Author: TaxDAO

Recently, MicroStrategy is accelerating its increase in Bitcoin holdings, with its holdings soaring from 226,000 in June 2024 to 12 439,000 coins per month, this investment style has attracted widespread attention. MicroStrategy’s substantial increase in Bitcoin holdings is inseparable from the strong support of the company’s CEO Michael Saylor. Saylor has become a well-known figure in the crypto market in 2020 due to his firm belief in Bitcoin. However, he was involved in a huge tax dispute in 2022.

In August 2022, the District of Columbia (DC) sued Saylor through the Office of the Attorney General (OAG), accusing him of fraud and tax evasion of approximately US$25 million. Saylor may be fined $75 million under the District of Columbia's False Claims Act (FCA). After more than two years of litigation, the two parties reached a settlement agreement in June 2024, ending the case with Michael Saylor paying $40 million to the authorities. Although the settlement amount did not reach the US$75 million predicted by the outside world, it became the largest income tax fraud recovery case in the history of the District of Columbia, and once again aroused heated discussion from all walks of life. What is a tax settlement? Is this settlement worth $40 million? You may wish to review this case with FinTax.

1. Bitcoin billionaire involved in tax disputes 1.1 Michael Saylor’s entrepreneurial journey

Michael Saylor was born in February 1965 in Nebraska, the United States. His father was an Air Force officer. In 1983, Saylor entered the Massachusetts Institute of Technology (MIT) on a full scholarship from the Air Force Reserve Officer Training Corps (ROTC), majoring in aerospace engineering and history of science, where he met Sanju Bansal. In 1989, Saylor and Bansal co-founded MicroStrategy to provide companies with data analysis tools to help them make business decisions. In 1998, under Saylor's leadership, MicroStrategy successfully went public and became an industry leader in business data analysis and mobile software. In early 2000, Saylor's net worth reached $7 billion, making him a well-known figure in technology and finance.

In addition to being a successful entrepreneur, Saylor is also a staunch supporter of Bitcoin and a real Bitcoin billionaire. In 2020, he announced on social media that he personally purchased 17,732 Bitcoins for US$175 million, officially entering the encryption industry; and since 2020, with the support of Saylor, as of December 2024, MicroStrategy has also Spending billions of dollars to buy more thanWith 439,000 Bitcoins, it became the largest Bitcoin holding company in the world. Saylor highly admires the value of Bitcoin and believes that Bitcoin is not only a digital asset, but also a guarantee against inflation and a reliable store of value in a world where traditional assets are becoming increasingly unstable. His concepts and positive actions on Bitcoin have influenced many investors in the crypto industry and directly promoted the development of the crypto industry.

1.2 Sudden tax dispute

However, while Saylor was vigorously purchasing Bitcoin, a tax storm was brewing against him. In 2021, a whistleblower accused Saylor of defrauding DC by failing to pay full income taxes from 2014 to 2020. DC launched an investigation through OAG and filed a lawsuit regarding Saylor's alleged tax fraud, requesting further recovery of Saylor's unpaid taxes from 2005 to 2020.

DC, through OAG, accused Saylor of evading huge personal income taxes by forging residence information. Although Saylor has long lived in Washington, D.C., he avoided nearly $25 million in personal income taxes by reporting his residence in a low-tax state, such as Florida. In addition, OAG also pointed out that MicroStrategy, the company founded by Saylor, also played a key role in assisting him in tax evasion. Specifically, Saylor's annual salary is only $1, but MicroStrategy provides him with benefits such as a private jet, dedicated drivers and a security team. Because Saylor nominally resides in Florida, these benefits are not considered taxable compensation, allowing him to significantly reduce his tax liability.

Facing DC’s accusation, Saylor insisted that he moved to Florida more than ten years ago, purchased a house in Miami Beach, and moved his life center to Florida. He emphasized that he lives, votes and performs jury duty in Florida. At the same time, MicroStrategy also argued that the company had no right to intervene in Saylor's personal tax affairs and therefore should not be responsible for Saylor's tax problems.

