Tax treatment of Passover "sales"?


R

Rich Carreiro

I have read that an observant Jew who owns a business
is obliged to keep the business kosher for Passover
as well as his own home.

That being an obvious problem for a food-related
business :) a clever solution has apparently
arisen -- the Jewish business owner will sell his
business (or at least the non-KfP items) to a non-Jew
for the duration of Passover. Apparently (from
what I've read) the sales contract has to be real
in the sense that it is truly legally binding. It's
often in the form of "I'm selling you the business
for $X (where $X is a legit number) but you only
have to pay me $1 today. The balance is due in
nine days and if you don't pay in full the business
reverts to me."

While the contract is legally-binding in the sense
that if the "buyer" really forked over the balance
he would in fact truly own the business, both sides
enter into the contract with the expectation that
the balance will not be paid.

So I'm wondering what the tax treatment of that
is. Is it ignored for tax purposes (and if so,
on what grounds)? Is it treated like a some sort
of failed installment sale where virtually zero
payment was ever received? Something else?
 
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S

Stuart A. Bronstein

Rich Carreiro said:
I have read that an observant Jew who owns a business
is obliged to keep the business kosher for Passover
as well as his own home.
I've seen that sort of thing.
That being an obvious problem for a food-related
business :) a clever solution has apparently
arisen -- the Jewish business owner will sell his
business (or at least the non-KfP items) to a non-Jew
for the duration of Passover. Apparently (from
what I've read) the sales contract has to be real
in the sense that it is truly legally binding. It's
often in the form of "I'm selling you the business
for $X (where $X is a legit number) but you only
have to pay me $1 today. The balance is due in
nine days and if you don't pay in full the business
reverts to me."
What I've seen is a purchase with a right to buy back for the same
price. But it can take any number of forms.
So I'm wondering what the tax treatment of that
is. Is it ignored for tax purposes (and if so,
on what grounds)? Is it treated like a some sort
of failed installment sale where virtually zero
payment was ever received? Something else?
I'd think it would be treated as a sham or collapsible transaction.
In other words, ignored for tax purposes, since in fact no one is
earning or receiving any income.
 
M

Mark Bole

Does the business have any employees during the "open" period? Does the
erstwhile owner temporarily become an employee of the new owner? I'd be
concerned, even as a short-term owner, about things like payroll taxes,
workers comp, other labor laws, insurance exposure, etc.

I'd think it would be treated as a sham or collapsible transaction.
In other words, ignored for tax purposes, since in fact no one is
earning or receiving any income.
That made me chuckle, to consider that for tax purposes it could be
ignored as a "sham", but for religious purposes it's treated as a
perfectly legitimate and sincere transaction. I guess the standards of
one's "higher authority" really do vary.
 
D

David Rosenbaum

Well, tax law doesn't always make economic sense, so I wouldn't hold it up nacle of logic.

As I see it, the $1 earned should be reported. But it's so minimal that it never is, I assume.
 
B

Barry Margolin

David Rosenbaum said:
Well, tax law doesn't always make economic sense, so I wouldn't hold it up
nacle of logic.

As I see it, the $1 earned should be reported. But it's so minimal that it
never is, I assume.
Couldn't he avoid that by giving back the $1 when the "sale" doesn't go
through?

But since he's Jewish, giving up a buck might be unthinkable (I'm
Jewish, so I hope I can say that without being called racist).

Couldn't they structure the deal this way: Sell the business to the goy
for $1, then a week later buy it back from him for $1. The two sales
cancel each other out, and there's no tax implications.
 
I

ira smilovitz

Couldn't he avoid that by giving back the $1 when the "sale" doesn't go
through?

But since he's Jewish, giving up a buck might be unthinkable (I'm
Jewish, so I hope I can say that without being called racist).

Couldn't they structure the deal this way: Sell the business to the goy
for $1, then a week later buy it back from him for $1. The two sales
cancel each other out, and there's no tax implications.
That's exactly how the deal is structured. It creates a wash sale as the original seller buys back the business/assets at the end of Passover for the same amount as they were sold for. Technically, it should be reported as such, but since there is no tax implication from the paired transactions, it's easier to just ignore them.

Ira Smilovitz
 
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B

BignTall

I have read that an observant Jew who owns a business
is obliged to keep the business kosher for Passover
as well as his own home.

That being an obvious problem for a food-related
business :) a clever solution has apparently
arisen -- the Jewish business owner will sell his
business (or at least the non-KfP items) to a non-Jew
for the duration of Passover. Apparently (from
what I've read) the sales contract has to be real
in the sense that it is truly legally binding. It's
often in the form of "I'm selling you the business
for $X (where $X is a legit number) but you only
have to pay me $1 today. The balance is due in
nine days and if you don't pay in full the business
reverts to me."

