American Eagle coins: possible income tax dodge?

Great Debates
1

About 15-20 years ago, the U.S. mint began minting gold and silver (and now platinum) bullion coins called “Eagles.” There is a one-troy-ounce silver Eagle coin, and there are gold and platinum Eagle coins of one, one-half, one-quarter, and one-tenth troy-ounce sizes.

In order for these bullion coins to be protected under the anti-counterfeiting laws of the United States, they are each stamped with a denomination in dollars. A one-troy-ounce Silver Eagle is marked “one dollar,” for instance, while a one-troy-ounce Gold Eagle is marked “50 dollars”. These are real pieces of currency, and if you really wanted to, you could walk up to a Federal currency office and demand that they give you $50 in cash for a one-troy-ounce Gold Eagle. You’d be stupid to do it (gold is now worth over $320 per ounce), but you could do it.

Obviously, the precious metals in these coins are worth far more than the dollar values stamped on the coins. This is to prevent people from “cashing them in” when prices in the bullion markets fluctuate – i.e. if a one-troy-ounce Gold Eagle were instead marked “300 dollars”, you could take your stash into a government currency office and demand $300 in cash for one even if the price of gold dropped to $200 per troy ounce. Thus, the coins are marked with dollar values substantially below their market value.

But this opens up a potential income tax loophole:

Suppose you’re a building contractor and someone wants you to add a room onto his house. And say your normal charge for doing so would be $6000. But now suppose that instead of accepting $6000 in cash from the customer, the customer agrees to pay you 20 one-ounce Gold Eagle bullion coins. Each of these coins has a market value of approximately $300 at current market prices, so they are worth the same $6000, but each coin is stamped as being worth only $50 in currency.

At the end of the tax year, you declare on your Federal Income Tax return that your revenue from this venture was 20 x $50, or $1000, rather than the $6000 those coins are actually worth. Since the coins are officual U.S. currency, you should get to treat them as being worth their face value of $50 each rather than their market value of $300 each. You then pay the tax on that $1000 of Income in regular cash.

Congratulations, you’ve just slashed your income taxes down to 1/6 of what they would have been had you done a regular cash transaction with the customer! If you got enough people in your community to agree to use Eagle bullion coins for all their commerce, everybody’s income taxes would go down to 1/6 of their normal level. As would their sales taxes (which are based on the dollar amount of the sale), and property taxes (which are based on the number of dollars used for purchasing the house or condo).

Is there some flaw I’m missing in this scheme? How would the IRS or the sales tax bureau or the property tax assessor attack it?

2

BTW, I should mention that the U.S. Mint, who maked these Eagle bullion coins, sells them to precious metals dealers at prices that are at or above the going market value for the precious metals contained therein. The Federal government does not actually sell one-troy-ounce Gold Eagle bullion coins for the $50 value stamped on them.

3

One problem I see with this scenario is that you are going to have to pay taxes (in the form of earned income) on these coins when you sell them (at above face value). I suppose you could sell them in such a way as to hid reporting the profit in selling them as income, but that would be considered by the IRS as illegal.

4

Out of curosity tracer, how many of these were minted? Getting them in sufficient quantities would definately be a hurdle to do any serious tax evasion…

5

Netbrian They made plenty of them. Quantity is not gonna be a problem.

Other considerations aside, I believe ataraxy22 to be correct. Even if the scheme of taking the gold pieces in at “face” value were legal(and I’m sure it isn’t), you would have to pay a tax on the difference in value. between the value when they were received and when you sold them.

The IRS would almost certainly say that you had receive value in excess of the printed value, and you would have income based on the current market value of the gold coins.

6

Well, I did a google search on “income tax” “gold coins” and “face value,” and found this:

http://ww5.cch.com.au/Tax+Cases/aat0198.doc

It looks as though an Australian taxpayer managed to pull off the scam described in the OP!

7

You’ve pointed out, samclem, there’s an often overiding principle in taxation that addresses ascertaining value in an exchange. The value of what is given equals the value of what is received. This is the amusement park case in philly the name of which I cannot recall. The point is, the value of something received in payment for services rendered or property exchanged for tax reporting purposes is its fair market value (what a willing buyer would pay to a willing seller, neither party under any compulsion to act).

Currency is generally assumed to have the “value” of its printing, yes, but that real value is ever changing, even with paper currency, i.e., a '90s buck wouldn’t buy what an oughts buck would if you had spent it in ought, so it’s value is still really determined by what you can get in exchange for it.

Say your '00 paper buck was so rare as to be collectable and was worth $50. If you sell it to someone at fair market value for that amount of today’s paper currency, you’ve got taxable gain to report (less the basis you can establish for it, which would be whatever you paid to obtain it – best case is the $1 it was originally worth, for $49 in gain). Rare coin/currecy dealing is not a tax dodge. Even though it’s “official U.S. currency,” it is still to be valued by the amount of value you could receive in exchange for it today, which is fair market value, which is what you’d get down at the Circle K or from a collecter if your '00s buck were an item.

You could walk in and demand cash, and might get away with claiming a loss of income for these coins based on the actual amount paid for a hunk of gold with a $1 stamped on it, but good luck if you don’t report a gain when value is recieved. While I have no idea beyond perhaps ascetics why the amount is there, I suspect the $1 stamp is not actually there to prevent trading precious metals.

And in your original scenario, as you point out, you’d have to pay taxc on the sale of the gold because your basis to report was so low. Also, the guy you built the room for would have fair market value in excess of reportable basis and he would have excessive tax gain to report if he sold the house himself.

8

The interesting scenario is at the end of the OP, where a community agrees to use them as currency. They can charge each other $1 for a value of $6 within the community. They can declare fewer tax dollars on these exchanges so long as they remain in the community without devaluing their net worth when they leave the community. They will have to pay taxes when they leave, but as long as they stay in the community, they continue to benefit for tax purposes.

