The pigs are fed; Pigs get slaughtered
A tax planning saying goes, âPigs are fed; the pigs are slaughtered. By offering “questionable tax break” to business customers, AmEx taught itself a lesson they should have known already.
The tax alchemy of AmEx
AmEx wanted to increase commission fees for business customers. So, he suggested private business owners make payroll and other large payments using AmEx wire transfer services.
Here is how the AmEx pitch went. At current rates, a payment of $ 10,000,000 made by AmEx wire transfer would generate $ 177,000 in AmEx fees. Suppose business owners pay income tax (federal + state) at a marginal rate of 42%. In such a case, if the owner were to fully deduct the expenses, their after-tax cost would drop to $ 102,660 ($ 177,000 x (100% -42%)).
Now it’s time for alchemy. AmEx sellers have told customers that payments made by AmEx wire transfer will earn one reward point for every dollar spent. Reward points could be transferred to a personal AmEx Platinum Charles Schwab card in the name of the owner. This card would allow the owner-holder to redeem his points at 1.25 cents per point. Thus, 10,000,000 points would be converted into a non-taxable cash payment to the owner of $ 125,000.
When the smoke cleared, using this scheme, the owner would free up $ 22,340 (the tax-free payment of $ 125,000, less the after-tax cost of $ 102,660 of AmEx fees).
The loser in this shell game was the Federal Treasury.
Unfortunately for AmEx and cardholders, this program depends on the cardholders’ ability to fully deduct the $ 177,000 while paying no tax on the redemption of points of $ 125,000.
While federal tax authorities typically overlook redemption of in-kind reward programs (such as frequent flyer miles from airlines redeemed for airline tickets), authorities take a different view on cash refunds.
The AmEx arrangement did not pass the odor test. If the business and business owner are separate taxpayers, transferring reward points from the business to the owner will look the least like taxable compensation or dividends of $ 125,000.
If, on the other hand, the business and business owners are treated as one taxpayer, the payment of $ 177,000 and the cash redemption of $ 125,000 are part of an overall plan and should be deducted. This translates into a tax deductible commission paid to AmEx of $ 52,000 ($ 177,000 to $ 125,000). This is the net revenue that AmEx would record, at no net cost to the Federal Treasury.
Echoes of the Wells Fargo scandal
Readers may recall the Wells Fargo Bank scandal, in which more than 5,000 employees opened more than 3.5 million accounts on behalf of hundreds of thousands of customers.
Like former Wells Fargo CEO John Stumpf, AmEx management downplayed the severity of the scandal by focusing on the limited impact of misconduct on AmEx’s overall bottom line. Stray employees, AmEx tells us, have been made redundant, disciplined or retrained.
But the Wells Fargo scandal was not about frontline workers. Even Senator Enemy Bankers Elizabeth Warren described these employees as $ 14 / hour victims, pushed past their breaking point by their business leaders.
The problem at Wells Fargo was the senior executives who failed to put in place proper controls and allowed for a deeply corrupt culture.
Likewise, the issue at AmEx is the judgment and probity of senior executives, and the culture they have created. These executives reportedly told sales staff to avoid speaking with prospect’s tax advisers or providing documents about the scheme. Staff members also reportedly agreed to prevent their pitch calls from being recorded by AmEx compliance monitoring equipment.
The Oscar-winning film The Sting opens with two little Depression-era crooks who accidentally defraud the bagman of a New York gangster boss. In response, the Pivot sends out their hired killers.
Wells Fargo has only deceived 3.5 million retail customers. AmEx, on the other hand, tried to rip off the federal government. Expect Uncle Sam to dispatch the Internal Revenue Service and the Department of Justice.
# the goodwill win