MLB Hall Of Fame catcher Ivan "Pudge" Rodriguez at the helm of the NISI 2400
Today is the official first day of summer 2017 - boats, baseball, beer, back yard barbecues, bathing suits, etc.
A season of long days of leisure with family and friends. But it doesn’t have to just be a time of idle fun in the sun.
Why not make it even more rewarding?
Maybe we can learn something about taxes and the IRS from the original boys of summer - Major League Baseball players?
Maximize your peer / pier time this summer.
To reap the best of what the yachting lifestyle has to offer, including friends and your professional peers as often as possible can make it even more rewarding. This relaxing peer / pier conversation can often produce some surprising yet substantial benefits.
Recently while enjoying the best of the summer season, I was prompted to inquire about the strike zone in Major League Baseball.
I came across a very good piece by Cork Gaines of The Business Insider, "What A MLB Strike Zone Really Looks Like And Why Players Are Always So Mad About It" where he explores the research by Brian M. Mills of the University of Florida examining which pitches are actually called balls and strikes by MLB umpires.
I was struck by the similarities with how the IRS enforces the tax code.
It appears baseball and especially this research offers some valuable insights for anyone seeking to legitimately minimize their tax liability, mitigate their risk of an IRS tax audit, and assure compliance with the tax code.
It could be especially helpful for yacht owners.
Reviewing the research reminded me of my initial meeting with a client that was a Major League pitcher at the time. I asked what they talked about in the bullpen and the dugout.
He confided that in addition to the game, they spent a lot of time talking about how much they pay in taxes.
He said, they compared notes and strategies. They learned what others were doing and it provided a good measure as to the effectiveness of their current team of financial and tax advisers.
I was initially surprised. But quickly realized they are just like everyone else with a combined tax rate of 30, 40, even 50% - and some down time at work.
Even at lower rates, with enough income it’s still possible to pay millions of dollars in taxes – so it is understandable that taxes are often a major discussion topic between peers with the same problems and interests.
Peer conversations and especially relaxing pier conversations provide unique opportunities that differ from client to adviser conversations. For example, how does one know if their current team of financial and tax advisers are good, fair or poor?
It’s easy to become comfortable and complacent with the status quo, especially if advisers are likable, but seldom is it prudent long-term wealth management as the tax code changes often and with little warning or fanfare.
Many advisers, including yacht brokers, can do their clients a disservice by attempting to “protect” their clients. But from what?
These advisers often just end up keeping their clients in the dark about new superior alternatives and opportunities. The client can be a big loser in the long run. What do they call that…the mushroom treatment?
Too many advisers often seem more interested in protecting their jobs…than their clients’ best interests. That is when things can get ugly.
Thus, regular communication with trusted and competent peers allows one to compare tax and wealth strategies, learn something new and identify which advisers may have more “on the ball” so to speak. And sometimes when it may be time for a walk.
Have you seen the studies showing that with professionally prepared tax returns by CPAs, the tax liabilities can vary by as much as 100% depending on the CPA preparing the return?
If one is not comfortable having such conversations with peers, then find other trusted information sources or check with other professionals that are independent of your current advisers - just to see what alternatives and better ideas may be out there.
Peer / pier conversations become increasingly important as many of the affluent now run the risk of over reliance upon a small group of advisers trying to insulate them from strangers with new and often better ideas.
Preventing this type of group think can be especially relevant for boat owners and the role the evolving tax strategies often play in yacht ownership.
DON'T BE FOOLED, OR GET CAUGHT LOOKING AS THEY SAY.
Whether you are buying a boat, selling a yacht, operating a boat as a business, or thinking of donating a yacht to charity, there is usually a yacht broker, a promoter, or some other “professional closer” brought in to “pitch” the potential tax benefits necessary to close the deal.
In fact, the expected tax benefits of owning a boat are now an essential element of most yacht transactions. So it needs to be correct - and not just minimally so.
Often the “pitches” are based upon reciting very specific provisions of the tax code and some hyper technical and tortured application thereof to generate the desired tax treatment –necessary to persuade a prospect to close the sale.
Sounds easy enough – at first impression. Here is what the tax code says, here is how you comply, and voila - here are your tax benefits.
But the reality can be much different.
The tax benefits promised by many of these boat business, yacht charter management programs are analogous to citing rule 2.00 of the Major League Baseball rule book and then saying all you must do for your tax benefits is to just throw strikes.
Like complying with the required tax provisions - easier said than done.
