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CPA Advice for Homer Simpson
Homer Simpson
FROM: CPA & Associates
Economic Substance and Moe's Business Plan
Mr. Simpson:
I appreciate your contact regarding economic substance and my recommendations as to if you should enter Moe's business plan. With such a large amount of cash taxed on your latest success, it is only obvious that you would want to protect and profit off of what remains. However, one must do so in good ethical standing. The rest of this memorandum serves the purpose of educating you into making the proper decision for yourself.
First and foremost, before entering any business transaction, one must understand the definition of "economic substance," which defined by the United States Treasury...
In other words, there is protection against those that are purposely avoiding paying taxes. In order to lawfully enter this business venture with Moe, the IRS claims that the transaction should be relevant other than in the purpose of economic substance, the transaction changes in a meaningful way, and that the taxpayer have substantial purpose other than economically benefitting from the transaction.
Economic profit laws fight against tax evasion even when on paper the transaction looks…
The federal government has been tightening the laws about unethical profit for some time now. You may recall Martha Stewart's insider-trading scandal, or the accounting fraud of Enron that resulted in the Sarbanes-Oxley Act of 2002. Though both do not directly relate to your situation, it is clear that one should not attempt to fool the United States government. Once in court, Martha Stewart and the accounting staff of Enron were found guilty. Martha Stewart was convicted of conspiracy and served time in jail, while guilty Enron staff served jail time for fraud.
It is to my recommendation that you receive the advice of your wife as more justified than the advice of Moe. Unethically selling an investment in time for a large reported loss will surely trigger a red flag to the IRS, and your defense will be weak. On top of this, every business venture has some risk, so returns are not even guaranteed, and thus might not end up in your favor anyways.
Please do not hesitate to contact us if you have further questions.
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