Oil investor Zukerman gets almost six years for tax evasion

(Bloomberg) Oil industry investor Morris Zukerman was sentenced to 70 months in prison for evading $45 million in taxes, a scam that included a bogus $1 million charitable donation and fibs to his own accountants. He was also fined $10 million.

“I recognize and profoundly regret the criminal offenses I committed,” Zukerman told U.S. District Judge Analisa Torres during the hearing in a Manhattan federal court room, reading from a prepared statement. “This is painful to acknowledge.”

Zukerman’s schemes were even more robust than those uncovered by prosecutors. As his case moved toward sentencing, Zukerman, 72, filed amended tax returns showing that his undeclared income was more than $17 million higher than what the government alleged in its indictment, prompting prosecutors to argue that Zukerman doesn’t deserve leniency.

They sought a sentence of as long as 84 months.

“There are two words and two words alone that explain the conduct in this case: unmitigated greed,” Special Assistant U.S. Attorney Stanley Okula said. “The defendant is in a financial position enjoyed by very few in this country. There was no economic need for him to do what he did.”

Defense lawyers disagreed and said the revised tax returns demonstrated their client was being forthcoming. They sought a sentence with limited time, saying Zukerman’s advanced age raised health concerns and made recidivism unlikely.

‘Citizenship Award’

The judge appeared skeptical of defense arguments throughout the hearing, asking his defense lawyer at one point: “Do you think he should get a good citizenship award for paying his back taxes?” Though she declined to impose a prison term at the top of the guideline range, she raised Zuckerman’s fine far above the maximum guideline of $250,000.

Zukerman’s family members, who sat behind him during the hearing, wept as the sentence was imposed, and he hugged them afterward. He declined to comment as he left the courtroom.

In his guilty plea last year, Zukerman admitted claiming millions of dollars in bogus deductions, providing false information and documents and failing to report profits, including $28 million from the sale of a company.

Prosecutors said he gave phony information to his accountants and lawyers who were representing him in an audit by the Internal Revenue Service. He also claimed to have donated $1 million to a conservation group to purchase land on Block Island in Rhode Island, when he actually bought the land outright himself.

In addition to pleading guilty, Zukerman agreed to pay $37 million to the IRS.

Lending Art

Zukerman launched his investment firm in the late 1980s after a 16-year run at Morgan Stanley, where he led the bank’s energy practice for a time. His major projects included partnerships with ConocoPhillips Co., Exxon Mobil Corp. and Kinder Morgan Inc. He was also active in philanthropy, funding a sociology professorship at his alma mater, Harvard University, and lending works from his art collection to the Metropolitan Museum of Art.

Authorities alleged that part of Zukerman’s tax evasion involved his art dealings, having $50 million worth of Old Masters paintings shipped to addresses in Delaware and New Jersey to avoid New York state sales tax. The paintings almost immediately ended up on the walls of his Park Avenue duplex. He also agreed to pay New York state $4.6 million.

In support of their sentencing position, prosecutors submitted emails between Zukerman and others coordinating the delivery of art to his New York apartment after it had been shipped to Delaware, and emails in which he openly discussed profits from a business deal that he didn’t declare to tax authorities.

In his defense, Zukerman submitted more than 100 letters from supporters vouching for his character, including one from Zbigniew Brzezinski, the U.S. national security adviser during the Carter administration, who presided over the marriage of Zukerman’s daughter and cited his “genuine patriotism.” He also submitted a 2007 letter from the then-president of the Metropolitan Museum of Art, Emily Rafferty, thanking him for a $100,000 pledge.

The case is U.S. v. Zukerman, 16-cr-00194, U.S. District Court, Southern District of New York (Manhattan).

Bloomberg News

Mysteries lurk within Trump’s 2005 tax return

The Form 1040 that leaked out this week revealing the first two pages of Donald Trump’s 2005 tax return contained a few revelations, with some tantalizing hints of what might be found in the rest of the president-to-be’s tax filings. Tax expert Bill Smith of CBIZ MHM provided an in-depth analysis to Accounting Today.

On Tuesday night, Pulitzer Prize-winning tax journalist David Cay Johnston revealed a fragment of Trump’s long sought after returns on MSNBC’s Rachel Maddow Show (see Trump paid $38M tax on $150M income, according to newly unearthed 2005 return). Johnston said the tax return had arrived in the mail from an anonymous source “over the transom.” The return demonstrated that Trump had in fact paid federal income taxes, at least in 2005 for his 2004 taxes.

