The Benefits of Incorporating Abroad in an Age of Globalization

The Benefits of Incorporating Abroad in an Age of Globalization

By STEVEN M. DAVIDOFF

Michael Kors Holdings not only sells fashion that people crave, it has also offered shares that were a hit with investors. The company’s shareholders, including the designer himself, sold about $944 million worth of stock last week in an initial public offering that valued the company at about $4 billion.

Michael Kors is not just a successful I.P.O., however. The company is also a case study on how globalization increasingly allows companies to avoid United States taxes and regulation.

Michael Kors gets about 95 percent of its revenue from sales in Canada and the United States. Like most clothing manufacturers, the company makes its clothes largely in Asia. And Michael Kors has gone one step further. It has outsourced its corporate governance and taxes to the British Virgin Islands.

Because the company is organized there, it sidesteps higher taxes and substantial regulation in the United States.

The tax savings are likely in the millions and could end up being much more.

If Michael Kors were organized under the laws of the United States, it would be subject to taxation on its worldwide income instead of just the revenue it earned in the United States. The company could defer these taxes on foreign income by keeping the money abroad in foreign subsidiaries. If it repatriated the money to the United States, it would then be taxed at rates of up to 35 percent, offset by any foreign tax paid.

Because of this tax regime, JPMorgan Chase estimates that American multinationals have $1.375 trillion in cash sitting overseas. By keeping this cash abroad, these companies are not subject to United States tax until the money is returned to America. These companies may be waiting for Congress to enact a tax holiday to allow the cash’s repatriation.

Since Michael Kors is organized abroad, it never has to face this issue and will pay tax only on money earned in the United States. Right now, Michael Kors does not have significant foreign revenue, but this is bound to increase, as the company appears focused on building international sales.

Michael Kors will also be able to dodge much of the securities and corporate regulation applicable to American public companies, which are subject to scrutiny under the federal securities laws intended to protect investors. This requires an American company to file quarterly reports and publicly disclose material events promptly upon their occurrence. Executives also have to report all stock sales within two days, and companies are generally required to have a board comprising a majority of independent directors. As a foreign corporation, Michael Kors is under no such restrictions and instead is subject to bare-bones reporting requirements under United States securities law.

If a shareholder wants to sue a Michael Kors director for misconduct, good luck. The corporate laws of the British Virgin Islands are very different from those of United States. Michael Kors states in its I.P.O. prospectus that “minority shareholders will have limited or no recourse if they are dissatisfied with the conduct of our affairs.” A shareholder would most likely have to sue in the British Virgin Islands. While a few weeks’ visit there might be nice, I am not sure that shareholders are prepared to spend years on the island locked up in litigation.

It is not just Michael Kors that is taking advantage of foreign incorporation. Private equity firms have been buying American companies with significant foreign operations and reorganizing them as foreign corporations. The private equity firms will then arrange for the company to make an initial public offering on an American exchange. Freescale Semiconductor Holdings, a company purchased by a consortium of private equity firms in 2006, went public on the New York Stock Exchange in May, yet it was organized under the laws of Bermuda.

It is all seems so easy.

More American companies would probably love to lower their taxes and leave for the Caribbean, if not for Congress. In 2002, Stanley Works, based in Connecticut, tried to reincorporate in Bermuda to save $30 million a year in taxes. But after a public outcry, the company’s board abandoned the plan. Congress subsequently passed a law prohibiting companies from migrating out of the United States to lower their taxes unless the exit involved a sale of control. Private equity firms take advantage of this loophole to send portfolio companies with large overseas operations abroad.

Michael Kors was reincorporated in the British Virgin Islands and established its corporate headquarters in Hong Kong in connection with its acquisition by Sportswear Holdings in 2003. Sportswear Holdings is based in Hong Kong and controlled by Lawrence S. Stroll and Silas K. F. Chou, both of whom reside outside the United States. Michael Kors’s foreign incorporation and headquarters was most likely put in place to take advantage of this foreign ownership and further ensure that the United States did not tax its owners.