While the contract is legally-binding in the sense
that if the "buyer" really forked over the balance
he would in fact truly own the business, both sides
enter into the contract with the expectation that
the balance will not be paid.

So I'm wondering what the tax treatment of that
is. Is it ignored for tax purposes (and if so,
on what grounds)? Is it treated like a some sort
of failed installment sale where virtually zero
payment was ever received? Something else?
Assuming the original owner regains ownership as
planned, I would expect this to be treated as a sham
transaction and ignored for tax purposes.

I'd be more concerned about the potential non-tax
issues if things don't go smoothly. Are there
licenses that need to be transferred to the new
owner (and then back) in order for the business to
legally operate during Passover? Since this appears
to be a sham transaction, both owners may be sued
if something bad happens. Are the Insurance companies
OK with this arrangement and will they cover both
old and new owners during Passover? What happens
if one of these two die during Passover? There may
be other potential land mines that could really mess
up the short term owner. This whole scheme sounds
like a bad idea for the non-Jew friend.

If God applies a 'function over form doctrine' the
negative consequences for the 'observant' Jew in
the hereafter may dwarf anything bad that happens
in this world.
 
I

ira smilovitz

Assuming the original owner regains ownership as
planned, I would expect this to be treated as a sham
transaction and ignored for tax purposes.

I'd be more concerned about the potential non-tax
issues if things don't go smoothly. Are there
licenses that need to be transferred to the new
owner (and then back) in order for the business to
legally operate during Passover? Since this appears
to be a sham transaction, both owners may be sued
if something bad happens. Are the Insurance companies
OK with this arrangement and will they cover both
old and new owners during Passover? What happens
if one of these two die during Passover? There may
be other potential land mines that could really mess
up the short term owner. This whole scheme sounds
like a bad idea for the non-Jew friend.
This isn't an issue because the typical pattern is that only the non-kosher food items are sold to the non-Jew and not the entire business. The sold items are segregated from any part of the business that might continue to operate during the holiday (cabinets sealed, shelves coveree, etc). Any business risks remain with the Jewish owner.

Many food related businesses close completely for the holiday to avoid any question as to whether the owner is complying with religious restrictions.

Ira Smilovitz
 
S

Stuart A. Bronstein

Lawrence Israel said:
But what about sales taxes on each sale?
Interesting point. At least in California the sale of a business
does not ordinarily trigger sales tax, either on the business as a
whole or assets of the business. I'd guess there are similar
exemptions in other (but perhaps not all other) states.
 
I

ira smilovitz

But what about sales taxes on each sale?
What's the issue? There aren't any sales tax triggering sales. The sale of the non-kosher for Passover food to the non-Jew is not a retail sale as the purchaser is buying it for resale. The transferred food isn't sold during the holiday because to do so would create the appearance that the Jewish business owner was violating the religious proscriptions. The repurchase of the food is also not a retail sale.

Ira Smilovitz
 
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B

BignTall

What's the issue? There aren't any sales tax triggering sales.
The sale of the non-kosher for Passover food to the non-Jew is
not a retail sale as the purchaser is buying it for resale. The
transferred food isn't sold during the holiday because to do so
would create the appearance that the Jewish business owner was
violating the religious proscriptions. The repurchase of the food
is also not a retail sale.

Ira Smilovitz
Around here, a sale by a retailer is considered a retail sale unless
the buyer supplies a sales tax exemption number. The temporary
food distributor may have some hoops to jump thru to make this
work properly.

It is interesting that storing non-kosher food (even if owned by
someone else) at the Jewish business is considered religiously
acceptable but selling it is not. In both cases, the Jewish
business is involved with non-kosher food during Passover.
 
S

Stuart A. Bronstein

BignTall said:
It is interesting that storing non-kosher food (even if owned by
someone else) at the Jewish business is considered religiously
acceptable but selling it is not. In both cases, the Jewish
business is involved with non-kosher food during Passover.
I've heard of people doing that with bread products in their homes
during passover - they leave everything in place, but have someone
else buy it and own it over the holiday. It's all about the
loopholes.
 
B

Barry Margolin

BignTall said:
Around here, a sale by a retailer is considered a retail sale unless
the buyer supplies a sales tax exemption number. The temporary
food distributor may have some hoops to jump thru to make this
work properly.

It is interesting that storing non-kosher food (even if owned by
someone else) at the Jewish business is considered religiously
acceptable but selling it is not. In both cases, the Jewish
business is involved with non-kosher food during Passover.
I believe the requirement is that the two foods have to be kept
separate. As long as they're in separate refrigerators, they meet that
proscription.

If they sell them, they'll probably have go pass over the same sales
counters, using the same utensils, etc. and that's the problem they're
trying to avoid.
 
