Free widgets?

[MikeHalloran]

Let's say that a company makes widgets, sells them all over the world, and is competitive in all those markets.

The Big Boss behaves a little unusually; he does all of the production engineering, worrying about cycle rates of the machinery and such. He bitches about productivity, but the numbers are hard for anyone else to get. There appears to be a reason.

The production buyer has been quietly told that when the paperwork reaching her desk tells her to buy, e.g., ten thousand pounds of brass bar, she is to buy instead twenty thousand pounds. She does this for all commodities.

What appears to happen is this: Whenever a thousand assembled widgets reach finished goods storage, the paperwork says that a thousand widgets have been added to the world inventory, at a measured cost that makes them competitive in the domestic USA market.

But, real quietly, at the same time, another thousand assembled widgets arrive in finished goods storage for the Overseas Division, run by Big Boss' son. Overseas is under the same roof, but has no production capacity of its own, and it does not detectably buy anything from anyone. The stuff it needs to sell ... just shows up. It can be competitive anywhere in the world, because the cost basis is .. zero.

The company is privately held. Big Boss, or his wife, is the majority stockholder. Officers of the company may or may not own any stock. It is not clear that anyone but Big Boss and the buyer are aware of the standing order.

Questions:

If this is not a scam, why the charade?

If it is a scam, who is being scammed?

What would you do if you encountered it?

Report it? To whom?




Mike Halloran
Pembroke Pines, FL, USA

 

[Haf]

I am also not an expert on corporate tax laws, but this sounds fishy to me.

I agree that it sounds like the company is trying to minimize profits in the US while maximizing profits in the foreign market, and my guess is that it's for a net tax advantage.

While that may not be illegal, what goes on behind the scenes to support this may be illegal. For example, if the foreign corporation receives "free" widgets, certainly that must be reported. Similarly, if the foreign corp. moves money to the domestic corp. to subsidize the cost of buying twice the commodities, that must also be reported.

Since the owners of the two corporations are father and son, they may pull off these transactions through "unofficial" channels. Furthermore, this could be a scheme by the father to gradually funnel portions of his estate to his son while avoiding taxes or fees associated with trust funds, etc.

These are of course speculations and maybe IRstuff is right and it's a money laundering scheme or something else. I guess money laundering doesn't make a whole lot of sense to me, because I'm not sure why they'd go through the added trouble of this "buy double, make twice as much" scheme to launder cash.

 

[wes616]

No one has talked about the Son, who runs the overseas sales. Maybe he's doing it to "give his son a job" without incurring too much dammage if the son fails. Or to quietly provide guidence to the son, who may eventually run the entire company.

Wes C.