Michael Kors and Freescale show yet again that American corporate tax laws need to change as companies become increasingly international. The United States is one of the few countries in the world to tax worldwide income for companies based here.

In a world where companies have a choice about where to incorporate, enforcing these tax rules is going to get harder. Michael Kors stock may be listed on the Hong Kong Stock Exchange and the company may have headquarters in Hong Kong, but this appears to be a mailbox. The fashion designer’s largest office is in New York and its stock is also listed on the New York Stock Exchange. But when it came time to set up the company’s place of organization, Michael Kors chose a third country where it had no operations.

Congress can try to close this loophole, but companies that want to lower their taxes will still find a way to incorporate abroad, something made easier by the ability to raise capital through an I.P.O. anywhere in the world.

Perhaps it is time for the United States to adopt a tax system more in line with the rest of the world. This does not mean pandering to tax havens, but it should incentivize companies to bring their riches to the United States.

The regulatory concerns are also high. American investors may be investing in Kors and other companies incorporated outside the United States without appreciating that they are not subject to the same United States laws that other publicly traded companies are. The Securities and Exchange Commission set up these different regimes to attract foreign listings, but companies like Michael Kors are taking advantage of the loophole to lower their tax burden, possibly at the expense of shareholders.

Welcome to globalization.

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Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

IRS ISSUES Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.

Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.

