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Old 05-15-2019, 01:30 AM
Derleth is offline
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Can you cheat "100% Profits To Charity"?


Newman's Own is a salad dressing brand which proclaims that "100% Profits to Charity" presumably meaning that all of the profits Newman's Own makes from selling salad dressing go to the Newman's Own Foundation, familiar to anyone who watches PBS. If you're of a certain cast of mind, it doesn't even take five minutes to come up with this little scenario:

Newman's Own is the well-known corporation, but it buys all of its ingredients and rents all of its property and, Hell, licenses its trademark from some other corporation with a name that never gets advertised. Call it the Invisible Corporation. Invisible Corporation makes no promises and gives to no charities, it simply arranges its prices such that 99% of what Newman's Own takes in isn't profit. It shifts prices on a quarterly basis, if not more frequently, such that the Newman's Own Foundation is getting something close to nothing but different from the day before off of the raspberry vinaigrette and all the other dressings Newman's Own sells; the Invisible Corporation exists to be the profit-making entity in the relationship, Newman's Own exists to get tax benefits, and Newman's Own Foundation exists to look good to people who buy somewhat more expensive salad dressings.

Would that be illegal?
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Old 05-15-2019, 01:45 AM
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It's what's commonly known as Hollywood accounting.

Movie studios often sign up actors with a promise that they'll get a share of the profits from the film when it's released. But then the studios arrange the production so that the film never generates any profit on paper.

An easy way to do this is to divide things up between several supposedly separate and independent companies (all of which the studio owns). Money that comes in can then be shifted out of one company which would owe a profit into another company which does not - but the studio owns both companies and ultimately keeps the money.
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Old 05-15-2019, 03:56 AM
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Yep you can cheat at both the "profit" and "charity" part.

IKEA does a master class in this. It's a $36 billion charity. Most of the money it makes is spent on licensing the IKEA name from the founder. It's a good job such payments are essentially tax free...
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Old 05-15-2019, 04:00 AM
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You can also blow your profits on executive salaries and bonuses, especially when the executives are also the owners.
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Old 05-15-2019, 04:31 AM
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The practice is known as "transfer pricing"; related bodies trade among themselves at prices which are not market prices, but are engineered to ensure that the bulk of the profit accrues where it will be most advantageous. Most of the time this isn't drive by the desire to be able to make a marketing claim such as is made on the Newman salad dressing label, but by the desire to ensure that the profits are not subjected to tax.

Tax authorities, for obvious reasons, take various measures to combat transfer pricing or to render it ineffective for tax purposes, which in turn drives taxpayers and their advisers to develop ever more creative ways of acheiving the aim of minimising tax.

Ironically, if the aim is to mimise tax you actually do want the profits to accrue to the charitable entity, since they will be tax-exmpt there. If you engage in transfer pricing to ensure that the profits acccrue to the privately-owned for-profit corporation, they'll be taxed.

Plus, charitable entities are subject to a higher degree of scrutiny that most other entities, in that both the tax authorities and the charity regulators take an interest in their affairs. Obviously the effectiveness of this scrutiny will vary from jurisdiction to jurisdiction, but in general charities over=-paying for goods and services sourced from related for-profit entities is something both tax and charity regulators can get quite shirty about.
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Old 05-15-2019, 04:53 AM
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Originally Posted by Little Nemo View Post
It's what's commonly known as Hollywood accounting.

Movie studios often sign up actors with a promise that they'll get a share of the profits from the film when it's released. But then the studios arrange the production so that the film never generates any profit on paper.

An easy way to do this is to divide things up between several supposedly separate and independent companies (all of which the studio owns). Money that comes in can then be shifted out of one company which would owe a profit into another company which does not - but the studio owns both companies and ultimately keeps the money.
Even the late great Stan Lee got hoodwinked back in '02.

~Max
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Old 05-15-2019, 05:04 AM
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You can also blow your profits on executive salaries and bonuses, especially when the executives are also the owners.
The salaries don't even need to be for executives, nor do they need to be inflated. A company (or non-profit) could establish run-of-the-mill "employment" positions that are effectively sinecures. The owner could reward or support his cronies or extended family by hiring them as "administrative assistants", "managers", "image consultants", etc. and paying them a market-rate salary with the understanding that they don't even need to show up at the office.
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Old 05-15-2019, 05:42 AM
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Originally Posted by Derleth View Post

Newman's Own is the well-known corporation, but it buys all of its ingredients and rents all of its property and, Hell, licenses its trademark from some other corporation with a name that never gets advertised. Call it the Invisible Corporation. Invisible Corporation makes no promises and gives to no charities, it simply arranges its prices such that 99% of what Newman's Own takes in isn't profit. It shifts prices on a quarterly basis, if not more frequently, such that the Newman's Own Foundation is getting something close to nothing but different from the day before off of the raspberry vinaigrette and all the other dressings Newman's Own sells; the Invisible Corporation exists to be the profit-making entity in the relationship, Newman's Own exists to get tax benefits, and Newman's Own Foundation exists to look good to people who buy somewhat more expensive salad dressings.

