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What Is Tax Evasion?

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If a taxpayer uses an unlawful strategy to avoid paying taxes legally owed, this is referred to as tax evasion. Tax evasion can come with serious consequences such as a large fine and jail time.

The Difference Between Tax Avoidance and Tax Evasion

Often times, the line between tax avoidance and tax evasion is a fine line. For instance, a taxpayer who has a child under 16 qualifies for a reduction in his or her taxes. Asking for this deduction is legal tax avoidance. However, if a taxpayer claimed that he or she had a dependent under 16 but had no dependent, that would be fraud and an example of tax evasion.

The History of Tax Evasion

Tax evasion has been occurring as long as there were taxes to be paid. Typically, citizens of a country that had an income or value added tax avoided payment by paying off tax officials who would fail to report the evasion. Today, tax evasion is considered to be a major problem in less developed countries where sophisticated collection and reporting systems may be lacking.

In 1972, a research paper was written that examined why individuals would try to evade paying their fair share of taxes. The findings revealed that evasion was higher during times of unemployment and during times of dissatisfaction with government. Evasion rates were also linked to the tax rate itself. Not surprisingly, the rate of tax evasion was also associated with the likelihood of getting caught and the penalties associated.

Notable Examples of Tax Evasion

The most notable example of tax fraud occurred in 1929 and involved Chicago gangster Al Capone. He had been wanted for years on charges of murder and other crimes, but none of the charges resulted in a guilty verdict. However, he was eventually found guilty of tax evasion and spent time in prison.

Wesley Snipes was convicted of failing to file a tax return and had to spend three years in jail in addition to paying millions of dollars in back taxes to the IRS. He reportedly failed to file or pay tax because of his political views.

Many people know Abbott and Costello for their skit Who’s On First. However, most don’t know that the comedy duo was convicted for tax evasion in 1956, which forced them to sell the rights to many of their creative works. They would also be forced to sell much of their personal property as well.

The next time you want to avoid paying your taxes, you may want to think about the consequences of doing so first. You may have to pay back taxes, endure IRS levies of your property and spend time in jail. While you generally have an opportunity to make up for an honest mistake, it is almost always better to file an accurate return the first time.

Taxes: Fraud or Negligence?

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Maneuvering the world of taxes can be difficult. The IRS is in the back of everyone’s mind, and can often make you wonder if you’re doing everything right.

What is Tax Fraud?

Tax fraud is the more serious of the two offenses. This is done willfully. There are common tip offs to fraud that all auditors look for. They can include:

  • two sets of ledgers for fiances
  • underreporting income willfully
  • using a false number for social security
  • false documents are used
  • a nonexistent dependent is claimed for an exemption

There are other signs that are looked for, but these are the top five tip offs. All of these are done willfully. However, finding only one of these on only one of the reports is not enough to have it considered fraud.

Other signs of fraud could include a failure to even supply records of income to the FBI, deals with cash that are uncommon to that business (such as a deposit of $4,000,000,000 for a minimum wage worker who does not have wealthy family), and any large number of errors that are all in the favor of the payer.

What is Tax Negligence?

Tax negligence, on the other hand, is the equivalent of making a careless mistake. Tax auditors expect to see a few errors on every report due to how complex taxes can be.

In fact, auditors will not suspect fraud in the majority of cases. Unless they can see the badges of fraud – which include the five tip offs mentioned above and others, such as freshly printed receipts that are fake and checks that increase payments – they will only charge you with negligence.

The fine for a careless mistake on tax reports is usually 20% of your taxes. This means that you will pay an extra 20% – which is better than an extra 75% for tax fraud if you aren’t referred to the IRS. You can incur higher fines by having other failures, such as a failure to give full answers to questions asked by the IRS and a failure to have a good reason for the mistake.

White Collar Crimes

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White collar crimes are non-violent acts in which perpetrators use deceptive practices to cheat victims out of money for their own benefit, often resulting in significant financial gain. This brand of criminal is typically an astute business professional employed in a high-ranking position and with whom the victim placed their trust in, such as an accountant, business manager, financial adviser, or trustee. White collar crimes are estimated to cost the United States anywhere from $300-600 billion per year. Three common types of white collar crime often reported are Corporate Embezzlement, Investment and Accounting Fraud and Insider Trading.

Corporate Embezzlement

Embezzlement is defined as the fraudulent obtainment and misappropriation of funds which were entrusted to an individual. In other words, the perpetrator first steals the funds and converts those monies into their own, or a third-party account. Examples of such action at the corporate level might include a money manager or financial planner stealing funds from company accounts, or a corporate trustee tapping funds from a corporate trust fund. Embezzlers often attempt to conceal their crimes through deceptive practices, such as falsifying financial records, creating false vendors to which companies send bills to and receive payment, thinking those entities are legitimate clients and through Ponzi-like schemes in which criminals scheme investors out of large sums of money by promising them large future returns.