FS-2011-13, December 2011 The IRS is aware that some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so.  Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law.  This fact sheet summarizes information about federal income tax return and FBAR filing requirements, how to file a federal income tax return or FBAR, and potential penalties. Note that penalties will not be imposed in all cases.  As discussed in more detail below, taxpayers who owe no U.S. tax (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties.  In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause. This fact sheet is provided for information purposes only, and the topics discussed may or may not apply to a particular taxpayer’s situation.  The IRS continues to consider the topics discussed in this fact sheet and will provide additional information as it becomes available. 1.  U.S. income tax return filing requirement As a United States citizen, you must file a federal income tax return for any tax year in which your gross income is equal to or greater than the applicable exemption amount and standard deduction.  For information about whether you must file a federal income tax return for a particular tax year, including exemption amounts and standard deductions, see Publication 501 (Exemptions, Standard Deduction, and Filing Information) for that year.    Generally, you are required to report your worldwide income on your federal income tax return.  This means that you should report all income, regardless of which country is the source of the income.  Generally, you only need to file returns going back six years. 2.  Penalties imposed for failure to file income tax returns or to pay tax If you are required to file a federal income tax return and fail to do so, or you fail to pay the amount of tax shown on your federal income tax return, you may be subject to a penalty under Internal Revenue Code (IRC) section 6651, unless you show that the failure is due to reasonable cause and not due to willful neglect.  The penalty is 5 percent of the amount of tax required to be shown on the return.  If the failure continues for more than one month, an additional 5 percent penalty may be imposed for each month or fraction thereof during which the failure continues.  The total failure to file penalty cannot exceed 25 percent.  Note that there is no penalty if no tax is due. If you fail to pay the amount of tax shown on your federal income tax return, you may be subject to a penalty for failing to pay under IRC section 6651(a)(2), unless you show that the failure is due to reasonable cause and not due to willful neglect.  The penalty begins running on the due date of the return (determined without regard to any extension of time for filing the return) and is 1/2 percent of the amount of tax shown on the return.  If the failure continues for more than one month, an additional 1/2 percent penalty may be imposed for each additional month or fraction thereof that the amount remains unpaid.  The total failure to pay penalty cannot exceed 25 percent. Note that there is no penalty if no tax is due. Under IRC section 6651(c)(1), the failure to file penalty is reduced by the amount of the failure to pay penalty for any month in which both apply. For more information regarding the failure to file penalty and the failure to pay penalty, see IRS Notice 746 (Information About Your Notice, Penalty and Interest). Example 1:  Taxpayer is a United States citizen who lived abroad in Country A for all of 2010, during which time Taxpayer worked as an English instructor.  He maintained a checking account with a bank in Country A, and the highest balance in the account did not exceed $10,000 in 2010.  Taxpayer complied with Country A’s tax laws and properly reported all his income on Country A tax returns.  Although Taxpayer earned income in excess of the applicable exemption amount and standard deduction, he did not timely file a federal income tax return for tax year 2010.  After learning of his U.S. filing obligations, Taxpayer filed an accurate, though late, federal income tax return showing no tax liability after taking into account the section 911 foreign earned income exclusion and the foreign tax credit for taxes paid to Country A.  Taxpayer is not liable for a failure to file penalty, since the amount of tax required to be shown on the federal income tax return is zero.  Similarly, Taxpayer is not liable for a failure to pay penalty, since the amount of tax shown on the return is zero. Whether a failure to file or failure to pay is due to reasonable cause is based on a consideration of the facts and circumstances.  Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them.  In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information, including: The reasons given for not meeting your tax obligations; Your compliance history; The length of time between your failure to meet your tax obligations and your subsequent compliance; and Circumstances beyond your control. Reasonable cause may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances.  Among the facts and circumstances that will be considered are: Your education; Whether you have previously been subject to the tax; Whether you have been penalized before; Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know; and The level of complexity of a tax or compliance issue. You may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or you were unaware of the requirement and could not reasonably be expected to know of the requirement. Example 2:  Same facts as Example 1, except Taxpayer’s federal income tax return showed a tax liability of $2,100.  Taxpayer is subject to the failure to file penalty, unless Taxpayer shows that the failure to file was due to reasonable cause and not due to willful neglect.  Taxpayer is also subject to the failure to pay penalty, unless Taxpayer shows that the failure to pay was due to reasonable cause and not due to willful neglect.  Since the failure to file penalty is reduced by the failure to pay penalty for any month during which both apply, the maximum failure to file penalty is $472.50 (22.5 percent of $2,100).  The failure to pay penalty will accrue for 50 months before the 25 percent maximum is reached.  The maximum failure to pay penalty is $525 (25 percent of $2,100).  The penalties could be lower depending on when Taxpayer filed the return and paid the tax shown on the return.  The penalties also could be lower, or there could be no penalties at all, to the extent Taxpayer is able to show that the failure to file or failure to pay was due to reasonable cause and not due to willful neglect. 3.  Possible additional penalties that may apply in particular cases In addition to the failure to file and failure to pay penalties, in some situations, you could be subject to other civil penalties, including the accuracy-related penalty, fraud penalty, and certain information reporting penalties.  For information regarding the accuracy-related penalty and the fraud penalty, see IRS Notice 746 (Information About Your Notice, Penalty and Interest).  For information regarding information reporting penalties, see the instructions for the specific information reporting form.  For example, see the Instructions for Form 3520-A for information on the penalty for failure to file Form 3520-A.  4.  FBAR filing requirement As a United States citizen, you may be required to report your interest in certain foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).  For information about FBAR reporting requirements, including reporting exceptions, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions. 5.  How to file an FBAR For information about how and where to file an FBAR, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions. If you learn you were required to file FBARs for earlier years, you should file the delinquent FBARs and attach a statement explaining why they are filed late.  You do not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR.  As discussed below, no penalty will be asserted if IRS determines that the late filings were due to reasonable cause.  Keep copies, for your record, of what you send. 6.  Possible penalties for failure to file FBAR If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty.  Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation.  See 31 U.S.C. § 5321(a)(5).  Note that this penalty is applicable only in cases in which there is willful intent to avoid filing.  Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation.  There is no penalty in the case of a violation that IRS determines was due to reasonable cause.  For more information about the FBAR penalty, see Form TD F 90-22.1.  For information about the reasonable cause exception to the FBAR penalty, see IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR). Example 3:  Same facts as Example 1, except that the highest balance in Taxpayer’s checking account exceeded $10,000 and, after reading recent press and thus learning of his FBAR filing obligations, Taxpayer filed an accurate, though late, FBAR.  The FBAR was accompanied by a written statement explaining why Taxpayer believed the failure to file the FBAR was due to reasonable cause.  The IRS will determine whether the violation was due to reasonable cause based on all the facts and circumstances.  Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case.  Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted. Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account.  There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause.  No single factor is determinative. Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return.  As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause.  No single factor is determinative. Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter.  See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).  The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate.  Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination. Example 4:  Taxpayer is a United States citizen who lives and works in Country B as a computer programmer.  Taxpayer has checking and savings accounts with a bank that is located in the city where he lives.  The aggregate balance of the checking and savings accounts is $50,000 during the tax year.  Taxpayer complied with Country B’s tax laws and properly reported all his income on Country B tax returns.  Taxpayer failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts.  After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, Taxpayer filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that he was previously unaware of his obligation to report the accounts on an FBAR.  Taxpayer also filed federal income tax returns properly reporting all income and no tax was due.  The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances.  Taxpayer had a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due.  Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case.  Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted. 7. New reporting requirement for foreign financial assets A new law requires U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 to report those assets to the IRS.  This reporting will be required beginning in 2012.  Taxpayers who are required to report must submit Form 8938 with their tax return.  See Notice 2011-55  for additional information about this reporting requirement under IRC section 6038D.

