“Honey…What’s this envelope from the Department of Taxation and Finance?”
“I don’t know. Why don’t you open it?”
“OK. It says that the purchase of your 1967 Chevrolet Corvette for $500 is below market value, and they want to audit the transaction.”
When economic times get tough, the tough get more aggressive, and that’s exactly what seems to be happening now as the Department of Motor Vehicles, in conjunction with the Department of Taxation and Finance, seem to be putting significantly more effort into catching those that they perceive to be tax cheats. Colleagues in other states tell me that they are experiencing the same crackdown.
Now please don’t take this as a warning from me that because of this crackdown, now is the time to do the right thing and pay the appropriate tax on the purchase of your collector car. I’ve always suggested that my customers do this, for many reasons.
The example above is one reason. The New York State Department of Motor Vehicles has always collected sales tax for the Department of Taxation and Finance on private party transactions. If either one of these agencies had any reason to believe that the transaction was below “book value” the transaction could be red-flagged, leading to an audit. This didn’t happen very often, possibly because there is no universally accepted “book value” on most classic cars. Should they be questioned, many people seemed to feel that a plausible excuse for such a low purchase price was “The car needs a total restoration.” Maybe this would work, maybe it wouldn’t. At the very least, if audited you would have to count on the seller of the car to perjure himself by swearing to your untruth.
Even if it did work, getting past the tax authorities is just the beginning of the potential problems that fibbing about the purchase price could lead to. I just testified in the case of the wealthy CEO of a Silicon Valley dot.com company who purchased a mid- 60s (model purposely omitted to protect the stupid) Italian convertible for $50,000. He told his tax registry (the case was outside of New York) that he had paid $5,000 for the car which saved him about $2,500 in taxes. He then proceeded to obtain an “agreed value” collector car insurance policy in the appropriate amount of $50,000, the actual purchase price of the car. Everything was fine until his car was t-boned by a driver on the very first day that she had her license.
Everything was still fine because his insurance company immediately cut him a check for $50,000. Everything was still fine when his insurance company subrogated against the other drivers insurance company because it was deemed to be 100% her fault. Everything was still fine until a sharp attorney for the other insurance company thought that $50,000 was a lot of money for a car that was over 40 years old. He subpoenaed the sales tax records and discovered the fraud. Suddenly everything wasn’t fine anymore. I watched the wealthy CEO squirm in the witness seat as he tried to explain to the jury how he had committed tax fraud to save a few dollars.
Even if none of this happens to you, more pitfalls await. Take the case of the gentleman from Queens who purchased a 1969 Camaro for $40,000. He too obtained an “agreed value” collector car insurance policy in the appropriate amount of $40,000, but only declared $3,000 to the tax authorities. The very next day after he purchased the car, it was stolen.
Classic car insurance companies are known for settling cases and writing checks quickly…unless they suspect fraud, which they take very seriously. And even though this gentleman had insured the car appropriately, and had legitimately suffered a loss, it reeked of fraud having been stolen only one day after the insurance took effect. Just like in the previous case, the insurance company obtained the amount declared to the Department of Taxation and Finance, and lo and behold…it was only $3,000. Having to choose between admitting to tax fraud or insurance fraud is not an enviable position to be in.
Sometimes even an honest transaction can lead to an audit. A customer bought a 1965 Corvette about two years ago, and for legitimate tax purposes he financed the purchase price of $45,000. He paid down the balance significantly over the past two years to about $25,000. Because he is a genuinely nice guy, and the money was secondary, he agreed to sell the car to a friend of his if his friend would just “pay off the balance of the loan.” Therefore the Bill of Sale accurately reflected a sale price of $25,000. A few weeks later he received a notice from the Department of Taxation and Finance that he was to appear in their offices for an audit of the transaction because the sale price was perceived to be significantly below fair market value. The transaction was legitimate and he has a complete paper trail, so he had nothing to worry about.
The next time you buy a classic car, think about the potential ramifications of fibbing about the purchase price in order to save on the tax. It comes back to haunt you much more often than you might think.