When Fashion and Tax Law Collide
The following is a transcript of the Fashion Law Network podcast featuring an interview and discussion with Atlanta tax attorney Alyssa Whatley. Topics include various aspects of fashion and tax law including tax implications of Hollywood swag/gift bags, celebrity and influencer tax issues, and the recent Gucci tax evasion case.
Kasia: Hey, Alyssa. Thanks so much for joining me on the Fashion Law Network podcast today. How are you?
Alyssa: I’m great. How are you doing?
Kasia: Good. Thank you. So, let’s dive right in and tell me about your journey into tax law. After getting to know you a little bit, I found that you’re one of the only tax attorneys I’ve met who actually made tax law fun.
Alyssa: Yeah. So, I got into tax law actually through my law school. We had a low-income tax payer clinic where we would help low-income individuals with their disputes with the Internal Revenue Service. And I previously had a bankruptcy background and I just fell in love with tax, it’s code-based. But at the same time, you can put so much into it. It’s kind of like a little game that you get to play how the code sections interact and fact patterns and can put a specific way of looking at things that make it fun. So, it’s not just black and white as most people would think.
Kasia: Right. That’s great. Now, tell me what exactly is tax law for people who may not know.
Alyssa: So, tax law has a variety of practice areas. I specifically practice tax controversy, which sounds scary, right?
Kasia: Yes, it does.
Alyssa: But tax controversy is anybody that has…any taxpayer that has a dispute with the Internal Revenue Service or state taxing authorities. And so, a dispute would be maybe an audit situation where you filed your return and the IRS doesn’t accept your return as filed, maybe they’re questioning your business expenses, deductions, income, that nature, all the way to collections where the IRS or the state taxing authorities say, “You owe us money.” But maybe you can’t pay it. So, we help in resolving those types of disputes by working out settlements or installment agreements for individuals and businesses.
Kasia: That’s interesting. Now, what about after law school? Do you need any additional credentials to be a tax attorney, or how does that work?
Alyssa: So, normally, you can just practice tax controversy with just a JD, which is a law degree, but some people like to take it a step further and get an LLM in tax, which is a master’s of taxation law. A master of tax laws as it’s called. So, it’s one more step that someone can take to really do a deep dive and specialize into tax.
Kasia: And tell me, when do people usually hire a tax attorney like you? What’s the process there?
Alyssa: When should they hire an attorney or when do they….?
Kasia: When should they? Let’s put it that way.
Alyssa: So, I think the best time to hire a tax attorney is when you have a tax issue that you’re concerned about before it becomes an emergency. So, normally, how the IRS alerts you or state taxing authorities alert you that there may be an issue is via correspondence through the mail with a good old fashioned letter. And so, normally, when you get that first letter that says, “Hey, we don’t agree with what you filed,” or, “Hey, you owe this.” That’s a good time to reach out and get an attorney. A lot of people are scared and their way of dealing with it is taking those letters and throwing them in the trash, and then hoping that they don’t get another letter. But that’s not the best way to deal with your problems. Because the sooner we’re involved, the better job we can do. And a lot of people…or maybe people try to handle it themselves. And what I try to convey to people is once you’ve put something out into the universe and it’s wrong, it’s really hard for me to undo it. So, people oftentimes will take it upon themselves to contact the IRS. And maybe they didn’t say something the correct way or present their information the right way. Once it’s out in the universe, it’s really hard for me to undo it when it could have been done the right way the first time and they might’ve gotten a better result.
Kasia: Right. So, the rule here is contact Alyssa as soon as you get a letter.
Kasia: Okay. Now, what are some like really general rules of tax law? Like, you have to file your taxes every single year.