Would that be illegal?
I don't know about charities, but this method is commonly used for tax evasion. Bigcorporation France makes almost no profit (hence pays almost no taxes) because it pays huge fees for a variety of services provided or supposedly provided by Bigcorporation CaÔman Islands, for instance.
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Old 05-15-2019, 07:10 AM
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Would that be illegal?
Itís only illegal if somebody lies to the tax authorities or the charity regulators, and itís very easy to set up a company structure such that lying is completely unnecessary. For the charity, simply set it up as a charity. Thereís no need for the charity to be involved in the salad dressing business. All it needs to do is receive and disburse money and have some good looking person appear at media and corporate events. And the charity regulatorsí interest is only going to be in the charity. For the operating company thatís actually in the salad dressing business, decide how much the overall enterprise wants to give to the charity. Thatís the operating companyís profits, 100% of which goes to the charity. That companyís sales revenue may greatly exceed its costs of sales and other direct expenses. Which is why you have a third company in the enterprise, the profit-making company. That company owns the intellectual property, such as the recipe and brand, which it leases to the operating company. It also charges management fees and various other service fees. All of these charges just happen to equal that difference between the operating companyís sales revenue and direct expenses. It takes some budgeting and manipulation to get the numbers right, and some paperwork to make it legal, but global corporations do it all the time. Itís the transfer pricing that UDS wrote about. And, as clairobscur noted, structuring the enterprise this way allows the profit-making company to set itself up in some low-tax locale where it can retain as much of the profits as possible.
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Old 05-15-2019, 07:24 AM
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For specific clarification to get at a general point: doesnít Newmanís Own, in particular, go on to spell out that theyíve donated [checks wiki] over half a billion dollars to charity in the process? So, yeah, they lead off by just saying the Ď100%í part; but then they add Ďhundreds and hundreds of millionsí, right?
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Old 05-15-2019, 09:25 AM
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You can also blow your profits on executive salaries and bonuses, especially when the executives are also the owners.
Yeah, that's how I always pictured it.

A company makes $10,000,000 and it's cost-of-goods is $8,000,000. $2MM in profit, right?

Wrong. The C-Suites pays itself $1.99MM and the $10,000 goes to charity. Win for everyone!
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Old 05-15-2019, 09:29 AM
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How are "C-Suite" salaries and benefits part of your COGS? There is a difference between gross profit and net profit. Maybe Newman's Own has clarified their label statement on their website. I'm sure the foundation has an annual report that you can find on their website, or request a copy of.
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Old 05-15-2019, 03:32 PM
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How are "C-Suite" salaries and benefits part of your COGS? There is a difference between gross profit and net profit. Maybe Newman's Own has clarified their label statement on their website. I'm sure the foundation has an annual report that you can find on their website, or request a copy of.
Here: http://newmansownfoundation.org/file...2012-31-15.pdf
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Old 05-15-2019, 03:38 PM
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You can also blow your profits on executive salaries and bonuses, especially when the executives are also the owners.
Doesn't even have to be a charity, or executives.

Here in Minnesota, we have public financing for political candidates who meet certain requirements.

I know of one case, a new candidate running against a very well-supported incumbent, who filed for public financing. He hired his wife as campaign manager, and his teenage sons as campaign workers. Their salaries over 4 months used up nearly all the public financing -- just a little left over to print some literature & lawn signs. All quite legal, at the time.
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Old 05-15-2019, 03:51 PM
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Various consumer credit/debt management companies have bragged about being "non-profit", misleading people into thinking that the company was good hearted folk trying to help people out of debt.

The above mentioned huge salaries to family and friends belie all that.
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Old 05-15-2019, 04:23 PM
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I worked for a (honest) non-profit. I wasn't involved in fundraising, but I heard enough from our development people to know there are all kinds of ways businesses can define "profit" and, for that matter, "donation." For that matter there are all sorts of ways for a charity to define "operating expenses" and "program expenses."
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Old 05-15-2019, 08:45 PM
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I'm an accountant that specializes in nonprofits. There might be lots of ways, but there is also over sight, and people can and do lose their 501 status by doing it illegally.
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Old 05-15-2019, 10:29 PM
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As UDS discusses, that particular tax dodge is well known.

In Hawaii, the LDS Church runs the highly successful Polynesian Cultural Center with shows for tourists. That is a for-profit business, but they have a variable price lease on the land which is owned by the LDS Church, a non-profit organization.

