Arbitrage Is Legal, But You Better Pay the Taxes

Let’s say you are 100% certain that the price of a certain article will increase from $0.20 to $0.62 in a few weeks. Can you purchase a stock of that at $0.20 each and then sell them later at $0.62? If there are no laws against it, certainly. Of course, the $0.42 profit is taxable. That last line allegedly was forgotten by a Tennessee legislator.

Joseph (Joe) Armstrong is a member of the Tennessee legislature. He wanted to increase the state’s tobacco tax from $0.20 to $0.60 (per pack of cigarettes). Was he interested in the health of the residents of the Volunteer State? Perhaps. According to the indictment handed down last week, he was really interested in the health of his bank balance.

The Justice Department alleges that he entered into a conspiracy to profit from the increase in the cost of a tobacco stamp. Buy low, sell high is great, but as a legislator you’re not supposed to profit off of it. (Though Mr. Armstrong wanted a tripling of the price, the tax increase ended up being $0.42 per pack to a tax of $0.62.) Mr. Armstrong got a loan, bought lots of tax stamps at the old rate, and then sold them at the high rate. He used a nominee business (through his accountant) to hide the profits. His accountant got 15% of the profits.

(The accountant made a plea deal in July 2014 that was unsealed earlier this year. Charles Stivers, a CPA, was Mr. Armstrong’s accountant. As a reminder to the IRS, a license doesn’t make a person immune to deficiencies in ethics.)

The Justice Department alleges that Mr. Armstrong wanted to both have his after-tax income equal his pre-tax income from the scheme (always a good, albeit, illegal option) and he wanted to hide this from his wife. He is also being charged with lying to the IRS about his activities.

Mr. Armstrong pleaded not guilty to all charges on Friday. If found guilty, Mr. Armstrong will likely be residing at ClubFed.

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  1. […] Fox,¬†Arbitrage Is Legal, But You Better Pay the Taxes. It looks at the tax troubles of a recently-indicted Tennessee […]