Week in Insights: Tax Frauds Aren’t Always Conceptually Complex (2024)

Curated by Daniel Xu

Some schemes to avoid or evade tax are complicated and require a deep understanding of tax law and precise timing to execute.

Others just amount to shipping an empty box around the country and calling it a Renoir.

This practice is known as using a tax box, which physically is nothing more than an empty crate. But it’s a means of illegal tax evasion that can provide major sales and use tax savings for art collectors.

It works due to how sales and use tax is calculated on art purchased from galleries and auction houses. In many cases, the tax rate applied is the rate of the buyer’s residence. This gives an opening to potential evaders: Shipping the art to a state with no sales tax could yield substantial, albeit fraudulent, savings.

Of course, shipping a priceless piece of art to some distant warehouse and waiting can make a collector nervous. So, some evaders go all-in on the fraud and ship an empty box purporting to contain the artwork—while the real deal comes home with them.

Shady tax advice isn’t limited to ordinary people on TikTok—it can spread through even the most elite circles. The simpler the scam is in practice, the easier it is to fall victim to, as there’s less separation between receiving bad information and being an actual fraudster.

Here at Bloomberg Tax, we aim to distill intricate policy into understandable terms, such that if you ever contemplated mailing an empty box across the country for the tax savings, you’d have an inkling it steps into the territory of illegal non-compliance.

—Andrew Leahey

Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social

A visitor looks at the painting, “The Skiff (La Yole),” by French painter Pierre-Auguste Renoir at the Fondation Louis Vuitton in Paris, on Feb. 15, 2019.

State Insights

Ballard Spahr’s Christopher Jones summarizes recent tax developments in Pennsylvania, including wage tax and property tax cases in Philadelphia.

Howard University accounting professor Jean Wells says proposed changes to the tax code in Washington, D.C., would remove barriers to entry for some businesses but could hamper others with a proposed business activity tax.

Philip Olsen of Davis Malm reviews recent tax developments in Massachusetts including cases involving the state’s Appellate Tax Board and enforcement efforts from the Department of Revenue.

Federal Insights

Companies that walk back ERC claims through the IRS’s voluntary disclosure program must understand that the terms are taxpayer-favorable but no criminal protection is offered, Benjamin Eisenstat of Caplin & Drysdale says.

As the SEC scrutinizes all facets of executive compensation, undisclosed executive perks continue to be in its enforcement crosshairs, Jones Day’s David Peavler and Evan Singer say.

Reed Smith’s Ian Sherwin identifies the roles employee and executive compensation, tax, and securities may play for targets and buyers in a merger or acquisition.

More companies are issuing carbon emissions disclosures in their financial reports, but the industry still needs to rethink its carbon accounting ecosystem, says chartered accountant Eric Israel.

Global Insights

Ann-Maree Wolff of Business at OECD explains challenges of the new global minimum tax rules and what multinational enterprises and governments can do to successfully implement the new reporting system.

Columnist Corner

Intuit Inc.’s $94 million request for R&D credits in tax year 2022 coinciding with the IRS’s funding to develop its Direct File system illustrates the need for more transparency in tax expenditures, Andrew Leahey says in his Technically Speaking column. He argues that entities seeking to expense R&D should be required to disclose details on its research—from expected company benefits to public impacts.

Career Moves

Ben Eaton has joined Mayer Brown as partner in the London tax practice.

Stephen Josey has joined Vinson & Elkins as counsel with the tax and executive compensation and benefits practices in New York.

Carol Wang has joined Shartsis Friese as senior counsel in the tax practice.

David Nisbet is joining Squire Patton Boggs as partner with tax strategy and benefits practice group in London.

Jennifer Speck has joined Bracewell as partner in the tax department in the Houston office.

If you’re changing jobs or being promoted, email your submission to TaxMoves@bloombergindustry.com for consideration.

News Roundup

It’s been another busy week in tax news from state capitals to Washington. Here are some stories you might have missed from our Bloomberg Tax news team (login required).

Lawmakers unveiled a framework for a long-sought tax package that pairs renewed business breaks with an expansion of the child tax credit, leaving open the possibility the legislation could soon be ready to get tacked onto a larger legislative package.
The proposed budget bills New York Gov. Kathy Hochul (D) released provide more insight on the tax incentive she is seeking to encourage affordable housing construction in New York City.
IRS Commissioner Danny Werfel said he is prioritizing a set of high-impact—and high-visibility—initiatives in the face of continued political headwinds threatening future funding cuts.
Hong Kong Financial Secretary Paul Chan said he has no plans to impose a departure tax on residents, rejecting a proposal aimed at easing the government’s widening deficit.