When sales are good more of the revenue can be transferred to the entity which is not taxed. When sales are not good, then less money is transferred.
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Old 05-16-2019, 03:23 AM
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You can find a ton of smaller "charities" where the owner is basically the only person running the charity and most of the donations accrued going to paying for their living/travel expenses. They're still somehow able to claim they're legit by putting all remaining money left-over into charity work and claiming since they have no overhead they can donate the maximum to charity.
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Old 05-16-2019, 06:51 AM
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As UDS discusses, that particular tax dodge is well known.

In Hawaii, the LDS Church runs the highly successful Polynesian Cultural Center with shows for tourists. That is a for-profit business, but they have a variable price lease on the land which is owned by the LDS Church, a non-profit organization.

When sales are good more of the revenue can be transferred to the entity which is not taxed. When sales are not good, then less money is transferred.
Churches are not "Non-profit Organizations" they are churches. Non-profits file tax returns, churches don't. Non-profits pay (depending on your state) sales tax, use tax, property tax, amusement tax. Churches don't. Non-profits can be audited by regular IRS, state, or municipal auditors. Churches can't.

Churches have only been exempt from oversight for a few years, but since the change, there are now churches that own cattle ranches and oil refineries. The thing to do about it is get Congress to change the law back to where it was so we can audit churches again.

Non-profits get audited, and there is regulation and oversight. People can cheat, but they get caught and punished for it. Churches are another story.
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Old 05-16-2019, 06:56 AM
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You can find a ton of smaller "charities" where the owner is basically the only person running the charity and most of the donations accrued going to paying for their living/travel expenses. They're still somehow able to claim they're legit by putting all remaining money left-over into charity work and claiming since they have no overhead they can donate the maximum to charity.
If the charity is a registered 501c3, then it needs a board, and that is more than 1 person.

If the charity is not a registered 501c3, then it is not a charity, and when you're caught, you get fined and assessed for back taxes.

If the charity makes more than $50k it needs to file a 990. (Less than $50k a 990n that only reports the name of the board chair, and the amount of gross receipts).

I know there is this persistent idea that small charities are somehow a dodge, but it is generally private family foundation that are the dodge, and also the reason for the level of regulation that we have. The dodges get caught too.

Last edited by l0k1; 05-16-2019 at 06:57 AM. Reason: typo
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Old 05-16-2019, 09:06 AM
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Not sure about the USA, but what I heard from an accountant here in Canada - if Revenue Canada thinks the jobs for relatives or friends are bogus, if they are far beyond reasonable (that favourite lawyer word...) then they can attribute that income to the high-paid executive who set them up in the job. "I'll pay my wife $200,000 to clean the office once a week" doesn't work. A reasonable amount, yes; highway robbery, no. The accountant mentioned the case he knew where one son was a "sales consultant" pulling down a heft salary for essentially not even showing up to work. The income was reassigned to daddy who paid the top marginal rate on it... plus a penalty for tax fraud. of course, if the person is doing close to a real job and the salary is not too far out of line, then it's just plain nepotism.

Last edited by md2000; 05-16-2019 at 09:06 AM.
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Old 05-16-2019, 10:49 AM
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The Newman's Own Foundation Form 990 indicates that substantially all of its approximately $35 million in income comes from No Limit, LLC an entity it controls. (See Schedule 4 on page 94 listing sources of "Other Income").

Although the form discloses the income and expenses of the Foundation itself, it does not provide any disclosure on the expenses of the business entity that is providing its income.
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Old 05-16-2019, 12:55 PM
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If you look on page 100 of the return, you'll see that it is one of 3 pass through organizations. These for-profit entities file their own returns with the IRS. Their financials are not required to be public, but I bet we could figure their profitability v sales with public information.
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Old 05-16-2019, 12:55 PM
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Paying executives/owners exorbitant salaries is a very poor way to avoid paying taxes. Those executive owners have to pay income taxes on those salaries, at currently higher tax rates than corporate income tax rates.

And paying royalties/licensing fees to another party results in the other party having to pay taxes on that income.

Transfer pricing strategies are not illegal, but are evaluated and scrutinized by taxing authorities on both sides of the transaction. Companies are required to provide documentation that the transfer price is within a reasonable band of arms-length transactions, meaning that even though the transfer of goods and services is between related parties, it should be valued at similar 3rd party market transactions.
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Old 05-16-2019, 01:46 PM
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I worked for a liquor distributor that overbilled itself for a maintenace contract and truck leases (same parent company). Whatever they saved in income tax, they ended up paying more in sales tax (plus $500k in fines and interest for not figuring use tax on the scheme). Companies do it. They get caught. Then they do it again.
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Old 05-17-2019, 02:01 AM
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As I mentioned upthread, one of the world's richest men owns possibly the world's wealthiest "charity" -- The Stichting Ingka Foundation, aka IKEA (cite).

This kind of tax dodge -- which is what it appears to be -- is not always a small-time operation, easily shut down by regulators.
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