Alyssa: Yes. So, the easiest and most simple rules are not that hard to follow, which is you need to file and pay tax on time. And so, generally, that date is April 15th. It can vary though if it falls on a holiday or a weekend, obviously, it gets pushed to the next business day. But this year due to COVID-19, that was actually extended to July 15th. But what a lot of people don’t know is when they’re scared, they don’t file, and not filing on time can actually have more consequences because first off, it is a crime not to file. So, the easiest way to fix that crime is to file the return. And then the penalties for filing late are actually more than the failure to pay penalty. So, people can save money by filing on time even if they can’t pay.
Kasia: Right. And then I love how you always say that it’s just never too late to fix your tax mistakes, right? You know, some people just don’t know and that’s okay.
Alyssa: Yeah. I think people are scared because it’s the federal government and it’s the Internal Revenue Service, or maybe a state taxing authority and they just get scared and that feeling of anxiety and stress, they just don’t wanna deal with it. And actually what I find is once we get into the details of what’s going on with people and I provide them other options, and this is how we’re gonna fix it, and this is what we’re gonna do, people feel so much better and they feel relieved and they’re like, “I’m sleeping at night.” And I’m like, “Great. You should be.”
Kasia: Right. Exactly. Now, let’s move into another area here, which is how does tax law coincide with the fashion and entertainment world? So, one of the first times, personally, I heard of tax implications on gifts to celebrities or influencers was back when the IRS noticed that these Hollywood Swag Bags or gift bags that various celebrities get at awards shows have a really high value and may be taxable. So, just by way of some background in 2006, the Academy Awards stopped giving you gift bags because of the IRS’s scrutiny that eventually got settled. But, for example, it’s reported that the gift bags for the 2020 Oscars were valued at over $200,000. They had really high ticket items like exotic cruises and a gold vape pen. And I guess the thinking is that the celebrities will use these items, post them on their social media, or maybe they’ll be seen in public paparazzi photos using the items or on a trip that they were gifted and then the donee will get major publicity. So, can you kind of guide us here, what is a gift, what is income? It can be a little confusing.
Alyssa: Right. So, our tax code has a really broad definition of what is considered income. And one of the exceptions to what is income is if something is a gift. But in order to be a gift, it has to be given with a donative intent. Like, expecting nothing in return. And so, that’s very easy to see maybe between family members, right? If I give my mom something or my mom gives me something and there’s a certain amount of gifts that you can donate. So, it comes down to the facts and circumstances revolving around the transaction. And so, we began to question, can a corporation truly have donative intent when they’re giving these high-value items to celebrities? Are they really just giving them out of the goodness of their heart or are they really expecting something in return for giving those items? And so, that’s when it becomes a fact by fact tax analysis of whether this transaction could be taxable or not.
Kasia: Right. Now, what about this, how about when, let’s say, a major fashion influencer on Instagram gets some designer items from the actual designer, how does that work? Is that a gift or how does that analysis work?
Alyssa: Right. So, I think that and what we were talking about is that our tax laws are hard to interpret sometimes when the industry and the nature of jobs, income, all of these things are changing, right? These tax laws were written a long time ago and it takes a long time for tax law to catch up to certain industries where it’s not necessarily clear or like the transactions that are going on are not necessarily defined or commonplaced. So, we have a lot of people, a lot of your clients probably that are out there on Instagram and others are living in the gig economy, I call it. You know, people that are self-employed creating their own, you know, way of living and earning money. But when they received these items, again, we have to ask ourselves, what is the purpose of this company giving this individual this item? It would be hard to argue that the company, you know, giving this Louis Vuitton bag is not expecting anything in return. You know, it is easier to believe that if they give the influencer the bag and that person has maybe 80 million followers, right, or 50,000 followers for that matter, if this person has a large influence and there’s a picture of them holding the bag, the people are gonna want to buy that bag. And so, it can seem like a form of marketing, right? Because they’re getting the bag and the company is getting something in return, which is brand awareness.
Kasia: Right. Yeah. That makes sense. Now, how about this? Let’s say we talk about the online resale economy, which is really like exploding now. So, let’s say fashion editor or another influencer gets like five designer bags and then instead of using them, he or she decides to sell them on something like The RealReal, which is like one of the top online reselling websites, what would the tax implications be in this situation?
