Episode 319: Why a Hitman Needs a Tax Plan

Everyone engaged in an income-generating activity needs a tax plan, even if those income-generating activities are criminal in nature. To be clear, we aren’t interested in furthering criminal activity, but hiding income from the IRS means taking a major risk – for every taxpayer.

To illustrate this point, consider the case of Al Capone.

How Tax Evasion Charges Brought Down Al Capone

Al Capone was one of history’s most notorious gangsters. His criminal enterprise was active in Chicago for years during the early 20th century – an enterprise that included murder. Capone’s activities were no secret, but he never committed the crimes himself, instead delegating them to underlings. This made it impossible for authorities to pin any of the crimes on him personally, as he always had a rock-solid alibi.

But Capone made a mistake that would eventually topple his empire – he refused to accurately report his income to the government.

Murder was impossible to prove, but it was easy for IRS agents to prove that Capone’s income and account activity did not match his tax reports. Eventually, this led to Capone’s arrest and charges of tax evasion, which he was convicted of. The legendary mob boss, a man always one step ahead of the Chicago police, was sentenced to 11 years in federal prison.

If only he had planned and filed his taxes properly, Capone may have avoided prosecution until the end of his criminal career.

That’s why we say that everyone, no matter their occupation, should focus on accurate tax reporting and planning with a knowledgeable tax attorney.

What’s the Difference Between a Tax Plan and Just Filing Taxes?

Capone didn’t report and file his taxes properly – a process known as tax preparation. That made tax evasion charges much easier to prove.

We recommend taking tax preparation seriously, of course, but your situation may call for a long-range plan that goes beyond mere reporting filing. What you need are tax planning services.

What’s the difference between a tax plan and tax preparation?

  • Tax preparation services – During tax preparation, your tax professional will identify the right tax forms for your situation and ensure they are filed accurately and on time. If you’re unsure about tax forms, deductions, credits, or any other tax fundamentals, these services can maximize your savings.
  • Tax planning services – Tax planning is a forward-looking service that accounts for your future tax goals and decisions. For example, if you’re starting a business soon, tax planning may involve picking the right tax structure, setting up business accounts, and scheduling income/expenses. Tax planning is also appropriate for individuals with income-generating assets. As such, there’s a lot of overlap with estate and tax planning services.

You can think of tax preparation as ensuring ongoing compliance, while tax planning is more about maximizing your tax savings.

Three Reasons to Invest in Tax Planning Services

Tax planning services are an investment, because like all investments, they’re expected to provide a return. Here’s how a tax plan does that:

  • Tax planning ensures ongoing compliance – Tax preparation is meant for on-the-spot compliance, through proper filing and reporting. Tax planning establishes long-term compliance controls that, if consistently observed, will ensure you remain compliant year over year.
  • Tax planning optimizes your savings and liabilities – The goal of tax planning is to position clients in the most advantageous way possible, relative to existing tax laws. As such, tax planning can be extremely complex and requires an expert reading of the tax code. Tax planning professionals leverage their knowledge in this area to maximize deductions and credits, while minimizing their client’s taxable income. To do so, tax planners typically recommend (and support) strategies that develop over many months or years. These strategies may involve highly complex transactions that must be executed properly.If tax plans aren’t developed ahead of time, you’re likely leaving money on the table. At the least, you’ll spend a lot of time making tax-related adjustments in real time.

     

  • Tax planning takes your unique situation into account – There are numerous tax planning strategies, but only some of them will apply to your situation. You may own a business, or you may have inherited an income-generating trust or estate. You may be interested in acquiring real estate. You may be self-employed with a home office. You may earn income trading securities or other assets. Whatever your situation, there is a tax planning approach that makes the most sense for you. When working with a professional tax planner, they will quickly ascertain how to deliver maximum results for your tax situation. In this way, expert tax planners create customized strategies for their clients.

 Tax Planning Services Can Help Every Taxpayer – Even Mob Bosses

Chances are, you aren’t running an organized criminal outfit, but if you earn taxable income, you have one thing in common with Capone and other criminal masterminds – you need a tax plan and proper tax preparation. CPAs and tax attorneys are the experts in this area, with deep knowledge of tax laws and how to apply them. This means a trusted tax planner can customize tax minimization strategies to fit

Episode 318: Secured Transactions: Collateral, Security Agreements, and Processes

Secured transactions involve the use of collateral to secure a financing agreement. In most cases, the obligor (the creditor) provides a loan to the obligee (the borrower) in exchange for first rights to the secured property, should the obligee fail to uphold their obligation.

Secured transactions may involve many types of collateral. Most states, including Texas, have a Uniform Commercial Code that dictates how this collateral is secured.

It is crucial to have a reputable Houston attorney on your side when any agreement of this nature is created to ensure you are informed, protected, and that terms within the agreement are enforced.

What Assets Can Be Used as Collateral for Secured Transactions?