California's tax-hike advocates may setting up circular firing squad

California's tax-hike advocates may setting up circular firing squad

By Dan Walters

Published: Friday, Dec. 2, 2011

Those who believe that California should raise taxes – including Gov. Jerry Brown – to close its budget deficit or increase spending may be forming a circular firing squad.

Four major tax measures, all with well-heeled support and opposition, appear to be headed for the November 2012 ballot, plus a few lesser tax proposals. Voters could be subjected to weeks of confusing propaganda, and their response could be to reject everything.

The Think Long Committee for California – a group of political and civic figures and financed by billionaire Nicolas Berggruen – wants Californians to approve a sweeping tax overhaul that would extend sales taxes to services, simplify the income tax and generate about $10 billion more year.

Molly Munger – the daughter of Charles Munger, Warren Buffet's chief business partner – wants a sliding scale increase in income taxes to raise $10 billion a year for K-12 and preschool education.

Hedge fund manager Tom Steyer would indirectly boost taxes on out-of-state corporations doing business in California, by changing the way their taxable incomes are calculated, to boost spending on green energy by $1.1 billion a year.

Finally, Brown and his union allies will soon unveil a temporary sales tax hike and income tax surcharge on the affluent to raise about $7 billion a year to close the state's chronic budget deficit.

If they all make the ballot, not only will voters be bombarded by their advocates and opponents, but they create intramural rivalries.

Brown's allies in the public employee unions, especially the powerful California Teachers Association dislike the Think Long proposal because it would shift the tax burden from higher-income taxpayers to those in the middle-income brackets – and because Think Long wants the schools to give up billions of dollars owed by the state. The Brown and Munger plans would be direct competitors.

It sets up a situation not unlike what happened in 2009, when then-Gov. Arnold Schwarzenegger and the Legislature placed a package of several budget and tax measures on a special election ballot. Voters reacted angrily at its complexity and rejected everything.

The 2009 package violated an unwritten rule of ballot measures, that they should be as simple – perhaps as simplistic – as possible because when voters are confused and uncertain about something, they're more likely to reject it.

The 2012 measures could create the same kind of confusion and play into the hands of anti-tax groups that would like to see everything die.

Obviously, the way to avoid that situation would be for Brown and others who want to raise taxes to make some sort of deal to present one relatively straightforward, poll-tested tax measure.

However, given the big egos involved, it's doubtful anyone has the stature to make that happen.

© Copyright The Sacramento Bee. All rights reserved.

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Call The Bee's Dan Walters, (916) 321-1195.