This is the largest income tax fraud recovery case in the District of Columbia’s history and the first lawsuit in the District since the District amended the False Claims Act (FCA). According to the FCA, it is illegal to intentionally conceal, avoid or reduce the obligation to pay taxes to the SAR. The SAR can impose a fine of three times the tax amount on the violator. Therefore, outsiders have believed that Saylor may be liable for a fine of US$75 million.

2. The parties to the lawsuit reached a settlement: Why didn’t Saylor fight to the end?

After more than two years of investigation and litigation, with both parties insisting on their own opinions, Saylor and DC finally reached a settlement and signed a settlement agreement in June 2024. Without determining that Saylor and MicroStrategy had committed any illegal acts, case, bySaylor paid authorities $40 million to settle the case. What kind of tax settlement system is applicable to this case? Why did both parties choose to settle the dispute through reconciliation rather than continue litigation?

2.1 U.S. Tax Compromise System

The U.S. tax settlement system (Offers in Compromise) comes from the Taxpayer Bill of Rights. While taxpayers bear tax payment obligations, they are protected by the Taxpayer Bill of Rights and enjoy ten rights, including the right to know, the right to quality services, the right to final determination, the right to confidentiality, and the right to question the IRS's position and appeal. Among them, "the right to a fair and equitable tax system" clarifies that taxpayers have the right to request the tax authorities to consider facts and circumstances that may affect the taxpayer's potential liabilities, ability to pay, or ability to provide timely information.

As a non-litigation dispute resolution method, tax settlement is suitable for disputes between taxpayers and tax authorities during tax audits, especially when the amount of tax payable cannot be clearly determined or the taxpayer's financial situation cannot be fully determined. When paying taxes. At the same time, when the taxpayer's assets and income are lower than the tax payable, the tax department may consider accepting a settlement, allowing the taxpayer to resolve the tax problem with an amount lower than the tax payable. In addition, the tax department may also accept a settlement if paying the tax in full would cause financial hardship to the taxpayer. Due to the flexibility and efficiency of the tax settlement system, according to public data, about 80% of small tax litigation cases can reach out-of-court settlement before trial, thereby avoiding a lengthy litigation process and reducing the time and cost burden on both parties.

2.2 Analysis of the reasons for the settlement between the two parties

The two parties chose to resolve the dispute through reconciliation, involving an amount of up to US$40 million. In addition to the time, money costs, and lengthy litigation procedures mentioned in the settlement agreement, this choice also reflects the strategic considerations and actual needs of the plaintiff and defendant.

For DC represented by OAG: First, avoid the uncertainty of the outcome of the lawsuit. Although the SAR may have a large amount of evidence to support its claims, Saylor's legal team is strong and may also raise various defense grounds and challenge the chain of evidence. In this case, Saylor's status as a state resident remains unclear. At the same time, the timing of OAG's filing of the lawsuit is also questionable. The time it chose to file the lawsuit happened to be within a short period after the FCA was revised. The outside world may question whether it "selected a favorable time" to file the lawsuit. If the case fails as a result, the SAR will not only lose potential compensation, but may also weaken its law enforcement credibility in similar cases in the future. Second, quickly obtain financial compensation through reconciliation. The $40 million settlement not only provides the District with direct fiscal revenue, but also provides flexibility in the allocation of administrative and legal resources. Third, establish a legal deterrent effect. Although Saylor did not admit any illegal conduct, the settlement amount of $40 million itself is a strong signal to the public and businesses that DC takes tax compliance seriously..