 A variety of assets, both tangible and intangible, may be used as collateral to establish a security agreement. The Uniform Commercial Code (UCC) defines more than 20 categories of assets eligible for this purpose. Some examples include:

  • Equipment
  • Inventory
  • Machinery
  • Buildings
  • Land
  • Securities
  • Account receivables
  • Mineral rights
  • Farm products
  • Patents

The UCC defines how the above assets are managed during a secured transaction, but there are exceptions. Most notable is real property. Land and buildings are governed by the state’s property law. And in Texas, a deed of trust is used as the security agreement when real property is put up as collateral.

What is the Uniform Commercial Code in Texas?

The Uniform Commercial Code is one of the nation’s most expansive and oldest uniform acts, dating back to the 1950s. It is used to standardize certain aspects of commercial transactions. Specifically, the UCC governs the creation and administration of some business contracts and liens.

All 50 states have their own version of the UCC. There are minor variations between them, but in general, the UCC ensures commercial contracts and lien instruments are treated the same in every state.

Article 9 of the UCC addresses secured transactions and what requirements must be met before an obligor has established a security interest in the collateral. Most importantly, the obligor must submit a financing agreement and security agreement to the relevant government office – typically the Secretary of State.

The Role of Financing and Security Agreements in Secured Transactions 

Before a creditor can claim rights or security interests with the collateral, the transaction must be “perfected.” In this context, perfection means the obligor takes the steps necessary to make the transaction official. In doing so, the lender asserts their first priority over the collateral in the event that the debtor fails to make payments.

There are a few ways to achieve transaction perfection, but the most common way to do it is to file a financing statement and security agreement under UCC provisions. Here’s a brief explanation of each:

  • Financing statements – Also termed Form UCC-1, creditors file a financing statement to detail the parties involved in the transaction, along with the collateral that will be used to secure it. Form UCC-1 is used by government agencies and other creditors to track which assets have been secured by which creditors. Financing statements do not establish a security interest in the collateral. To do that, a security agreement must be submitted to the relevant government office.
  • Security agreement – Security agreements give creditors a security interest in the named collateral. With this interest, the creditor may take possession of the assets should the debtor fail to meet the agreement’s terms.To establish a security interest, there must first be a security agreement. Put simply, there must be a written record confirming that both parties – the obligor and obligee – agree to granting the obligor a security interest in the property.Further, there must be a specified value associated with the collateral. This is usually defined when the creditor lends money or when the debtor begins payment. Finally, the debtor must have partial or total rights to the collateral.If the above prerequisites are met, the security agreement will serve as notice to other creditors that the creditor has first rights to the collateral.

An important note – security agreements are based on a “first file, first serve” basis. In other words, whichever creditor submits the security agreement and UCC-1 form first will be considered the priority creditor should the collateral assets need to be liquidated.

How an Attorney Can Help with a Secured Transaction

 Secured transactions are an active part of law. As such, it’s highly recommended that both parties have legal counsel throughout the process.

A reputable attorney with experience in secured transactions should be on hand when the security agreement is initially formed, during closing, when payments are being made, and if any disputes arise while enforcing the contract. And disputes are extremely common.

Legal representation is especially important for creditors, for a couple of reasons:

  • Protecting the creditor’s rights – An attorney can preserve as many protections as possible for both the debtor and creditor. On the creditor’s side, this protection is necessary to prevent any exposure to legal liability.For example, the UCC does not determine when a secured transaction has entered into default. This is something that must be specified in the security agreement so the creditor can engage in collections without violating UCC provisions.Another example – if a creditor does opt to liquidate collateral, it must do so in a “commercially reasonable” fashion. In other words, the creditor must make reasonable, provable efforts to extract maximum value out of the collateral.This is a gray area that regularly provokes litigation from the debtor’s side. An attorney can guide creditors through this process so they can demonstrate commercially reasonable efforts and avoid a lawsuit. Secured transactions are littered with potential legal liabilities like this, which is a primary reason why creditors seek legal counsel before executing one.
  • Ensuring the security agreement is enforceable – A security agreement is not enforceable until it is properly drafted, written and perfected. Any minor mistake during this process can have major consequences. An attorney will provide counsel through this process to ensure the agreement is enforceable.For example, if the security agreement is not attached to the UCC-1 form when the contract is finalized, the collateral is not secured. Another creditor could jump in with their own security agreement claiming the same assets and attain first rights. Until the agreement is perfected, the debt is unsecured – which is a risky position to be in for a creditor.

An Attorney Can Help Your Organization Make Sense of Secured Transactions

Secured transactions are complex. If they aren’t executed in accordance with UCC provisions and aren’t perfected, it could expose your organization to excessive, and unnecessary, liability.

It’s important to work with a reputable attorney that is experienced with establishing secured transactions, including developing the security agreement terms and ensuring they are enforced. In short, this will ensure your organization is protected and entitled to the assets it has secured.

Episode 317: Bankruptcy Code 727 and 523 from the Creditor’s Perspective

PlayPlay

Today we will be addressing Section 727 523 of the bankruptcy code and how creditors can deploy these to their advantage.

U.S. bankruptcy law is designed to give honest debtors a chance to start over with a clean financial slate. It’s a merciful and laudable alternative to the debtor’s prisons that once ran rampant in England, but it’s a complex law with many exceptions.

