The Frustrated CFO

If You Are Cheating on Your Taxes, Don't Step on Anyone's Toes

I've been going to the original Bumble & Bumble salon on 56th Street since... Well, who cares?  Especially when we talk about, to paraphrase Benjamin Franklin, the only two certain things in this world - our attempts to resist aging and taxes.

All I'm saying is that I have a first-hand experience with the house that Michael Gordon built - in this very location, starting back in 1977.  In fact, the masters I come to see here have been at B&B since the very beginning!  This says volumes about the environment of the place. It has a very unique ambiance - you feel special there.  That's why the company has an impressive record of retaining clients and employees alike.

Up until the 2006 sale of the B&B brand (the salons, the products, et al) to Estee Lauder (most people don't realize that it also owns Clinique, MAC, Bobbi Brown, La Mer, Origins, Jo Malone, Smashbox, Aveda, and Darphin), from time to time you could catch a site of Mr. Gordon on the premises.  His mannerism always struck me as a peculiar combination of a relaxed composure (grapevine has it that he is into Buddhist spirituality) and a blatant assholiness toward some employees.

But, as I always say, you don't get to be a successful entrepreneur by being warm and fuzzy.  To survive in business you need to be tough.  Some of us can be tough and decent at the same time.  Unfortunately, that's very rare.  Well, since I didn't need to deal with him personally, I was able to abstract Michael Gordon into what he was as a small-business owner: someone, who started from nothing and grew his brand to international recognition.  I admired him for his courage, drive, and strategic savvy. 

Also, one cannot dismiss the fact that for Mr. Gordon it wasn't just about branding, growth, and money.  He was truly a hair-man, devoted to the idea of creating high-quality products that satisfied a wide spectrum of needs.  Unlike the vast majority of other famous salon owners (Sally Hershberger is one example), who are engaged in "private label" merchandising (i.e. buying generic, mass-produced,  "juice" and pouring it into containers with their names), Michael Gordon actually developed unique mixtures, which are used to great effects in many salons and homes. 

It was his quality standards and unrelenting drive to succeed that fascinated me.  Imagine my surprise, when I read in New York Times that this remarkable and shrewd businessman was arrested for tax evasion.  And it wasn't even for something cleverly devised (not that I would approve that) - no, it was plainly stupid: he didn't declare on his tax return the $30 million capital gain generated by that famous sale of B&B. 

The charges (both criminal and that of stupidity) against him are mounting: when he was questioned by IRS about this omission, he claimed ignorance of the fact.   And that's lying to a federal agent, because apparently there is evidence of his active attempts to hide this money. 

What is the point of lying like that anyway?  Didn't he sign his tax return back in 2007?  He never heard of capital gains? Weren't there a horde of lawyers and accountants involved in the closing the deal?  Nobody mentioned the tax liability?  Hard to believe.     

NYT didn't make it a secret that IRS has acted on a tip received from a "confidential informer."  Of course, they did.  Truth be told, IRS doesn't have sufficient resources to look for specific violations of the tax code.  The best they can do is to react to the red flags selected by their algorithms.  Your employer reported your earnings, but you didn't include them on your tax return - an inquiry will commence.  Itemized deductions  exceed certain levels, even if by $100 - the flag will be raised.  Meanwhile, corporate executives receive multi-million dollar perks and call them "business expenses"; private shareholders transfer stocks and property between related parties and don't recognize capital gains; owners make equity withdrawals and show them as loans - and none of it ever get noticed.  

However, the situation changes if someone makes a call, sends a letter, or an electronic message to IRS, detailing a case of the tax evasion.  If this someone provides sufficient information and the violation is big enough to prick up agents' ears, they will be on the case right away.  Especially if it involves a notable figure that can get media interest (hey, you cannot blame IRS agents for wanting some attention). 