“The only thing you can tell for sure is it looks like he paid about $13.8 million in tax in 2004, because with his estimated and his withholding that was in the neighborhood of $13.7 or $13.8 million,” said Bill Smith, managing director of CBIZ MHM’s National Tax Office. “He’s going to be covered for not having to pay the penalty for underpayment of estimated taxes by paying 100 percent of last year’s tax bill. Nothing’s for certain, but I would say that’s a probability.”

Trump may have used a $916 million net operating loss that was uncovered last October during the presidential campaign when The New York Times found copies of his New York State tax returns from 1995. At the time, tax experts speculated Trump could have used the net operating loss to avoid paying taxes for up to 18 years.

Smith believes some of the net operating loss was still being used on Trump’s 2005 return.

“With the $103 million loss, I think most of that probably has to be the remnants of that net operating loss carryforward that we saw in the past, which would mean the $31.2 million of alternative minimum tax probably comes from the net operating loss,” he said. “You only get to take 90 percent of a net operating loss for AMT purposes, as well as having high New York City and New York State income taxes.”

The White House defended Trump’s tax payments in a statement Tuesday night as Maddow was getting set to reveal the tax returns. “Before being elected President, Mr. Trump was one of the most successful businessmen in the world with a responsibility to his company, his family and his employees to pay no more tax than legally required,” said the White House. “That being said, Mr. Trump paid $38 million dollars even after taking into account large scale depreciation for construction, on an income of more than $150 million dollars, as well as paying tens of millions of dollars in other taxes such as sales and excise taxes and employment taxes and this illegally published return proves just that. Despite this substantial income figure and tax paid, it is totally illegal to steal and publish tax returns.”

Trump had also claimed depreciation as a source of his tax breaks during his debates last year with Hillary Clinton. Smith acknowledged that depreciation could be a factor in the 2005 tax filing, but it wouldn’t show up directly on the two-page 1040.

“I would think that depreciation is going to be netted out on his Schedule E, where he’s got $67.3 million of income,” he said. “Most of the depreciation is probably going to be already taken there, and you have a net number rolling forward to the front page, so to speak.”

The tax forms leaked to Johnston did not include the Schedule E or any of the other supporting documents, however, so it’s difficult to be sure where the depreciation is showing up. But Smith believes the depreciation amounts aren’t part of the $103 million loss shown on the 1040.

“They’re either going to be already on K-1, so if you’ve got K-1 income and he’s bringing that through, that’s going to be showing up, tracking right off his K-1’s, but it’s going to be a net number, again coming through alike on Schedule E or whatever the K-1 pertains to,” said Smith. “That shouldn’t, as far as I know, go into that $103 million loss. And that is the line that a net operating loss would carry through to on the front page of the 1040.”

As a major real estate developer, Trump would be able to claim a large depreciation deduction.

“Absolutely, he would,” said Smith. “There’s nothing wrong with that. But I just don’t think that shows in the $103 million loss. To me, that’s more likely to show up in the $67 million of income on rental estate, etc. So if he has $167 million of income and $100 million of depreciation, that nets out to $67 million, and that’s the number that rolls forward to the first page, because we don’t have Schedule E. The income number could be $567 million of income and $500 million of depreciation. There’s no way for us to know by looking at page 1.”

Smith also finds the dividend figures to be intriguing. “The ordinary dividends and the amount that were qualified was interesting,” he said. “Nothing wrong with it, but it was a pretty low percentage of qualified dividends for the total amount of dividends.”

The main mystery revolves around the $103 million loss, however. “It’s certainly nice to have a $103 million loss if you’ve got $150 million of income,” said Smith. “I mean, the loss jumps out. We’d love to see what that is and how that’s explained. Otherwise when they talk about all the other taxes he paid in their statement, with the Social Security and Medicare tax of a million eight, it’s a little disingenuous because you get to deduct half of that on line 27. There’s a $943,000 deduction there, so they kind of glossed over the fact that it’s only half that amount.”

However, he acknowledged it’s all legal. “There’s nothing wrong with that,” said Smith. “That’s the way it works, nothing nefarious about it in any way.”

As for who leaked the tax return, Johnston suggested on Maddow’s show it could have come from Trump himself. The tax return is stamped “Client Copy,” so it probably did not come from Trump’s accountants. Others have suggested it may have come from a bank where Trump was seeking a loan or from a 2006 lawsuit in which Trump sued New York Times reporter Timothy L. O’Brien, who claimed in his book “TrumpNation: The Art of Being the Donald,” that Trump had exaggerated his net worth. As part of the discovery for the lawsuit, Trump had to provide his 2005 tax return to O’Brien’s attorneys (see I Saw Trump’s Tax Returns. You Should, Too).