During a Chapter 7 filing, determining which debts are dischargeable and which are not is a major part of the process. It takes about six months for the courts to officially discharge an individual’s debts, and during this time, creditors will have the opportunity to review the debtor’s disclosures and file any motions that will improve their chances of recovering lost assets.

What is a Non-dischargeable Debt in Bankruptcy Law?

The point of filing Chapter 7 bankruptcy is to “discharge” as much debt as possible from the individual’s obligation. In other words, the debtor is no longer legally obligated to pay discharged debts, and creditors are legally barred from pursuing them.

The majority of debts are dischargeable through Chapter 7, but not all of them. These “non-dischargeable” debts cannot be removed from the debtor’s obligation, even with a successful Chapter 7 filing.

As for what debts fall into this non-dischargeable category, the specifics are detailed in Section 523. Further, Section 727 may also be used to deny debt discharge, in general, but there are notable differences between 523 and 727, and these differences are relevant to creditors tied to the case.

What Debts are Exempted from Discharge Under Section 523?

Section 523 references more than a dozen specific instances where a debt is not dischargeable through Chapter 7. Some examples include:

  • Tax and customs debts, with some exceptions
  • Student loans, with some exceptions
  • Consumer debts incurred for luxury goods and services, over a $550 threshold and incurred within 90 days of filing bankruptcy
  • Cash advances in excess of $825 taken out within 70 days of filing bankruptcy
  • Domestic obligations (child support and alimony)
  • Debt incurred as a result of willful and malicious injury or damage
  • Debt incurred as a result of causing injury or death with a vehicle, if alcohol or drug intoxication was confirmed as a factor in the accident
  • Debt, property, or services acquired as a result of fraud or misrepresentation.

There are additional discharge exceptions, but the above represent the bulk of Section 523 actions.

What is Section 727 and How Does it Affect Debt Discharging During Bankruptcy?

Section 727 also concerns whether debts qualify for discharge or not. The primary difference between Sections 727 and 523 is the scale at which they are applied. Section 523 motions are targeted at a particular instance of debt, while Section 727 motions consider all of the debtor’s debts at once. Put another way, if a Section 727 motion succeeds against a debtor, then all of their debts are not dischargeable through Chapter 7 – effectively eliminating the only reason why an individual would declare bankruptcy to begin with.

Section 727 motions may be filed for many reasons, including:

  • Failure to provide tax documentation
  • Destruction or concealment of accounting documentation
  • Attempts to transfer or conceal property in an attempt to avoid creditors
  • Failure to complete a financial management course prior to filing bankruptcy
  • Commission of perjury or fraud related to the bankruptcy case\

In general, if the debtor does not act in good faith from the start of the bankruptcy process, Section 727 may be used to invalidate their attempt to discharge debts.

Creditors Can File a 523 or 727 to Claim Losses from a Debtor, but Considerations Apply

Bankruptcy trustees and creditors may file for a 523 or 727 motion if they suspect the debtor does not qualify for debt discharge under those sections. As for which motion to choose – and whether it’s worth filing a motion to begin with – there are some important considerations:

  • The creditor has the burden of proof – If the fight over discharging a debt results in a trial, the creditor is responsible for proving the motion. This will necessitate an organized legal offense, with documentation and knowledge of bankruptcy code required. 
  • If provable, a 523 motion is usually more beneficial to a creditor – In some cases, either a 727 or 523 motion may be available to creditors. Generally speaking, it’s more beneficial for creditors to demonstrate a 523, if possible.Here’s why – if a 727 is granted and all the debtor’s obligations aren’t discharged, the debtor may have a crowd of other creditors to deal with. You’ll be competing with them for whatever recompense the debtor can afford.

    As a 523 motion only addresses a particular debt, creditors can work to only have their debt barred from discharge. If the debtor has fewer creditors to deal with, they’ll be more likely to resolve their remaining debts in full. That’s good news for any creditor left standing after the bankruptcy process is complete.

     

  • The debtor’s circumstances are also relevant to the decision – Filing a 523 or 727 is an investment – in time, money, and mental bandwidth. In some instances, this investment may not be worth it to the creditor. For example, if the debtor is unlikely to financially recover and be able to afford their non-discharged debts, there may be little reason for a creditor to pursue action.Of course, it can be difficult for creditors to know what the right decision is in this regard – a common reason for creditors to seek out professional legal assistance. 

Bankruptcy Law is Extremely Complex, So Speak with a Trusted Bankruptcy Attorney First

Bankruptcy is complicated on both sides of the process. From the creditor’s perspective, there’s a brief window to act, organize a legal strategy, and build a case for rejecting a discharge. The surest way to develop an effective response is with an experienced bankruptcy attorney’s assistance.

Bankruptcy experts help their clients weigh all potential options and determine which is most likely to render success. A bankruptcy attorney will also ensure their client acts in a timely fashion and acquires the documentation needed to demonstrate a 727 or 523 motion.

The U.S. bankruptcy process serves a noble purpose for individuals, but there are, of course, bad actors who leverage the system to their benefit. With proper legal maneuvering, however, creditors can hold debtors accountable – and potentially gain back their losses in the process.