Even though IRS has, what they call, a whistleblower reward program, it's not easy to get paid for reporting tax violations.  Obviously, in most cases, the informants are not motivated by money.  Typically, they have some sort of a relationship with the evader and it resulted in two outcomes: an incredible animosity that goes way beyond a simple grudge and the knowledge that the government is being shortchanged.  The IRS becomes a mere weapon of revenge.

This is why Leona Helmsley went to jail in 1992.  The Queen of Mean dragged behind herself a trail of disgruntled contractors, corporate employees, and household help, who really hated her.  Some of them possessed hard evidence proving that millions of dollars spent on personal properties were billed to Helmsley's real estate business. 

And that's why Michael Gordon got arrested.  In his brazen manner, he must've rubbed the wrong way someone with the first-hand knowledge of the $30 million unreported gain.  That hurt someone dropped a note to IRS.  

Do I have to state the obvious?  Don't steal big bucks from government - it's dangerous.  But if you make a conscious decision to dodge some taxes, make sure that no one knows about it but you.  And I mean NO ONE.  If that's impossible, make sure that you are super nice to those who are onto you - they have your freedom in their hands.       

Related articles

Founder of Bumble and Bumble Accused of Hiding $30 Million From I.R.S.

Quote of the Week: Unconscious Intelligence

"We think of intelligence as a deliberate, conscious activity guided by the laws of logic.  Yet much of our mental life is unconscious, based on processes alien to logic: gut feelings, or intuitions."

                Gerd Gigerenzer

Legal Expert's Rundown on Employers' Rights to Discriminate

I frequently write (and talk) about the distortion of bill of rights in the workplace and other similar perks of employees' existence.  Hell, I even have a separate category for posts devoted to nepotism. I always stress out that small-business employers can pretty much define their own rules, as long as they put them in writing and notify new hires of how things are done in their domain.  Not only that labor authorities don't look into employment conditions of companies with less than 50 employees, but, even if one or another wrong-doing is brought to their attention, they will take the corporate side as long as there is a correspondent written policy in place.  And think a hundred times before suing your former employer - you may end up staring at a defamation law suit filed against you. 

Now, I have an opportunity to direct my readers to an expert's list of legally permissible ways employers can discriminated both existing employees and job applicants in a business of any size - big or small.  I have previously quoted a veteran employment law specialist and award-winning writer Donna Ballman on the issues of workers' rights.  And, as you can see, her popular blog Screw You Guys, I Am Going Home is a single proud member of my Blog Roll.  I highly recommend for everyone to follow the link below and read her latest contribution to AOL Jobs - the characteristically concise summary of legitimized discriminatory practices.  I guarantee that at least some of them will surprise you.

8 Ways Employers Can Discriminate Against Workers - Legally by Donna Ballman         

What to Expect from a Boss with a Peter Pan Syndrome

Oh, Peter Pan, the "boy who wouldn't grow up," he is so endearing in his never-ending boyishness.  He doesn't care about the adult world problems.  His disregard for the laws of physical and emotional gravity allows him to fly without wings and fight pirates with an uncommon valor; but it also propels him out of the windows of the heart-broken girls: Wendy, and her mother Mary Darling before her, and who knows how many more.  Really, he belongs in his Neverland.

Yet, Peter Pans live among us.  You meet them every day: in your office, on your business trips, in stores and public transportation; you pass them on the street; they may be related to you and you see them across the dinner table.  They don't soar in the air or prance with swords (well, maybe some of them do).  Nevertheless, their true nature is that of unabashedly cocky young boys ready for adventures.  

Permit me to clarify.  We are not talking about physical appearance here.  People who look 10-15 years yonger than their age, whether because of their genetic make up or because they treat their bodies right, can be very grown up.  I am not talking about those who take part in what society perceives to be "young" activities either.  I actually think that people who never stop going to rock concerts and enjoy parasailing in their eighties are on a higher plane of sophistication.  No, the subject matter here is the psychological immaturity; the inability to accept the reality of the adult world.       