Investment And Accounting Fraud

Investment fraud, also known as Securities Fraud occurs when perpetrators deceive victims by luring them into purchasing high-risk stocks and promising them significant returns. These criminals often target inexperienced investors who are also unfamiliar with financial markets. Victims often lose large sums of money. Another example by which criminals commit securities fraud is by setting up and having victims purchase stock from what are known as “dummy corporations,” which are phone establishments that are given the appearance of being closely associated to a specific legitimate corporation.

A very common White Collar crime is accounting fraud where perpetrators employ deceptive tactics like falsifying accounting statements, or by deliberately underestimating expense reports.

Insider Trading

Insider trading is, arguably, the textbook definition of a white collar crime. This type of offense is carried out in two specific ways. The more commonly practiced method of insider trading involves a perpetrator obtaining specialized information about a particular company or stock, often referred to as a “tip,” which they turn around and offer to various individuals in the hopes of inducing them into making investments based on the knowledge they received. Insider trading can also be committed by persons holding fiduciary responsibility roles towards another individual, such as an accountant, trustee, financial adviser or attorney who buys or sells stock based upon insider information.

Why White Collar Criminals Get Away?

Arguably, the main reason white collar criminals go unpunished is because their crimes take a long time to be discovered and, in some cases, never are. Certain crimes like simple accounting frauds can be detected through financial audits. However, quite often, white collar criminals are highly intelligent, extremely careful and exceptionally clever individuals who understand the nuances and complexities of the systems they are defrauding and, moreover, know how to earn and maintain the trust of their victims.

How Can A Business Owner Avoid Being A Victim Of White Collar Crime?

Experts suggest the most important action any business owner can take is to keep a watchful eye out over employees in accounting or other financial departments. It also recommended that business owners carefully review banking statements and other financial records and, if they suspect any impropriety, to immediately contact a business attorney.

Understanding The Carried Interest Tax Law

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There is a long-standing tax law that has contributed significantly in a positive way to many aspects of businesses and the economy. It is known as the carried interest tax law. This law is credited with benefiting a number of industries and being a good influence on the economy by raising the level of tax revenues. It is designed to treat all partners involved in the operation of a business equally. Should the carried interest tax law be repealed, it could strangle the financing of start-up companies as well as impact many other types of business transactions.

Benefits

An effective method of compensating managers of hedge funds as well as private equity managers is found in this tax law. The carried interest tax is designed to create a return on investment for those who contribute to the fund. There are those who would like to have this tax law repealed because it permits fund managers to pay their tax at the capital gains tax rate. Some individuals in government would like them to pay the higher rate of taxation that is calculated with regular income.

How It Works

Partners in a fund receive a share of profits created by the fund. The profits received are based on the amount of money the partner has in the fund. If one partner puts in twenty percent of the fund, they receive twenty percent of the profits. A fund manager may not draw a salary for their management position. They might only get a portion of the profits that is more than the portion the manager contributed to the fund. Under this law, it’s possible for a manager to contribute twenty percent of the fund and receive thirty percent of the profits. The extra ten percent is compensation for their fund management work. This income is currently designated as carried interest and is taxed at the capital gain rate.

Economic Impact

Many people believe the carried interest tax law is a way to negate the negative effects of double taxation on corporate income. Many economic experts agree a change to the carried interest tax law could have negative effects on the economy. One industry that would be seriously harmed is the real estate industry. The partnerships in this industry could experience a tax increase of over 130 percent. This would slow down construction of buildings, homes and more. It would hurt all the other industries that depend on real estate such as building material suppliers and more. This could also cause a decrease in property tax revenues. This result would be a loss of many jobs and serious damage to the economy.

Politics

During both of his presidential campaigns, as well as in budget proposals, President Obama expressed his desire to repeal the carried interest tax law for investment managers. Senator Chuck Schumer objected to repealing this tax law. Senator Schumer’s position was that tax breaks provided by the carried interest tax law help a number of industries around the country such as real estate, oil and gas, and as well as a number of others. He felt it would be very unfair to focus so much on penalizing just investment managers.

Federal Reserve Delays Interest Rate Hike

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What is the Federal Interest Rate?

