Tax Secrets for the In-crowd.
Facts & Circumstances
The value of a deep tax law education plummeted as the internet was built out. Google put the last nail in the coffin. Today extensive experience is the trump card because it cannot be simulated.
I'm cognizant of tax law. It’s handy to know well, but I am primarily interested in how the code is administered and enforced. When those things change as litigation, regulations, revenue proclamations, etc. get built, the law itself changes, but the changes are not reflected in the act or the tax code. Tax Law is like a matrix of interrelated parts, approximately a quarter of a million pages long that change constantly. People who throw around tax code like it’s written on the back of their hand are not to be trusted.
Here is the pecking order of the entire body of tax law. From most important to least important. The bottom of the list reflects the language passed into law. The top of the list reflects the way the law is administered and enforced.
1 - Facts & Circumstances. Most important.
2 - Litigation
3 - Revenue Procedures
4 - IRS Regulations
5 - Everything else like private letter rulings.
6 - The other 53 codes in the United States Code.
7 - Tax code.
8 - Individual tax acts like the Tax Cut & Jobs Act.
Tax law is not a differentiator.
We only have one tax code and it’s identical for everyone. Five minutes on your phone will reveal anything anyone needs to know about tax law. Taxpayers with identical earnings should get identical results. They don’t because of Facts & Circumstances & widespread incompetence throughout the professions. But, when you introduce Facts & Circumstances into the mix, you open the door to niche opportunities to save tax legally.
That is the brilliance of the U.S. tax system.
This is what makes the US different from the EU. The EU dictates, as they are doing to Apple right now, but courts decide in the US. That's why we have a tax industry in the U.S. The distinguishing factor between companies that are successful long term is how well they blend the two together. Most of the Global 500 have people who can blend them together well. Private companies generally don’t. That’s why the GAO reported that large tax planned companies pay less tax at lower rates than smaller privately owned companies. Most tax pros avoid the talent issue by filing tax on the SALY (same as last year) method.
How Facts & Circumstances became prominent.
The 13th amendment is scary the way it’s written. So scary that Congress became concerned people wouldn’t vote for it. So they placed ads in every newspaper telling voters they would tax only profits. That ad became part of the legislative history, which has the force of law, even if it’s not specifically included in the law. This was later confirmed by the Supreme Court in Glenshaw Glass in 1954. It was also codified in section 162 of the 1954 Revenue Code. Section 162 says anything can be deducted if it’s ordinary & necessary (in the pursuit of profits). Eventually that became Valid Business Purpose, which is simply another term for Facts & Circumstances.
Tax strategy can't be learned in college.
You can’t just pick up a book and learn it. Not everyone has a strategic viewpoint. And not everyone is that creative. There is only one way to learn tax strategy ... by actually doing it. I’m now more than four decades in. Do the math.
But tax strategists don't grow on trees. Tax strategy isn't taught in college. You can’t just pick up a book and learn it. The only way to learn tax strategy is practice it for decades. As far as I know, I’m the only tax strategist working with private businesses. This shows up in government statistics right here. >> In 2016, the GAO reported, 99% of privately owned business pay more tax at higher rates than the Global 500.
THE TAX CODE WAS BRILLIANT BY DESIGN.
The 13th amendment created two separate tax systems in the US. One for businesses & their owners, and one for everyone else. There was some concern people wouldn’t vote for the amendment so Congress advertised through the country they would only tax ‘profits’. This became part of the amendment’s legislative history which made it a fundamental part of the amendment itself. The Supreme Court affirmed this in Glenshaw Glass in 1954, and Congress codified it in section 172 the same year. Section 172 explains it by saying anything is deductible as long as it is ordinary, necessary & reasonable in pursuit of profits. Nothing is excluded if you meet those requirements. (And who determines that? The taxpayer.) Later the courts added requirements for a valid business purpose and economic substance. The IRS used these to attack giant tax frauds, such as BOSS & SON OF BOSS. Even when Congress intends to prohibit a deduction, such as health club dues, it’s still deductible by re-characterizing it. Valid business purpose is the determining factor in tax law.
THE WAY IT WORKS WAS BRILLIANT BY MISTAKE.
The tax code is reportedly 77,000 pages long. Add in Regs, Rev Procs and litigated results, and now it’s 240,000 pages. Add in 50 states and 172 countries and it becomes 25 million to 53 million pages. Somewhere in here, the average tax preparer is left behind. Our genius intellect, 4+ decades experience and deep domain expertise sets us apart from the average tax preparers who were left behind after a few thousand pages. Inevitably in anything as complex and enormous as the tax codes, there are thousands, multitudes of discrepancies, differences, anomalies, inconsistencies that are breeding grounds for legal tax savings.
In its ultimate simplicity, if you're doing everything else right, there are only three ways to save tax; (1) move income to lower tax jurisdictions; (2) convert personal, non-deductible expenditures into legitimate tax deductions; or (3) convert taxable income into nontaxable income. Doing that legally requires tax strategy. Buying tax deductions is folly; it costs you 100% to save 37%.
According to the EU, Apple’s Double Irish tax strategy contributed $16 billion dollars in tax savings to fuel Apple's growth.
If your tax preparers aren't saving you tax, what good are they?