Direct expensing for farm taxes

Direct expensing for farm taxes

Warren Schauer, Michigan State University Extension   |   Updated: November 15, 2011

First-year Direct Expensing (Section 179) is an election in IRS code that allows businesses like farms to deduct the cost of capital purchases as a tax deductible expense. In 2011 up to $500,000 of personal property capital purchases may be direct expensed if placed in service by the end of the year.

In most cases the capital purchases that qualify are personal property used more than 50% of the time in the business. The property may be new or used. Examples of eligible property include farm machinery, breeding livestock, grain bins and other single purpose agriculture or horticultural structures. In addition, off-the-shelf computer software is currently eligible property. Single purpose structures do not include farm shops or general purpose farm buildings.

There are several limitations that apply for direct expensing. If the farm business purchases and places into service over $2 million dollars’ worth of qualifying property then the $500,000 limit is reduced dollar for dollar. For example if a farm buys $2,125,000 worth of equipment then the amount of First-year Direct Expensing (Section 179) allowed is limited to $375,000. If the business purchases $2,500,000 or more in 2011 then no direct expensing is allowed.

The amount is also limited to the combined taxable income before the deduction derived from the active conduct of all trades or businesses. Section 1231 gains and losses reported on form 4797, such as sales of breeding livestock and machinery are taxable income as well as wages. For example, if a farm bought $300,000 of farm machinery and the net farm income is $125,000 the first-year direct expensing is limited to $125,000. The amount disallowed by this business taxable income limitation can be carried forward against future capital purchases.

Also keep in mind in any year that the asset ceases to be used more than 50% in the active conduct of a trade or business, a portion of the expensed amount is recaptured.

The determination of whether the mid-quarter convention applies due to purchases made in the fourth quarter of the tax year is made after any direct expense deduction and reduction of depreciable basis for credits.

The carryover basis from traded-in property is not eligible for direct expensing, only the extra or boot can be direct expensed. Boot is the cash and/or loans that are used to purchase the asset in addition to the value of the equipment traded for another piece of equipment. If a farmer traded in an old tractor for a new tractor, only the amount paid to dealer beyond the value of the trade-in would qualify for direct expensing. In addition, large SUVs more than 6,000 pounds Gross Vehicle Weight Rating or not more than 14,000 pounds are limited to $25,000 in direct expensing. A business can direct expense a portion of an item and then use regular deprecation on the remaining amount.

Of course, if the taxpayer direct expenses 100% of an item then there is no more depreciation left to expense in future years on that piece even if it still is in use.

For tax years beginning in 2012, maximum direct expensing is $125,000 indexed for inflation with phase out starting at $500,000 of qualified property placed in service. In 2013 maximum is $25,000 with phase out starting at $200,000. It is possible that Congress could increase this amount prior to 2013.

Remember it is always a good idea to review any elections with your tax advisor.

This article was published on MSU Extension News for Agriculture. For more information from MSU Extension, visit http://news.msue.msu.edu.

IRS: Oakland's Largest Pot Dispensary Owes Millions

IRS: Oakland's Largest Pot Dispensary Owes Millions

Harborside Health Center loses high-stakes tax battle; advocates say ruling could cripple the industry.-- By Zusha Elinson on October 3, 2011 - 4:36 p.m. PDT  The Bay Citizen (http://s.tt/13qbg)

Oakland’s Harborside Health Center — the largest medical marijuana dispensary on the West Coast — lost the first round in a high-stakes battle with the Internal Revenue Service that could spell trouble for the booming pot industry.

In a letter to Harborside late last week, the IRS ruled that the dispensary cannot deduct standard business expenses such as payroll and rent, because it is involved in what the agency terms "the trafficking of controlled substances," said Luigi Zamarra, Harborside’s chief financial officer.

“We can't live with the conclusions that the IRS has come to and neither can the industry,” Zamarra said in an interview Monday. If the IRS ultimately prevails, “we would close our doors and go away because the business model wouldn’t work,” he said.

Zamarra said Harborside would appeal the ruling. An IRS spokesman declined to comment.