For Saylor: First, protect personal and corporate reputations through settlement. Reputation is a critical intangible asset for an entrepreneur and the company he leads. If the case goes to trial, relevant details will become public through court records, which could cause irreparable damage to Saylor's and MicroStrategy's public image. At a time when information spreads rapidly, negative public opinion may further affect MicroStrategy's shareholder confidence and market performance. Second, long-term considerations for listed companies’ compliance. As a public company, MicroStrategy needs to consider long-term interests when handling compliance matters. In a context where compliance is increasingly becoming a key element of business competition, especially when facing US and international regulatory agencies, maintaining good compliance can help companies reduce potential legal obstacles in the future and avoid affecting their business expansion. Third, avoid the risk of being found to be illegal. Although Saylor denies any illegal conduct, continuing the lawsuit may also face the risk of an adverse judgment. If the court determines that Saylor's actions constitute tax evasion or the submission of false tax documents, this will not only result in higher financial compensation, but may also bring additional scrutiny pressure on the defendant's future tax compliance. In addition, such judgments may become the basis for investigations by other states or tax authorities, continuing to increase Saylor’s legal risks.

In general, the decision of both parties to reconcile is the result of a rational weighing and reflects their pursuit of maximizing interests. For DC, the settlement provides efficient economic returns while demonstrating the seriousness of tax law enforcement; for Saylor and MicroStrategy, the settlement reduces uncertainty and potential risks, and protects the reputation and operational efficiency of individuals and companies.

3. FinTax tips and suggestions

In addition to understanding the practice of the U.S. tax settlement system, Saylor’s tax settlement case also provides some enlightenment for crypto asset investors.

First, pay attention to regulatory trends and be alert to changes in the intensity of tax law enforcement. In this case, FCA strengthened the intensity of tax collection through amendments, and DC accordingly filed a tax lawsuit against Saylor. In this regard, investors in the crypto industry should note that as the crypto asset market continues to grow, tax law enforcement agencies around the world have generally strengthened their supervision of crypto assets. But at the same time, there are dynamic changes in the trends and economies of various countries, and there may be significant differences in the intensity of law enforcement in different places at different times. Therefore, investors need to pay attention to regulatory trends in a timely manner and adjust tax activities in a timely manner to avoid risks and ensure tax compliance.

Second, pay attention to encryption tax compliance to avoid affecting corporate development. In this case, in order to avoid the continued impact of the tax controversy on Saylor and the company, Saylor chose to achieve tax settlement by paying US$40 million. This should attract the attention of crypto asset investment companies, who are investing and financing in crypto assets.When doing so, tax compliance should be considered as a strategic consideration. When making large-scale crypto asset investments, businesses should fully assess the tax implications and plan appropriately in accordance with legal requirements. If a company has ambiguities on tax issues or conducts that may lead to tax evasion, it may trigger broader legal risks and affect the company's financing ability and capital market performance.

Third, consider the costs and benefits comprehensively and make good use of the tax reconciliation system. Due to the complexity and volatility of crypto-asset transactions, investors may have tax disputes when filing taxes, especially when the valuation, transfer date and transaction details of the crypto-assets are unclear. If the tax cannot accurately determine the amount of tax payable, or there are differences between the two parties during the review process, investors can try to reach a settlement with the tax for an amount lower than the tax payable. In addition, tax settlements can also provide a certain solution for investors whose financial situation does not allow them to pay the full amount of tax. Through this system, investors can not only avoid lengthy litigation procedures, but also obtain flexible tax treatment options when disputes are not fully resolved.

The Saylor case provides a lesson for crypto-asset investors and once again demonstrates that tax compliance risks are an important issue that crypto-asset investors cannot ignore. By working with tax advisors and utilizing mechanisms such as tax reconciliation, investors can effectively reduce risks and improve the compliance and security of crypto asset investments. Of course, it is more important to eliminate hidden dangers beforehand than to solve them after the fact. Facing increasingly stringent and ever-changing tax regulations, investors need to remain highly alert to tax risks, promptly follow up on new developments in tax laws and regulations, and actively carry out tax planning and reasonable management with the assistance of professionals and tax software. Crypto assets to avoid legal proceedings or financial losses due to tax issues.