale, Arizona.

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