I

ira smilovitz

Around here, a sale by a retailer is considered a retail sale unless
the buyer supplies a sales tax exemption number. The temporary
food distributor may have some hoops to jump thru to make this
work properly.
Even so - what's the sales tax on a $1 transaction?
It is interesting that storing non-kosher food (even if owned by
someone else) at the Jewish business is considered religiously
acceptable but selling it is not. In both cases, the Jewish
business is involved with non-kosher food during Passover.
No, the Jewish business isn't involved with the non-kosher food during Passover. The food is physically isolated before Passover begins and isn't touched by the Jew until after he repurchases it at the end of the holiday. Some will go so far as to lock up the food so that they can't access it even if they wanted to.

Yes, it's a religious legalism. Conceptually, is it any different from the legalism that holds that a corporation is a person? Both provide means for dealing with issues that couldn't be dealt with otherwise.

Ira Smilovitz
 
B

Barry Margolin

ira smilovitz said:
Yes, it's a religious legalism. Conceptually, is it any different from the
legalism that holds that a corporation is a person? Both provide means for
dealing with issues that couldn't be dealt with otherwise.
The difference is that religious practices are generally thought to be
related to morality. Is the business owner somehow a "better" person by
taking advantage of a loophole in the wording of religious doctrines?
There's presumably a reason behind the requirement to keep Kosher for
Passover foods separate from non-KfP foods, does this sham sale really
serve that purpose?

Orthodox Jewry is full of stuff like this. Rich Jews sometimes hire
gentile servants on the Sabbath to turn their lights on and off, because
they don't think they're allowed to do it. By that logic, you're not
violating the commandment against murder if you hire an atheist to do it
for you.
 
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A

Alan

I have read that an observant Jew who owns a business
is obliged to keep the business kosher for Passover
as well as his own home.

That being an obvious problem for a food-related
business :) a clever solution has apparently
arisen -- the Jewish business owner will sell his
business (or at least the non-KfP items) to a non-Jew
for the duration of Passover. Apparently (from
what I've read) the sales contract has to be real
in the sense that it is truly legally binding. It's
often in the form of "I'm selling you the business
for $X (where $X is a legit number) but you only
have to pay me $1 today. The balance is due in
nine days and if you don't pahttp://www.e-ark.net/rabbi/10sale_form.pdfy in full the business
reverts to me."

While the contract is legally-binding in the sense
that if the "buyer" really forked over the balance
he would in fact truly own the business, both sides
enter into the contract with the expectation that
the balance will not be paid.

So I'm wondering what the tax treatment of that
is. Is it ignored for tax purposes (and if so,
on what grounds)? Is it treated like a some sort
of failed installment sale where virtually zero
payment was ever received? Something else?
How it works:

http://www.e-ark.net/rabbi/10sale_form.pdf
 
M

Marc Auslander

One of the Rabinic principles in Judaism is that the laws must be ones that
the people can live with. Historically, as life became more
sophisticated, the simple idea of destroying all Hametz for Passover
became a burden, so the Rabbis invented alternatives that the people
could live with.
 
W

W. Baker

: On Thursday, August 14, 2014 4:49:44 AM UTC-4, Lawrence Israel wrote:
: > But what about sales taxes on each sale?

: What's the issue? There aren't any sales tax triggering sales. The sale
of the non-kosher for Passover food to the non-Jew is not a retail sale as
the purchaser is buying it for resale. The transferred food isn't sold
during the holiday because to do so would create the appearance that the
Jewish business owner was violating the religious proscriptions. The
repurchase of the food is also not a retail sale.

: Ira Smilovitz

Ira, there are Jewish owned stores in my neighborhood tht sell their
chmatz and reain open in my very mixed neighborhood sellign all kinds of
Passover adn non Koser for Passover foods. At the end of the holiday our
Ortocox rRabbi announces that we can shop at these stores for chamatz.
this may well be more of a halachic(Jewish law) question than an
accounting one,but it seems to be common in many religiously mixed
neighborhood. I am gettign confused by some of this discussion.

Wendy Baker
 
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A

Alan

The difference is that religious practices are generally thought to be
related to morality. Is the business owner somehow a "better" person by
taking advantage of a loophole in the wording of religious doctrines?
There's presumably a reason behind the requirement to keep Kosher for
Passover foods separate from non-KfP foods, does this sham sale really
serve that purpose?

Orthodox Jewry is full of stuff like this. Rich Jews sometimes hire
gentile servants on the Sabbath to turn their lights on and off, because
they don't think they're allowed to do it. By that logic, you're not
violating the commandment against murder if you hire an atheist to do it
for you.
From Jewish Magazine.... the history of the practice that is at least
two thousand years old.

http://www.jewishmag.com/142mag/selling_chametz/selling_chametz.htm
 

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