Smith believes it may have come from a bank. “I’ve seen other speculation that makes more sense to me, that it could have been part of an application to a bank, so if you’ve got a foreign bank that he’s dealing with, they would only have requested the first two pages of the return so they could see the big numbers,” he said. “That might be the reason why it’s only two pages. Why would anybody at a bank leak it? That also would set you up for criminal prosecution, I’m sure. I don’t really have an opinion on it.”

Or perhaps it came from a member of Trump’s own family?

“Harkening back to the Hillary Rodham ‘I don’t bake cookies’ dustup, I did notice that Melania’s name is not Trump on this return,” Smith observed.

10 things to know about the report saying companies don’t pay taxes

Once health care is tamed, President Donald Trump and Congress will turn to other bears, such as the byzantine U.S. tax code. Conveniently, a new report has come out on legal tax avoidance.

The report, from the Institute on Taxation and Economic Policy, says 18 of America’s biggest corporations paid zero federal income tax from 2008 to 2015.

Feel free at this point to bang your head on the tax forms strewn across your desk. After that, consider these points:

1. General Electric Co., International Paper Co., Priceline Group, and Pacific Gas & Electric Co. were among the companies that the Institute for Taxation and Economic Policy says had no net tax liability at all over the period.

2. These are not simple calculations. They involve complicated assumptions and choices, such as what bits to put in the numerator (the tax) and what bits to put in the denominator (the profit). General Electric called the report “deeply flawed and misleading” and added: “Over the last decade, GE paid $32.9 billion in cash income taxes worldwide, including in the U.S.”

3. The Institute for Taxation and Economic Policy and its sister organization, Citizens for Tax Justice, lean left. Sample blog headline: “Bernie Sanders Is a Champion for Tax Fairness.” That said, CTJ’s corporate-tax studies have been cited even by neutral experts.

4. Note the word “legal” in “legal tax avoidance.” These companies obeyed the law, as far as anyone knows. If you have a problem with their actions, blame Congress, not the companies and their highly skilled tax attorneys and accountants.

5. ITEP cites the 18 companies to reinforce its larger point: that corporate taxes are lower than they appear to be. One of President Trump’s familiar talking points is that the U.S. has just about the world’s highest corporate tax rate. The ITEP report is titled The 35 Percent Corporate Tax Myth. It says that of the 258 companies in its sample that had profits every year from 2008 to 2015, the average “effective” tax rate was 21.2 percent.

6. It’s pretty well accepted by now that while the U.S. has one of the very highest top rates on corporate income, its average rate isn’t unusually high because there are lots of allowable deductions. So the new report, the latest in a series going back to the 1980s, isn’t breaking any conceptual ground.

7. Most of the 18 companies on the list are electric utilities. That’s no coincidence. During the financial crisis, Congress enacted a policy called “bonus depreciation” intended to stimulate economic growth. It allowed companies to write off new investments right away. Because they do a lot of investment, utilities enjoyed some of the biggest benefits. The downside? Because the investments are already fully written off, the companies won’t be able to get a tax benefit from depreciating them in future years, notes PG&E spokesman Brian Hertzog. International Paper also cited bonus depreciation, along with the impact of the recession and pension fund contributions. A spokeswoman for Priceline disputed the report, citing filings showing it did pay federal income taxes.

8. Just about everyone agrees that the U.S. corporate income tax system is a mess. That includes GE, which said in a statement, “The tax code is complex and outdated, which is exactly why tax reform must happen this year. GE has long been advocating to simplify and modernize the tax system—even if it means we pay more in taxes.”

9. Even if 35 percent isn’t what companies pay, the top rate does matter. As every student of intro econ learns, decisions are made at the margin, not on the average. If the government grabs 35 percent of the last dollar of income you earn, you’ll be at least a bit discouraged from earning that last dollar. “There’s a good argument for coming up with some broader business tax with a lower rate that doesn’t allow so many deductions,” said Alan Cole, an economist at the Tax Foundation, which describes itself as nonpartisan and which Cole called more “market-leaning” than ITEP and Citizens for Tax Justice.

10. The report urges Congress to stop allowing U.S. companies to defer federal taxes on offshore profits. More than $1 trillion in cash has piled up abroad because companies don’t want to pay U.S. tax on it. That may be a good idea, but only if it’s coupled with a cut in the top rate. Otherwise U.S. companies would have an even stronger incentive to shift their headquarters overseas to escape U.S. taxation, Cole said.