Rule 2.00 of the Major League Baseball rule book states:
The STRIKE ZONE is that area over home plate the upper limit of which is a horizontal line at the midpoint between the top of the shoulders and the top of the uniform pants, and the lower level is a line at the hollow beneath the kneecap. The Strike Zone shall be determined from the batter’s stance as the batter is prepared to swing at a pitched ball.
Right off the bat - there’s potential for mischief.
Without even leaving the rule book, it’s evident the strike zone is unique for each batter based upon the batter’s height, how he wears his pants high or low, the proportional relationship between his thigh and lower leg, and his batters’ stance – erect or compact.
Following the exact letter of the rules, the strike zone varies by player. The same is true of much of the tax code.
For example, the tax code requires that to take tax deductions for a charter boat business, a yacht owner must operate the yacht as part of a business and not a hobby.
However, just what constitutes operating a yacht in a businesslike manner with a true profit motive is not specified by statutes but has broad general guidelines. It is determined by the individual facts and circumstances each of each tax payer and can vary by the level of business and financial sophistication of the boat owner / tax payer.
A relatively unsophisticated boat owner will be held to a lower standard than a sophisticated successful business professional that owns a yacht.
An unsophisticated boat owner and a business professional that owns a yacht may do the exact same things, with the exact same boat, and with the exact same yacht broker or charter management company – and yet the unsophisticated boat owner will qualify for tax deductions while the successful business professional will not.
Because the business professional’s claimed boat business will be held to the same standards as his other business activities. As a successful business professional, his business standards and practices will usually be much higher than those minimum standards advocated and promoted by many of those boat business, yacht charter management schemes.
That is just one reason why many of the one stop pre-packaged boat as a business, yacht charter management offerings can be risky, especially for the more affluent and financially astute. What may suffice as operating a business for one person may not be adequate for another. Claiming business boat deduction is not a one size fits all proposition.
Then, as if it wasn’t enough the very rules mandate people be treated differently, there is the difference as to how even the rules are interpreted. That is true for both MLB and the IRS.
There are the rules, and then there is reality.
As Mr. Gaines reports on MLB, “The diagrams below, reproduced with the permission of the author, show the strike zone from the umpires’ point of view. Balls thrown inside the green line were called a strike more than 50% of the time and what we see is something that looks much more like a square strike zone (or even a circle) and less like the rectangle portrayed above.”
Interesting, but what does this have to do with taxes or the IRS?
What are the potential tax applications for business owners and especially for yacht owners?
First. It’s obvious from the diagram that a pitch could be technically a strike according to a strict interpretation of the rules, yet be ruled a ball in the real world.
That seems to be especially true if the pitch is on the margins. Working on the periphery of the rule, and the success rate is less than 50%.
So, if you are practicing a tax strategy that “operates around the corners of the strike zone” - one that is just barely technically compliant with the code, or just meets the bare minimums, you might want to reconsider that call.
Second. It is interesting that even though the regulation defining the strike zone did not change, the same regulators – umpires- evolved to call things significantly differently over just a six-year period.
The take away for tax payers.
Many of these boat business and yacht charter management companies like to promote their legitimacy by touting how many of these transactions they have done or how long they have been promoting the same program. They then therefore suggest that it will be right you today.
With both taxes and baseball, what may have been true in previous years, does not guarantee it will work today. And as previously explained – just because it worked in the past for others, it certainly doesn’t mean it will work for you today. Even if the rules have not changed, the interpretation may have- or it may in the future.
But there’s more.
The research goes on to document how umpires call the strike zones differently for right handed hitters than for left handed hitters. All in all, it’s a recommended read both for baseball fans and well as anyone employing sophisticated tax strategies. And certainly, for yacht owners taking tax deductions from a charter boat business.
So, what lessons can be learned from professional baseball players that might be instructive for yacht owners and others that employ sophisticated wealth management and tax strategies?
Its unwise to become complacent and overly reliant upon current advisers. It’s prudent to learn what other professionals are doing. Conversations with trusted peers can be helpful.
It doesn’t matter so much what the rules are, what really matters is how they call the game.
Trying to be too clever, playing around the margins, the chance of success is less than 50 / 50.
It’s not fair or consistent. They don’t treat everyone the same. Some people get breaks that others don’t.
How they call it, varies from person to person, year to year, even game by game.
It really doesn’t help to dispute a call. It usually just makes matters worse and results in greater punishment.