Alyssa: So, I guess we’re gonna can take it one way. Let’s say it’s a gift, right, the bag, and it’s a gift. So, when you get something as a gift, you take the basis of the person that gave it to you, right? So, whatever that person’s basis is, that would be your cost basis and determining your transaction. And so, your basis…let’s just do a simple example. Let’s say somebody gives me a painting and their basis, we’re just gonna say it’s $50,000. That was our basis. And I sell it…it’s a gift to me, so I’m taking their basis as $50,000 and we sell that painting for $100,000. My net income from selling that painting was $50,000 because it’s what I sold it for minus the cost basis equals the net. And so, in a gifting situation, you take on your donor’s basis.
Kasia: Okay. Interesting. Now, let’s talk about how, we kind of touched on this earlier, how technology is changing tax law, how this rise of Instagram, social media, all of these kinds of self-employed influencers are kind of making a big impact here. So, let’s do a hypothetical fact pattern here. Let’s say that there’s a really high-end Instagram influencer and she designed a pair of really expensive high-end socks. She’s trying to sell them, advertise them on her Instagram account. She has, you know, maybe a million followers. And then she posts these socks with really expensive shoes, which makes sense because she’s selling really expensive socks. So, would the Gucci shoes here qualify as being like an ordinary and necessary expense for her in this case?
Alyssa: So, we had talked previously and I had a case that was very similar to this. And the hard thing for the Internal Revenue Service to realize was the marketing expense. So, you know, she was advertising on Instagram, and just like this example, right, she was selling something high-end. We’re selling high-end socks. So, I’m not just gonna pair these socks with, you know, some shoes from Target, right? Because I’m trying to create a brand and image, a thought pattern that associates my socks with these high-end shoes, right? These are not your ordinary socks, right? So, I think it comes into play when you’re explaining things to the IRS, what you’re doing, right? We’re building a brand and it wouldn’t work to pair it with this, so I had to buy a more expensive item to create the imagery that I’m trying to sell. And so, when I was at the appeals conference for this individual that had a similar fact pattern, we ended up spending most of our time talking about how Instagram influencing works and why the images matter, right? And why it costs her so much to create these images and to go a certain place. And honestly, that’s why those brands are spending money with these influencers, right, because they want that item in the photo. And so, if there’s like large brands doing it, small brands can do it too.
So, it’s really making sure that you have records and receipts that you can explain how one item is used in your business and why it’s ordinary and necessary in the course of your business, and framing all of that in the correct way, and documenting it in the right way is where a tax attorney…if you get audited, where a tax attorney really comes in handy to advocate for you because a normal person would say, “Well, that’s not necessary.” Like, a good example was I had an auditor tell me one time that somebody having more than one device was not necessary and [crosstalk 00:14:56].
Alyssa: Right. Yeah. And to me, I had to take a step back and say, wait a minute. She said, well, same audit actually with the Gucci situation. He said, “She’s got three computers on here. I don’t think that that’s ordinary and necessary. She’s only one person.” I said, “Yeah, well, you know, I’m only one person. I have a law firm. I have a desktop computer and a laptop computer and a tablet. Do you expect me to bring my desktop computer to this audit?”
Kasia: Right. Yeah. That’s a really good example of how the code, you know, is having a hard time catching up with this explosion of electronics and social media platforms right now.
Alyssa: Yeah. And what is ordinary and necessary is gonna be a fact by fact basis and a totality of the circumstances involving a specific business. So, something that might be ordinary and necessary at one industry or one business might not be ordinary and necessary in another. So, it’s not a one-size-fits-all.