The Peter Pan Syndrome is not officially recognized by the Diagnostic Manual of Mental Disorders.  It's considered to be a "pop-psychology" term.  In other words, it's okay to use it in cultural and social context, but no doctor will get reimbursement by insurance for treating this affliction - there is no code for it.  I frequently wonder whether it is a ploy of the closeted Peter Pans of psychology.

Peter Pan of J.M. Barrie's story can be recognized right away.  The book illustrators even gave him pointy ears, hinting that he is not quite a regular human.  But in every-day life they are hidden inside people who appear to be all grown up.  Yet, there are certain telltale signs one can pick up right away.   It could be a sports car too small for the owner's body, or a tan in the middle of winter, or a jacket a size too small for a middle-aged banker, a hipster watch on a wrist of a 60-year-old lawyer, a second wife 25 years younger, a newborn child at 57.  I'm sure you know what I am talking about.  

However, at the end of the day, it's the personality traits that betray the Peter Pan's tendencies - the propensity for undisciplined, uncontrolled, irrational, irresponsible, disorderly, intoxicated behavior.  But, like with all archetypes, the negative trends coexist with positive potential that manifests itself as a free spirit, unbound instinct, potential for growth, hope for the future, untamed forward drive.

It's one thing to handle Peter Pans socially and even privately.  It's a completely different matter when you are confronted with men-boys in the work place, especially if one of them is your boss.  You have to be very careful: bosses like that think that they are invincible; they believe that they will come out on top in any situation.  They take big risks and trust they can get away with anything.  If they are lucky, their endeavors may lead the company to brilliant successes.  But many of them get smacked against the cruel wall of reality, crash and burn.

One of the most prominent symptoms of the Peter Pan complex is absolute inability to take No for an answer.  Many private-business CFOs deal with the childish behavior of their bosses and can fill in the blanks in this conversation:

CEO:    I want to...

CFO:    We cannot do this...

CEO:    Why not? (like a 10-year-old)

CFO:    We don't have...  And it's against...  We will jeopardize...

CEO:    I want to do it anyway... (like a 5-year-old)

It's very difficult to find the right way of dealing with an intelligent and talented person, who looks like an adult, but frequently falls into the pits of the child-like stubbornness.  The only thing you can do is to be constantly aware of the reality of the syndrome.  Hope for the best, but prepare for the worst.

Let me leave you with this popular culture example.  Mark Zuckerberg, a student at Harvard University, threw a tantrum like a 3-year-old boy in a sandbox, when his girlfriend dumped him - he called her mean names and told her secrets to the entire nursery school.  Then he ran out and slammed the door behind him as hard as he could.  The result of it was the creation of a network that pervaded the lives of hundreds of millions of people all around the world and made him the youngest billionaire.  Now, he will never grow up - he never got a chance to face the real world.  He went from childhood into a fantasy land.  He boasts that he wears the same thing every day.  So, does Peter Pan - the protective uniform of a boy who will never grow up.

Quote of the Week: The Biggest Problem of Contemporary Literature

"The reason why so few good books are written is that so few people who can write know anything."

                                            Walter Bagehot

                                             1826-1877

Note from The Frustrated CFO:

I feel a kinship with Walter Bagehot.  He was a businessman, essayist, and journalist.  While his main focus lied in the economy and money, he also wrote extensively on government, politics, literature, and culture.

Quiet Changes in Taxation, or the Underhanded Squeezing of the Middle Class

During the election, pollsters consistently showed that for the majority of voters "the economy" was a primary concern.  Unfortunately, nobody asks the test contingent what exactly they mean when they blacken a little circle next to "The Economy" and why they believe in new elects having any impact on it. 

In reality, for most people, the economic worries amount to "I don't have enough money to survive and I hope the President will make sure that I do."  I can hear the audience laughing.  I'm laughing too - through tears.   

