In the News: September 14, 2016

Ahoy, Maties!
Labor Day has faded into memory, and before you know it, the holidays will be here. Halloween, Thanksgiving, and the year-end Christmas/Hanukkah/Kwanzaa cavalcade of commercialism are the obvious "Big Three." But in all the holiday season hype, it's easy to overlook a newer celebration that grows more popular every year. We're talking, of course, about International Talk Like a Pirate Day — observed this year on Monday, September 19.
Have you heard about the new pirate movie? It's rated ARRRRRGH!
When you think of pirates, you probably picture swashbuckling "Golden Age" captains like Edward "Blackbeard" Teach or "Calico Jack" Rackham. Maybe your tastes lean towards the fictional Jack Sparrow or Long John Silver. Either way, you'd probably be surprised to learn that the real pirates of history could be a sophisticated lot, organizing themselves into democratic societies, with checks and balances to enforce discipline — and even "taxing" themselves to pay expenses.

What has two eyes, two arms, and two legs? Two pirates!
Some captains went so far as establishing written codes to maintain law and order. (No one walks the plank without due process!) Bartholomew "Black Bart" Roberts, who captured over 470 ships before dying in a broadside of British grapeshot, ruled according to 11 articles. Number ten on his list provided that, "The captain and the quartermaster shall each receive two shares of a prize, the master gunner and boatswain, one and one half shares, all other officers one and one quarter, and private gentlemen of fortune one share each." Even Bernie Sanders could approve of such equal distribution!

What do you call a pirate that skips class? Captain Hooky!
Today's pirates face a whole new set of challenges, including how to handle their ill-gotten gains. If you decide to deep-six your desk job for an eyepatch and life on the sea, you'll find your income subject to the same tax as any other business, legal or not. "Booty" is taxed at fair-market value under the rules of Code Section 83(b).

What was the pirate's golf score? Parrrrrrrrrr!
Fortunately, you'll get the same deductions as any other business. Ships and equipment you buy to conduct raids are considered capital equipment, depreciable over the applicable period. Guns, grappling hooks, and smaller items qualify for first-year expensing. And if the Indian navy sinks your ship, you can claim a capital loss. It's good to know that if an IRS auditor says "I'm the captain now," you won't be completely hornswoggled.

How much does it cost a pirate to get a piercing? A buck an ear!
Yo ho ho mateys, pay attention here. The end of the year isn't just holiday season, it's planning season. And planning is the key to keeping your treasure and making it grow. So call us to help keep the scallywags at the IRS from getting too many of your pieces of eight!

In the News: September 21, 2016

Zero Tax Thirty
Matt Bissonnette grew up in a dinky flyspeck of a town off the Alaskan coast that you can't get to without a boat or a plane. He ultimately escaped to join SEAL Team Six, the Navy's most elite counterterrorism force. He took part in the 2009 mission to rescue Captain Mark Phillips from Somali pirates, a story which was told in the movie Captain Phillips. But that was just a warmup for his biggest mission: "Project Neptune Spear," the 2011 raid that killed Osama Bin Laden.

In 2012, Bissonnette wrote a memoir called No Easy Day: The Firsthand Account of the Mission That Killed Osama Bin Laden. It earned him $6.7 million in royalties, which he planned to donate to the families of fallen SEALs. It also launched a lucrative second career as a public speaker. Unfortunately, Bissonnette broke the Pentagon rule requiring him to submit it for vetting before publishing. The day after the book landed on shelves, officials said it revealed classified information, a breach that could subject him to years in prison.
Last month, Bissonnette settled the dispute and agreed to pay back every dime of royalties, plus another $100,000 in speaking fees he earned before they approved the slides he uses in his presentations. Question: can he now deduct that payment from his taxes going forward?
Code Section 162(f) seems to shoot down any tax benefit. "No deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law." But what about payments made to settle a dispute before a fine or penalty is imposed? Treasury regulations state that payments made to settle that sort of potential liability aren't deductible. But the regulations also state that compensatory damages do not qualify as fines or penalties.
So, that's the $6.7 million question. Does Bissonnette's payment serve to compensate the government for the damage his book caused? If so, then he gets his deduction. Or does it merely settle his potential liability for civil or criminal fines or penalties — in a way that benefits both the government and him by avoiding the time, expense, and potential public disclosures involved in a trial? In that case, no dice.

Bissonnette isn't the only celebrity who may miss out on a fat tax deduction for a big gesture. Actress Amber Heard recently finalized her divorce from Johnny Depp with a $7 million lump sum payment, then announced she's giving it all to charity. But she probably won't get the deduction you'd expect. That's because you can only deduct up to 50% of your adjusted gross income in any year (and carry any remaining balance forward five years). Ouch! Bet she didn't see that coming!

Now, there are two ways Depp and Heard might be treating that $7 million. It could be a transfer between spouses, incident to the divorce. In that case, it's nondeductible to Depp and tax-free to Heard. (Too bad her financial disclosures show she doesn't have nearly enough income to take advantage of the full deduction.) Or it might be alimony, deductible to him and taxable to her. In that case, she'll still owe tax on the 50% of her donation that she can't deduct this year.

Here's the lesson. Sometimes pricey things happen, and we console ourselves by saying "at least I get a tax deduction." But that's not always true, and it's rare that value of the tax deduction is enough to compensate for the loss that creates it. So call us before your next big transaction and make sure it serves you best!