Kasia: Right. Yeah. I like that. That’s great. I think that’s gonna help a lot of my listeners too. So, now, let’s kind of switch gears a little bit. And I wanted to talk about a really major recent Gucci tax evasion case here based out of Italy with a settlement last year, which was initially filed by the Italian Tax Police. So, just a quick background here. Gucci was hit with one of the largest bills ever in Italy, and one of the largest for any Italian fashion house at 1.3 billion euros, which translates to around $1.5 billion, and it was reported that the Italian Tax Police visited the Milan and Florence offices of Gucci in connection with Gucci potentially paying taxes on profits generated by sales in Italy in another country with more favorable tax laws, Switzerland, in this case. The tax police claimed that Gucci had been involved in a large scale scheme to avoid paying taxes in Italy by allegedly relocating around 20 employees from their French and Italian offices to Switzerland as part of kind of like a tax optimization scheme, but that Gucci alleged that some of these employees continue to work in Italy. Now, Switzerland has a corporate tax rate of only 8% compared to 31% in Italy. And the company is said to have 1.3 billion euros in unpaid taxes beginning in 2010. Now, in the spring of 2019, the Kering company, which is kind of like the big conglomerate that owns Gucci. Let me just make a note here that it’s really important to note that Kering has denied avoiding any taxes. But they did, in fact, come to a settlement agreement where they paid a record 1.3 billion to settle this almost two-year tax battle with the Italian authorities. Now, I know this is like an Italian tax law case, but I would assume that there are similar cases here in the U.S. where U.S. residents try to avoid paying taxes by relocating, or what’s your take on that?
Alyssa: Yes. There’s a lot of, I would say, tax avoidance and tax evasion schemes that the U.S. companies and individuals try to take advantage of. And again, it always comes down to the facts. And this Italian case, it seems that the real issue was they were portraying that they were doing something, but in reality, they weren’t actually doing it, right? So, they’re trying to say, well, all these people are over here, but when they got down to the facts of it, they were actually still operating in Italy and just trying to avoid the tax. So, it’s always good if you were going to try to do some kind of tax reduction scheme that you actually…not a scheme, there are legal ways to reduce taxes, right, but that you actually meet all the requirements for setting up those, I guess, policies or plan you actually enacted, right? A good example here, just individuals doing that is people try to do that with states in the United States. So, people don’t like living in California or New York because they’re high tax states. And then when we changed our tax on 2018, they got even less…normally used to deduct property tax and state income tax and they kept it at $10,000.
Kasia: That’s right. Yeah. That was really, really big news here in California.
Alyssa: And it hurt people because people were getting to deduct their large state income tax liability on their tax returns, which really helped to lower their taxable income. So, you know, people would say, I’m gonna move to Nevada or Texas or Washington or Florida, right? I’m now a resident of Florida, or I’m now a resident of Nevada. And in case a lot of Californians they moved to Nevada because there is no state income tax. But they were really still earning their income by working in California. So, they would literally, like, cross the state line to work every day. And California got really aggressive about it. Because were they really changing their domicile for tax purposes? Again, it’s a factor test. Do you pay taxes in this state? Where do you earn the majority of your income? Where’s your car registered at? Do you own property in that state? You know, there’s a factor test for domicile, but if we’re, like, breaking it down on a simple level, you can kind of see what the Italian…what they did, they were trying to do it with a different country, but people in America do that with states.
Kasia: That is interesting. Yeah. That’s a very similar fact pattern here. And then also, in addition, as we’re talking about international tax laws, it’s worth noting that Italy recently introduced a new COVID-19 tax break for fashion companies that’s related to their unsold inventory. The law is called the Rilancio Decree, and I’ll provide a link to it at the bottom of my episode notes in the description of this episode if anybody would like to read it in full. It’s pretty interesting and really forward-thinking. So, fashion manufacturing is one of Italy’s most important industries, and there are various new additions to this tax amendment, which went into effect on May 19th. There’s a really specific provision that aims to provide tax credits for entities in the textile fashion and accessories sector related to their final stock inventory. Basically, it states that taxpayers who have businesses in the fashion industry can benefit from a new tax credit equal to 30% of the value of their unsold inventory at the end of the year that exceeds the average of the inventories booked in the three previous fiscal years. So, there’s just so many issues with the fashion supply chain right now because of COVID. There’s reduced orders, there’s a lot of canceled orders that people just can’t fulfill anymore. And then, of course, there’s a lot of stores that have closed and we don’t even know if they’re gonna reopen. Now, Alyssa, are you aware of any kind of tax amendment that’s similar to this here in the U.S. for manufacturers, especially since the U.S. is the world’s third-largest manufacturer after China and the EU?