The ruling highlights the conflict between federal and state authorities over medical marijuana, which is legal under state law but illegal under federal law. As Oakland and other cities have looked to dispensaries as sources for much-needed tax revenue, the federal government has toughened its stance toward the state’s marijuana industry.

Harborside — which has more 83,000 members and raked in $22 million at its Oakland dispensary last year — received a letter from the IRS late last week saying that the dispensary owed $2.5 million in taxes from 2007 and 2008. That’s $2 million more than Harborside paid for those tax years, Zamarra said.

The difference: The IRS insists that medical marijuana dispensaries must obey a section of tax code that prohibits companies from deducting most expenses if they are “trafficking in controlled substances.” [Section 280(e) of the Internal Revenue Code (“IRC”)] was designed as a tool for fighting drug trafficking.

Zamarra said that the IRS letter states that Harborside can’t deduct rent, payroll, health insurance or worker’s compensation insurance — deductions that are standard for many other industries. The only two things the IRS says the dispensary can deduct are the cost of buying marijuana and the cost of alternative health care services such as yoga, he said.

For instance, if Harborside bought marijuana for $60, sold it for $100 and used the entire $40 in income to pay salaries, rent and other expenses, the IRS would still demand that Harborside pay 35 percent tax on the $40, Zamarra said.

Richard Lee, who runs a downtown Oakland dispensary and is president of Oaksterdam University, which provides training to budding potrepreneurs, said the ruling would be a serious blow to the industry when added to increased local taxes and regular state and federal taxes.

The IRS began auditing Harboriside two years ago, as The Bay Citizen first reported. Last week's decision came after months of apprehensive waiting, Zamarra said.

Although the IRS ruled against Harborside on the [IRC Section 280(e)] issue, Zamarra said that that the auditors aren’t questioning whether the dispensary’s books are clean. Other dispensaries, like New Age Healing Collective in San Jose, have landed in hot water for allegedly cooking their books to hide the rivers of cash flowing in. 

“Harborside Health Center is very proud that they are not questioning our gross income or the details of our expenses,” said Zamarra. “The IRS has accepted our accounting.”

On the same day that it announced its loss to the IRS, Harborside also announced that it had handed over the last installment of its $1,081,450 tax bill to the city of Oakland, which now collects a 5 percent tax on marijuana dispensaries.

East Bay Congressman Pete Stark introduced a bill this spring that would change the federal tax code to allow medical marijuana dispensaries to make the same deductions as normal businesses.

"Our tax code undercuts legal medical marijuana dispensaries by preventing them from taking all the deductions allowed for other small businesses,” Stark said at the time.

But with the federal opposition to marijuana dispensaries, it’s unclear whether the president would sign the bill.

“The Obama administration is really on the counterattack right now, so I’m not sure what will happen,” Oaksterdam's Lee said.

Lee declined to comment on whether the IRS had raised the same issues with his dispensary. But Lee said Harborside’s battle with the IRS shows that the medical marijuana industry is making progress.

“At least it's better to be bankrupted than incarcerated,” he said.

Source: The Bay Citizen (http://s.tt/13qbg)

Grand Jury Indicts 55 for $250 million in tax scams

Grand Jury Indicts 55 for $250 million in tax scams

Mon Oct 3, 2011 11:57am EDT

(Reuters) - A grand jury has indicted 55 people for participating in scams that tried to bilk the government out of more than $250 million in undeserved tax refunds, prosecutors in California said on Monday.

Thirty-two indictments were returned by the grand jury accusing the people of various schemes to obtain the refunds. Millions of dollars were paid out, including a check worth almost $1.2 million, the prosecutors said.

The owners of one California company were accused of making presentations that claimed customers could get tax refunds from a "secret government account" after making payments to the company and agreeing to pay a percentage of any refunds they received, the prosecutors said.

More than 400 false tax returns were filed with the IRS as a result of the scheme allegedly run by a firm called Old Quest Foundation Inc. and another 35 were filed in a scheme allegedly run by another group, De la Fuente and Ramirez and Associates.