"Economy" is a very broad term.  It includes creation of the new jobs (the best hope for it are the small businesses, which don't get government subsidies and bailouts); reduction of the national debt (it would result in less of the tax money going into paying interest to the foreign lenders, but the counter keeps ticking upward); the trade deficit (well, that's an ongoing joke); domestic treasury (the interest rates have been at the record lows for years now, nevertheless the equity and debt markets jump up and down like a rabbit and a frog); foreign monetary policy (the only time the dollar gets stronger is because other currencies tumble), etc.   Oh, politicians of all ranks talk a lot about these issues, but they are like birds: a lot of chirping and wing-flapping, but there is no way they can do anything useful with those feathered extremities.

I'd say that the only part of "the economy," on which the government has a direct, visible, and tangible impact is TAXATION.  Three months ago I offered my opinion on the pre-election debates around the tax cuts and ridiculous $250K "middle-class" ceiling.  Well, at least those topics were brought into public view, brightly spot-lighted by all respectable publications, both in print and on the web.

But there are IRS changes that quietly undercut the fiscal well-being of millions of middle-class taxpayers, while remaining largely misunderstood and unnoticed.  From time to time they are briefly mentioned in the secondary business media, such as the WSJ blog, or discussed on specific accounting and taxation sites, but I believe everybody should be urgently educated on these financial assault weapons.  We should be screaming about them.

Among these painful tax issues, the Alternative Minimum Tax (AMT) is a biggie.  The general public is very intimidated by the AMT concept because the tax preparers are not willing to divulge their "trade secrets."  But the majority of financial professionals who don't make their living in personal taxation, including me, have no problem clarifying that it's exactly what it sounds like: the other method of calculating your tax liability, different from the conventional method.  Both methods must be applied and the one resulting in the higher taxes must be elected.   

The AMT approach seemingly follows the familiar chain of Gross Income, less adjustments, less exemptions, less deductions, less credits.  However, the structure of the reductions used to arrive at the taxable income and the way the flat AMT rate is applied make a big difference.

First of all, AMT disallows a large portion of the itemized deductions, including 100% of state and local taxes, plus a big chunk of medical expenses as well as of mortgage interest.  Moreover, while maxed at a seemingly lower flat rate (28%) than the top tax bracket (35%), AMT frequently yields higher results, because it's applied evenly to every dollar, starting with the very first one.  To contrast: regular method uses a progressive scale, wherein the first dollar is taxed at 10%,$8,701-st (for singles) at 15%, etc.; the 28% rate kicks in only after you reach $85,650 and 35% is applied to incomes over $388,850. 

Still, for many years this alternate methodology was kept at bay by the legislature, impacting only the big earners (2.7% of US taxpayers, or 3.8 million households).  The instrument of taming the AMT was the level of exemptions (non-taxable income).  In 2011 they were: $74,450 for married taxpayers filing jointly, $48,450 for singles and the heads of households, $37,225 for married couples filing separately. 

But everything changes now.  33 million will end up paying significantly more money to the federal government, because (unless a sensible decision is passed before the end of the year) the exemptions will drop to, respectively, $45,000, $33,750, and $22,500, bringing the AMT to new heights.

As I said, this is a big one and it's shocking that people are not talking about it every day at the water fountains.  However, there are even quieter changes in the Internal Revenue Code that lick the butter away from your bread.  For example, I have not seen any articles in newspapers or magazines addressing the fact that all of a sudden over-the-counter (OTC) medications were disallowed from the medical portion of itemized deductions.  And the $2,400 cap on pre-tax contributions into medical flexible spending accounts (FSA) went absolutely unspoken.  It just happened.  

I estimate that between changes in OTC, FSA, and AMT, my tax bill for 2012 will be $10,000 higher than it would be without these alternations.  I cannot help myself feeling violated.  Don't you?                 

Quote of the Week: Relativity of Existence

"I have an existential map.  It has 'You are here' written all over it."

