Most of you know that we provide tax and financial services to small businesses, entrepreneurs, and mid-sized entities.  We are proud that our services meet or exceed the capabilities those that the privileged few (the 1%) seek out and use- at a fraction of the cost.  So that everyone can get the chance to pay the lowest amount of taxes required by law.

Which often means that we use our expertise in understanding the tax code* and finding ways that lower folks taxes, that makes something tax-deductible.  Yes, it means we look for loopholes. 

And, we know that one person’s tax benefit is the next person’s tax loophole.  There’s no way around it.

I learned about that years ago.  I began doing my father’s income taxes- and that of his and my uncle’s business by the time I was 10 years old.  (My costs were lower- MUCH lower- than what they paid their accountant and I was better at finding ways to save them money.)

When I headed business divisions, my efforts at new product and product design were all aimed at increasing the profits and value for the firm.  But, I also used the tax code to amplify the benefit of these divisions to the corporate wealth. 

And, while an academic, I also was a partner in an R&D/product design house before the mid-1970s.  (Our firm was among the 500 fastest growing firms as chosen by Inc magazine for the first four years of their competition.  We realized that was the wrong focus [our reasons are explained here], so we no longer participated in the determination- but did partake of the knowledge imparted during the annual conference honoring present and past winners for about another decade beyond our participation in the charting of sales growth.)

Then, the government reinstated the investment tax credit in 1982.   So, to capitalize (pun intended) on that, I obtained a fleet license for Chrysler (and a few other business interests).  And, began a car leasing company.  I leased cars to my companies, neighboring firms and their executives, among others.  After all, the investment tax credit meant I could obtain a vehicle for a negative cash cost (due to that investment tax credit), lease it for three years, and make a small profit (about 10% of the car value).  I would sell the vehicle and obtain a newer one (via a 1031 exchange, meaning I was rolling over the remaining equity in the car to be taxed at a later date) and continue the leasing operation.  I also had a special deal for those who wanted to acquire the car after the lease period.   Either way, I made money.

The difference between what I did and what the 1% did was simply a matter of commas.  (This is a lesson for which I am always indebted to my mentor and friend, Arthur Lipper.)   I- and our clients- do what we can.  We do the best we can.  We work to pay the lowest amount of taxes that we are legally required to pay.  The difference between what we do and folks like Mitt Romney or Nicholas Woodman do is simply a matter of commas.  We may save $ 1,000-  they save $ 1,000,000,000- it’s just a matter of commas. 

Who is Nicholas Woodman?   He’s the guy who started GoPro, the go-to movie camera of a decade or so ago.  And, when GoPro went public, he found himself clearly part of the 1%.  So, he sheltered part of his $ 3 billion net worth by donating some $ 500 million to the Silicon Valley Community Foundation (SVCF)- which housed the assets of the Jill & Nicholas Woodman Foundation.  (This is but one example of users of the SVCF- for example, Mark Zuckerberg has parked about the same asset value with SVCF.)

Except- the Woodman Foundation has been incognito for many years.  No listing of to whom it donates money or to what causes does it promote.  And, public records are pretty scanty, too. 

The Foundation is simply the equivalent of a bank account within the SVCF.  Except the Woodman Foundation removed the need for Jill or Nicholas to pay capital gains on the $ 500 million gain.  (Not just over one year, but many.)   This is why many of the 1% have been using “donor-advised funds”- a checking account for ostensible charitable causes that has no (OK, maybe a little) accountability and serious tax benefits.

These donor-advised funds (the “DAF” in the title) have been populated with cash, with stock- but also with real estate and art.  (I will be talking about one such art repository tomorrow.)  You can find them parked in places like the SVCF, Fidelity Charitable, or Vanguard Charitable.  Where assets are parked, but the control rests with the donors. 

The donors decide to whom and when the value of the assets are dispensed.  The donors get tax benefits now- and for a while, but the charitable cause waits and waits and waits.

The donor-advised funds differ from family foundations.  Those entities are required to distribute  about 5% of their assets each year.  (I currently manage and/or advise a few such foundations.)  The family foundations also have reporting requirements.  The donor-advised funds can sit idle for years and rarely (if ever) report their activities.  (Some folks, like the Mercers, actually use these donor-advised funds for political shenanigans.)

Oh- don’t think these donor-advised funds are new; they’ve been around for almost 3 decades.   But, now-  they are more noticeable- with growth in donations to these entities increasing 15% a year for the past few years (and they do have more than $ 85 billion in assets).

The problem is the charitable deduction is not supposed to benefit the 1%- it’s supposed to benefit the folks or diseases that are in need.

And, back when Congress actually tried to do something (as opposed to hold hearings and/or pontificate), the Pension Protection Act of 2006 was passed to regulate donor advised funds.  OK,  not to regulate them- to put some window dressing on them, to make them look more palatable.  (The biggest change was to bar self-dealing.  No mandated distribution requirements were included in the legislation.)

Yeah.  I can see some really tough legislation coming out of Congress to reign in these activities soon.

Ha-Ha-Ha-Ha-Ha!

 

 

Oh, yes.  I have an offer on the table.  (OK.  On my blog.)  For those folks who purchase my new book.  You can find the offer here.