However, this requires that the community insulate itself from people outside the community. Otherwise, I enter with $50 in paper money and walk out with $300 in merchandise.

I think if you think about it, you will see that this sort of total economic isolation is not worth any ammount of tax shelter. We are basically talking about a commune. No banks, no imports, no exports.

So even if it was legal, I can’t see how it would be profitable.

9

jawdirk wrote:

The community wouldn’t have to isolate itself. All transactions with the “outside world” would of course have to be done in cash, and would be taxed at normal rates; but transactions inside the community would all be taxed on the lower currency-face-value rates of the bullion coins used.

If 90% of the income-related and sales-related transactions were intra-communuty, and only 10% were with the outside, then that’s still 90% of everybody’s transactions that would be taxed at this super-low rate.

10

If one regularly sells a certain amount of merchandise for $50, does that constitute a legal obligation to sell it for $50 to everyone that wishes to buy it?

11

The fatal flaw in the scheme is that the guy who hires the contractor has no incentive to pay in the devalued coins. In fact, he has a tax incentive to claim the highest amount he can document. Assuming the contractee is a business, they can deduct their payment to the contracter from their corporate profits. And since the business pays corporate taxes on their profit, they have an incentive to deduct as much as possible.

The scheme simply shifts the tax burden from the guy who gets the coins to the guy who keeps the coins (even assuming it would work). This is why businesses typically don’t just hand out cash to their workers with a wink and a nudge about the IRS. If they can’t document that they paid that money to their workers, the IRS is going to assume that the money was profit, and thus taxable.

The only time this scheme would make sense is if the business is trying to launder money…they have stacks of illegally gained profits and have to get rid of it somehow. Of course, then it makes more sense just to pay in cash. Then the money is untraceable…the money launderer gets his new house, the contractor gets a tax-free payment.

But in any case, the scheme would generally not work because there is no incentive for the PAYER to pay in discounted currency.

Now, with regard to communities using discounted currency inside themselves, to foil taxation. A much better system would be a system of labor exchange and barter and do away with money or script altogether. This is currently legal and essentially untaxable. If I trade you a cord of firewood for 500 pounds of apples neither of us has made money, neither of us has recieved income, and theoretically the value of each item is equal so nothing is taxable. The tricky part comes if the IRS decides that the values aren’t equal and calls it a gift. This is only a problem if the IRS is informed of the transaction. If I go to your house and work in the garden for 10 hours, and you babysit my kids for 10 hours there isn’t really any way the IRS can tax you. The problem is coordinating such efforts.

For an example see http://www.vashon.com/.

12

Why do you assume that the contractee is a business?

Here’s a quote from the OP:

**

Of course personal expenses are not tax deductible.

In any event, even the contractee were a business, the tax deduction would be worth a lot less than you imagine, since capital improvements to real estate are not currently deductible. It’s been a few years since I took tax, but I think the business owner would have to either divide the deduction over a period of years or simply increase the basis of his property.

Either way, there is potentially a net tax gain in the transaction since the contractor’s current taxable income will be reduced by a substantially greater amount than the contractee’s current taxable income will be increased.
**

IMHO, you’re wrong here, too. In the transaction you describe, my income would increase by the fair market value of the firewood. I may be entitled to deductions for the apples. But it would be the same amount of deductions as if I had sold the apples for an amount of money equal to the fair market value of the wood.

Thus, if I buy the apples for $400 and trade them for $500 worth of firewood, I would have $100 in income. Now, if I paid $500 for the apples I would have no income for the transaction. But that’s the same result as if I had sold the apples for $500 and used the money to buy wood.

In practice, barter helps your tax situation because barter transactions tend to be unreported. Also, if they are reported, the taxpayer can underestimate the value of the exchange.

13

Ok, well how about this scenario:

You’re very well off, and in your late 50s. In addition to the various trusts and whatnot you’ve set up, you have been gifting your family members $10,000 per year, each, in cash, in order to get ($10K * family * years-left) out from under those pesky estate taxes. [sub]I know a family that does this, sadly not mine[/sub]

Enter this scenario. Pay ($320 * 200) = $64000 for two hundred $50 face-value coins for each of these family members, and gift them each year in these coins. Thus escaping the arguments about “payer’s incentives”, and so forth.

Is this feasible, or as transparent a dodge as the OP is asking?

14

You do realize “it’s not feasible for the IRS to tax you” and “you don’t have any legal obligation to pay taxes on it” aren’t the same thing, right?

15

First of all, I think these coins are a little less common than you’re presupposing. Some group has been selling them and advertising for them on radio and claiming some limited number. While I can’t recall the number, it was surely lower than would be required for an entire community to operate with these coins. Additionally, that community would require multiple denominations of this currency. The flexibility of this system would depend on having an ample supply of the $1 coins. All in all, it would be so impracticable on that scale as to make the entire endeavor doomed from the outset.

Perhaps I’m missing something here, but I was under the impression that U.S. currency was always subject to recall by the Fed in exchange for the printed value. Otherwise a more flexible way to accomplish this scheme on an individual basis would be to collect celebrity autographs on paper bills. “Hi, I’d like to purchase this used truck, here’s $3 wink wink and - OHH - look there’s somebody’s name on there in cursive…is that reclusive author J.D. Salinger’s name?? I think it is!”

16

RexDart wrote:

I’ve heard those ads too, and they’re all pretty much scams. Some of them paint the coins red, white, and blue (to make them more patriotic or something) and then jack up the price. You can get Silver Eagles by the roll from on-line coin dealers; the going price seems to be about $8 a pop, including the dealer’s mark-up.