                                Steven Wright

 

 

 

 

 

 

 

 

MTA vs. Sandy, or The Frustrated CFO Now Predicts the Future

Ever since the "tempest" of August 2007, the MTA has been trying to assure the City that never sleeps that their bosses are not snoozing either, that they are awake and active, doing everything they can to protect NYC's transit from water disasters: they reported on elevation of ventilation grates and "building of other defenses."  (Isn't it amazing how vague and unspecific the reports of supposed efforts are?)  Anyway, they've spent nearly $100 million "making sure" that they can say to the water, "No Pasaran!" 

How much of that money was used for actual work and how much was appropriated to service MTA's $31 billion debt (i.e. to pay interest) or cover $900 million gap of its annual operating budget (including executive salaries) - that we will never know.  Yet, the City, even though fed up with MTA's bullshit, had no choice but to stick to "positive thinking" and hope that "everything will be Ok" (there is a reason the subway riders still clutch The Secret to their embattled chests, keeping it at a #1 spot on Mental and Spiritual Healing bestsellers list).  

And then, Sandy, the wild child of the thoroughly raped Mother Nature, rowed in on a high tide.  Her rage wasn't even that hard core.  She wasn't planning on avenging all human sins against the poor planet.  At no point she's raised her fists above 42 mph.  But the relatively moderate amount of liquid she spat out choked the MTA to a total standstill.  New York's ancient and pretty much dysfunctional drainage system couldn't absorb the incoming water and it went in straight through those elevated ventilation grates and whatever other openings it could find.     

Newspapers and bloggers write that MTA's workers heroically battled the consequences of Sandy's anger.  And that is absolutely right.  Individual employees on and under the ground toiled around the clock in harsh conditions.  As one comedian said many years ago, "We need to create disasters, so that we can have heroes."  However, I imagine that while they were struggling,  their bosses were singing hosanna to the storm for giving them stronger justifications to ask the public for more money, for much-much more money.

Liberals laud governor Cuomo for declaring in his post-Sandy speeches that we now live in a new climate reality, that people should get used to storms and hurricanes.  (Big Fucking News! Some people have been screaming about it for years, for decades, and nobody wanted to listen!).  The gratitude for stating the obvious makes the confused people hot for Andrew to the point that their urine boils inside.  They overlook a simple truth that no politician does anything without a politically-motivated reason. 

Yes, environmental policy, including eco-friendly transportation and energy efficiency, have always been a part of Andrew Cuomo's platform, but I don't remember him ever saying before that New York has become a target of continuous hurricanes.  It's not that he is wrong - we have pushed the climate conditions into the dangerous territory.  It's the timing of these "revelations" that bother me.  Call me a cynic, but I hear an already familiar pattern here: the dark clouds are gathering over us, so the sacrifices for the sake of protection must be made.      

And now, I will try to foretell the future events that will materialize out of this predicament.  First - the rise of the transportation costs.  The MTA already announced the impending hike (yet another one) of the tolls and fares to go into effect in March 2013.  I predict that the Authority will use Sandy to justify much higher increases than usual.  Originally they said that new city transit rates may go up to anywhere between 5% and 25%.  I am sure that it will be at least 25%, most likely even more. 

Then, the NYC government will be called into action to pitch in and, as a result, some sort of an additional levy will be imposed on NYC residents, both individual and commercial.   Eventually, the State will do the same.

And you know what, we will not even complain.  We will accept it as inevitable necessity.  It's like with all "security" issues.  Do you want another 09/11?  Of course, not.  So, submit yourself to surveillance cameras and telecommunications monitoring; take off your shoes and get a shot of X-rays in the airport.  Do you want to be paralyzed by the absence of transportation and electricity next time the City is hit by the storm (and remember - it's going to happen soon)?  No?  Then, pay up and shut up.

Quote of the Week: No Pain, No Gain

     "In Italy, for thirty years under the Borgias, they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance.  In Switzerland, they had brotherly love, they had five hundred years of democracy and peace - and what did they produce? The cuckoo clock."

 

                            From the movie "The Third Man" (1949)

        Written by Graham Greene, directed by Carol Reed