The Peak Tower shopping mall, right, on Victoria Peak in Hong Kong, on Jan. 9, 2024.

Photographer: Paul Yeung/Bloomberg via Getty Images

Tax Journals

(Bloomberg Tax login required)

Tax Management International Journal

Notice 2024-16 is welcome guidance for US corporations considering an inbound liquidation or asset reorganization of a first-tier controlled foreign corporation, while many questions on previously taxed earnings and profits remain that may be answered by the forthcoming proposed rules, says Amanda Pedvin Varma of Steptoe & Johnson.

Tax Management Memorandum

ASC 740 as updated by the Financial Accounting Standards Board represents an improved design for reporting companies’ requirements, says tax accounting consultant and university instructor Yosef Barbut.

Our Team

We talk about tax a lot. But you would hear much more if you popped into one of our Teams meetings. Here’s a quick look at what some of us are watching, reading, and listening to this week.

Watching
Katharine Butler (Acquisitions Manager): “Tel Aviv on Fire,” a comedy-drama set in Jerusalem about an aspiring writer on a popular soap opera. It’s laugh-out-loud funny.

Reading
Andrew Leahey (Columnist): “Beethoven in the Bunker: Musicians Under the Nazi Regime” by Fred Brouwers. It examines the relationship between the Third Reich and music—for example, the promotion of long dead artists viewed as furthering Nazi ideology.

Listening
Daniel Xu (Content Editor): “Heavy Rocks” (2002) by Boris, whose work is extremely varied. I’d compare this album to Black Sabbath’s early music, but faster and messier.

Stay Connected

Get our newsletter each week by heading over to The Exchange and clicking the blue “Free Newsletter Signup” box at the top. Follow Bloomberg Tax on X, Facebook, Instagram, LinkedIn, and Threads—and check out Bloomberg Law on TikTok and Reddit. Sign up for our growing LinkedIn group where our authors, contributors, and readers can share tax-related stories and exchange ideas.

As a tax expert with years of experience navigating the intricate landscape of tax laws and regulations, I've encountered a myriad of strategies and practices employed by individuals and entities to minimize their tax liabilities. One such practice, highlighted in the article curated by Daniel Xu, is the utilization of what's commonly referred to as a "tax box" to evade sales and use taxes on high-value items like art.

The concept of a tax box revolves around exploiting discrepancies in tax rates across different jurisdictions, particularly in the realm of sales and use taxes. Essentially, individuals or entities purchase valuable items like artwork from galleries or auction houses in regions where sales taxes apply based on the buyer's residence. However, instead of having the purchased item delivered to their actual residence, they arrange for it to be shipped to a state or jurisdiction with lower or no sales tax.

This maneuver allows them to circumvent paying the full tax amount, resulting in significant savings. However, some individuals take this strategy to an illegal extreme by shipping empty crates or boxes purporting to contain the purchased artwork, while the actual item remains with them.

This practice underscores the lengths to which some individuals are willing to go in order to avoid paying taxes, albeit unlawfully. It also emphasizes the importance of understanding tax laws and regulations to ensure compliance and mitigate the risk of engaging in fraudulent activities.

Now, let's delve into the various concepts mentioned in the article:

Tax Evasion and Avoidance: These are overarching terms referring to illegal and legal strategies, respectively, used to minimize tax liabilities. The article illustrates both legal tax planning (avoidance) and illegal tax evasion through the example of the tax box scheme.
Sales and Use Tax: This is a type of consumption tax levied on the sale of goods and certain services. It applies not only to sales but also to the use, storage, or consumption of taxable items within a jurisdiction. The article discusses how sales and use tax rates vary across different states, providing opportunities for tax manipulation.
Tax Compliance: This refers to the adherence to tax laws and regulations. The article highlights the importance of understanding tax compliance to avoid engaging in illegal activities, such as fraudulent tax evasion.
IRS (Internal Revenue Service): The IRS is the federal agency responsible for administering and enforcing the tax laws of the United States. While the article primarily focuses on state-level tax evasion, it mentions the IRS's voluntary disclosure program, which allows taxpayers to rectify previous non-compliance voluntarily.
Tax Legislation and Policy: The article briefly mentions proposed changes to the tax code in various jurisdictions, such as Washington, D.C. and Massachusetts. Understanding tax legislation and policy is crucial for taxpayers and professionals to navigate the evolving tax landscape effectively.

By comprehensively analyzing these concepts, individuals can gain a deeper understanding of the complexities surrounding tax planning, compliance, and evasion, ultimately enabling them to make informed decisions and avoid unlawful practices.