Bloomberg News

Ryan ready to twist arms to sell Obamacare plan to House GOP

(Bloomberg) House Speaker Paul Ryan has used a soft touch to win over rebellious conservatives. But, with his Obamacare replacement bill at stake, he’s delivering a tougher message: It’s time to fall in line.

“This is an all-hands-on-deck, because you know what? We all ran on repealing and replacing Obamacare,” Ryan said Wednesday, warning that the health care system will collapse if Congress doesn’t act. “This is why we have to pass it with something better.”

The with-us-or-against-us tone is a departure for Ryan, who has up to now trod carefully around the fiercely anti-establishment members who helped oust his predecessor, John Boehner.

Now the 47-year-old speaker has little choice but to take a firmer line, bolstered by President Donald Trump’s tweets, to drum up the votes for the first true make-or-break moment of his speakership. The House Ways and Means Committee voted 23-16 early this morning to approve its portion of the overhaul, which House leaders unveiled this week.

The extent to which Ryan needs to force his party to get on board with an Obamacare replacement measure that has been attacked by a wide range of conservatives will be an early indicator of how much of his ambitious agenda he’ll be able to accomplish this year—including a comprehensive overhaul of the tax code. Turning those big-ticket policy goals into law is the GOP’s best sales pitch for the 2018 midterm elections.

“Everyone wants to have the grassroots, up from the bottom, but ultimately you have to get stuff done,” said John Feehery, who was a spokesman for former House Speaker Dennis Hastert and now heads the communications practice at QGA, a public affairs company. “Leadership is all about knowing when you’ve have enough input from the masses and that’s when you lead.”

Trump Tweets

Ryan has two main weapons in his arsenal. One is the GOP’s urgency to repeal President Barack Obama’s Affordable Care Act after more than six years of using it as a rallying cry. Any member who votes against the bill supported by leadership will be accused of wanting to keep Obamacare.

The other is Trump himself, and his Twitter megaphone. Pressure from Trump is most effective in the House, where all members are up for re-election in 2018 and more purely Republican districts tend to be passionately pro-Trump.

“In most of our districts he’s an extremely popular president and an extremely talented communicator,” Kentucky Republican Brett Guthrie said in an interview. “He’s very willing to use his political capital to move this forward.”

Ryan said he spoke with Trump twice on Tuesday as reactions to the leadership’s health care bill were rolling in.

“Doing big things is never easy, but we have made a promise, and we’re going to keep that promise,” Ryan said Tuesday, holding up a copy of his draft legislation. “That is exactly what this bill does.”

Full Repeal

Even with support from the White House, Ryan faces early headwinds from within his own conference. An analysis for the Republican Study Committee, a group of about 170 House conservatives, called the tax credits in Ryan’s bill “Republican welfare entitlement.”

The most vocal members of the conservative House Freedom Caucus have said they still support Kentucky Senator Rand Paul’s plan that hews more closely to a 2015 repeal bill approved in the House and Senate.

Jim Jordan, a Republican from Ohio and a founder of the conservative Freedom Caucus, said members ran on a full repeal of Obamacare and all the related taxes. He said he’s open to negotiating with House leaders, but the current bill doesn’t go far enough.

“You don’t just have something handed down from leadership and say this is how it’s going to be,” Jordan said. “The American people just saw the plan today. I think they probably want to see a debate.”

Ryan says that debate already happened, with input from members helping to craft the House GOP “Better Way” policy agenda published last June, and a series of health care-focused listening sessions this year.

Of the 237 Republicans in the House, 175 attended at least one of the four meetings held by leadership to hear member concerns about health care, according to Chris Bond, spokesperson for Steve Scalise, the majority whip. Scalise’s office also hosted five staff briefings attended by 385 staffers from 234 offices, Bond said.

Growing Pains

Ryan said Wednesday he’s confident that he’ll get the votes he needs in the House to send the bill to the Senate. He said more than 60 percent of his members have never served under a Republican government, which might explain why they are used to digging in their heels on principle.

“What you’re seeing is, we’re going through the inevitable growing pains of being an opposition party to becoming a governing party,” Ryan said. “It’s a new feel, it’s a new system for people, but it’s all the more reason why we have to do what we said we would do and deliver for the American people.”

It’s also a new style of leadership for Ryan, who casts himself as a “policy guy” who tries to stand above the noise of politics, especially during the bumpy first few weeks of the Trump administration. Since becoming speaker in October 2015, he has employed what he calls a “bottom-up” approach, which aims to give rank-and-file members more say in the outcomes of legislation.

Some conservatives were initially skeptical of Ryan, but many praise him for giving more power to House committees and being less dictatorial.