Alyssa: So, the U.S does have some tax incentives for U.S.-based manufacturers. It’s called the IC-DISC Export Tax Incentive. Basically, it allows a company to export goods. They can get up to a 50% tax reduction on its exported income. But it’s not really necessarily COVID-related. That was around before COVID existed. The U.S. kind of took a different approach when they made changes to our tax laws due to COVID. For example, they extended filing and payment deadlines. They instituted the PPP, which is the Payroll Protection Program for companies, which allowed them to apply to cover wages for their employees. And then the SBA EIDL loans, which is Economic Disaster Injury Loans. So, they have a different approach and also delayed, you know, employment tax payments, and there’s also employment tax credits. So, the U.S. took different measures to help business owners and like a wide variety of businesses, not specifically manufacturing. And like you previously mentioned, that might be due to Italy being a smaller country and manufacturing being a very large portion of their GDP and what businesses are operated in that country and how that country produces income. So, in the U.S. we had a more broad approach that applied to, you know, a wide variety of industries to help with their, you know, reduced revenue.
Kasia: Right. Yeah. I guess it is kind of hard to compare the U.S. to a small country like Italy.
Alyssa: But it did remind me of one thing you were saying that we didn’t talk about, but I can just tell you real quickly. I was talking to a reorganization attorney that specializes in restructuring and reorganization for large companies. And what they have seen right now, and sad and unfortunate is a lot of big retailers filing for Chapter 11 reorganizations. You know, J.Crew was looking at filing bankruptcy. You know, these aren’t like, you know, major fashion retailers, just retailers in general because, you know, their profits and revenues were way down.
Kasia: Yes. Exactly. Actually, my Episode 4 of my podcast, I talk about the Chapter 7 versus Chapter 11 bankruptcy, and I go through a whole timeline of the past years’ retailers filing for bankruptcies, and it is astonishing how many of them there are.
Alyssa: Yeah. And it’s sad and it all goes back to this. So, good for Italy for trying to overdo some of that burden by, you know, giving them some kind of tax relief.
Kasia: Right. Exactly. Now, Alyssa, let’s switch gears again. Tell me what advice do you have for aspiring tax attorneys out there?
Alyssa: I would say get involved in your local tax clinic if you can, if you’re in law school, there’s clinics all over the United States and it will make you have…everyone I’ve ever talked to has loved their clinic experience. It really opens your eyes and people need help. So, it’s a great place to learn the basics of tax law, how our tax system works, how to help people, and what a day to day life looks like in somebody that practices tax controversy. Because even at my level, you know, I’m dealing with people with higher income and higher assets and higher liabilities, the numbers are larger. But what I do on a day to day basis is very similar to my time at the clinic, the analysis, and it makes you have a strong appreciation for the world of tax and how you can help people.
Kasia: That’s great. And now, tell me how can people reach you if they have a tax issue or a tax controversy?
Alyssa: Yeah. People can feel free to reach out. I do free appointments. They can visit me at my website, which is www.atltaxlawyers.com. And they can also give me a call at 404-551-5838.
Kasia: Great. Thank you. I had so much fun getting to know you and I hope to have you back again on a future episode.
Alyssa: Yeah. That would be great. Thank you so much for having me.
Kasia: Thanks, Alyssa.