“I think there’s a real desire, and I applaud the speaker for being willing to give deference to the committees and I think that that’s a good style,” said Representative Mark Meadows, a North Carolina Republican and chairman of the House Freedom Caucus.

Judged on Results

But now Ryan will be judged on results, not only on repealing Obamacare, but also for an overhaul of the tax code he has pledged to bring to a vote before the August recess.

Ryan has shown some ability to wrangle his restive caucus, mostly notably pushing through a difficult Puerto Rico debt bill last year. But the stakes are much higher this time around.

“You also have to be willing to get your fingernails dirty,” Feehery said. “By that I mean not wonky policy stuff, but you know trading votes and getting policies so you get the votes. It’s not necessarily glamorous work, but there are a lot of deals that have to get cut.”

Ryan does have a few carrots to offer House members. At a conference meeting Wednesday morning, he offered to match funds raised by GOP lawmakers for the month of March, according to a person who was in the room but asked not to be identified when speaking about the closed-door event.

The offer wasn’t tied to any specific policy, the person said. Team Ryan, the speaker’s national political operation, sent $4.4 million to the National Republican Congressional Conference last month, along with the $3.4 million he sent in January.

– Anna Edgerton

The tax implications of the GOP health plan

House Republicans released a bill, the American Health Care Act, on Monday night to begin making good on their promise to repeal and replace the Affordable Care Act.

The ACA repeal bill proposed in the House on Monday would immediately repeal the individual and employer mandates, and modifies the current premium tax credit for 2018 and 2019 before replacing it with a new tax credit in 2020, according to Nicole Elliot, former IRS senior director of operations for the Affordable Care Act and current partner with law firm Holland & Knight.

“The bill repeals the individual mandate and provides a retroactive break for those impacted in 2016,” she explained. “If you thought you owed a penalty for 2016 and paid it, if this bill goes through, you won’t owe it, and can get a refund.”

“That’s a significant change,” she said. “It also repeals a lot of the other ACA taxes, so starting in 2018 it repeals the medical device excise tax, the tanning tax, the Medicare tax increase as well as the net investment income tax of 3.8 percent.

“The biggest thing is that it makes some changes to the current premium tax credit. It modifies the credit for several years, and then in 2020 it repeals the premium tax credit and replaces it with a new credit. Under the bill an individual will now be able to get the premium tax credit in 2018 and 2019 for non-exchange coverage, which is significant. The amount of the credit is modified based on age in addition to income and premiums. The new credit in 2020 is an age-adjustable tax credit.”

The bill released on Monday contains the entire proposal, according to Jeff Martin, senior manager in Grant Thornton’s Washington National Tax Office. “I don’t expect another bill that will add to it. It’s a package of over 100 pages. It’s going into markup tomorrow. There will be plenty of comments, and we do expect some changes, but we don’t know whether they will be major or minor changes.”

“It does not repeal the ACA entirely,” said Martin. “It repeals some of the taxes that are in it. It effectively repeals the individual mandate and the employer mandate, by reducing the penalties down to zero. It also repeals many other things.”
Prospects of success

Despite the Republican majority in the House, the success of the bill is not assured since there are a number of Republican lawmakers who have vowed to vote against anything short of a full repeal of the ACA.

Medicaid administered by the states will no longer be open-ended based on the number of individuals covered, Martin indicated. “Under the proposal, they will now give states a fixed-dollar amount. The whole idea is that it will help curtail Medicaid spending.”

The new proposal does not place a cap on the exemption for employer-sponsored health care plans. “That was a way they were going to raise revenue,” Martin said. “Back when the ACA was negotiated, it was originally going to cap what an individual could exclude from income from health coverage, so any amount offered by an employer to an employee in excess of that amount would be income. They took that out of the ACA and replaced it with the Cadillac tax, an excise tax on high-cost plans. The Republican proposal put that [the cap on employer-sponsored health car plans] back in the discussion draft that was leaked 10 days ago. It created a lot of push-back, so they took it out and put the Cadillac tax back in, but with a delayed effective date.”

“They put the Cadillac tax back in for budgetary reasons, but they kicked it down the road to 2025,” he continued. “Congress already kicked it down the road from 2018 to 2020. It will get kicked down the road even more to the extent that it never goes into effect.”

“The amount of the new credit is based on the age of the individual, so the older you get, the larger the credit you can receive,” Martin said. “If you make up to $75,000, you get the full credit, but once you go over $75,000 it phases out. And you’re not eligible for the credit if you are eligible for employer coverage.”

“We’re still early in the process,” Martin cautioned. “There could be significant, or very minor changes, it will be interesting to see how it all works out.”

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