If you find it challenging to balance your personal or business books, pity the poor Federal Reserve. This entity is the Federal government’s monetary authority that acts as a central bank and provides reserves of money to private banking institutions. Among this agency’s duties to helping to main the health of the country’s economy by controlling the federal interest rate, sometimes also known federal funds rate. This is accomplished by charging interest rates on cash flowing through the economy and available monies at banks. The Federal Reserve’s (or Fed) intentions are to keep the economy stable and promote steady employment by moving interest rates up or down based on what financial markets are doing. Since a healthy economy with large amounts of money flowing through it can lead to inflation, the Fed will raise its lending interest rates at such times. This reduces borrowing and the amount of money in circulation. If the economy is in a slump and needs to be revitalized with infusions of new money, than the Fed will lower its interest rate. While this raising and lowering of the rate may seem arbitrary, the Federal Reserve looks at a number of factors before making a decision. Moving between raising and lowering rates is also not a process that happens quickly. The period between changes to the rate’s status is known as a “economic cycle” and generally lasts three years.

Why The Federal Reserve Was Expected To Raise The Federal Interest Rate

For almost the last seven years, the Fed has engaged in a “zero interest rate” policy. This was done largely to shore up the collapsing real estate industry after the burst of its “bubble”. After reducing rates, the Fed announced that the intention was to keep that policy in effect through the end of 2014 and possibly beyond. The decision to maintain the interest rate at a particular level for such an extended period of time was a highly unusual and historic decision by the Fed. In some quarters, that policy has resulted in huge returns. The stock market for example, has experienced a protracted “bull” or profitable market for years. But members of Congress and financial experts have warned that these abnormally low rates can discourage private citizens from saving. And the surplus of “easy money” in circulation could lead to product price inflation, further cutting into consumer savings. It has been suggested that the Federal Reserve raise the interest rate to at least 0.75 above percentage point this fall to head this off.

Why The Federal Reserve Isn’t Going To Raise Rates-For Now

On September 17 the Fed’s chairperson, Janet Yellen announced that the agency would be continuing their zero interest policy until the end of 2015, with an actual rate increase, if any, announced at that time. Yellen said that the Fed’s rationale for not increasing rate amounts at this time included a still struggling American economy and a suddenly “bearish” stock market. The suddenly volatile Chinese economy and the global repercussions from it were cited as another factor in leaving the reserve rate alone. As to whether or not a late year rate hike will actually happen, experts are choosing not to lay bets, claiming that they are “shocked” that the Fed made this choice. If a rate increase does happen in December of 2015 don’t be shocked if it’s well below the proposed 0.75 percentage point.

Venture Capital Boom Neglects to Support Startups Tackling Poverty

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There is a great deal of venture capital that is coming back into the economy. Luxury applications abound as money flows into the tech scene for businesses that help people find a valet or a home delivery for their laundry. However, one of the biggest critiques of the new money in the industry is that it is going to the top one percent.

The Number One Critique of Modern Venture Capitalism

Venture capital is somehow not finding its way down into the rural and underrepresented areas of the world. Although there is plenty of money flowing into luxury services, there is very little money that is going into keeping staples around four the people who need it. There is a great need for water and sanitation in some areas, but there is no venture capital going into these places at all.

Companies that put poor people first are always dismissed as charities or non-profits. Neither of these descriptions necessarily appeals to the top shelf investor who is looking to showcase profit to his social circle. However, companies who deal in social impact work are now proving to be profitable quantifiably. This may be changing the course of many businesses when it comes to traditional financing options, but the current class of venture capitalists seems not to have caught on quite yet.

The Money in Silicon Valley

Silicon Valley is a worldwide phenomenon. Businesses from poor countries in Africa and Asia routinely petition Silicon Valley for the money that they hold there. These businesses are successful in their areas; however, they do not receive the same support from venture capitalists as businesses of the same success in first world countries. This has left many of these companies in poor countries unable to scale their businesses in order to provide more service for their area.

Peter Scott, CEO and founder of BURN, is an entrepreneur who sells cleanburning stoves to families in Kenya. Although Scott was given funding for his successful idea from the impact investing firm Acumen, these kinds of firms simply do not have the same kind of funding that venture capitalists on Silicon Valley have.

The Payback Silicon Valley is Looking For

Many social impact companies that are successful do not have the numbers that Silicon Valley is looking for. For instance, although BURN is quite successful, it definitely does not have the profitability of a company like Uber. This ensures that the smaller companies will not receive the same kinds of benefits, because venture capitalists are not only looking for a profit: They are looking for bigger profits than their competitors.

The Turnaround

Even with this attitude firmly ensconced in Silicon Valley, there are some people who are breaking through. There are some venture capitalist investments into companies in the United States that are working on water purification, toilets and hygiene, rural agriculture and new stove technology. The amount of money that went into companies who were specifically looking to bring technology to poor and rural areas has gone up over US$100 million from 2010 to 2014, according to the Dow Jones data from the San Jose Mercury news. However, there is still quite a long way to go before these social impact companies will receive anywhere near to the funding that they need to truly expand their efforts.

For venture capitalist investment services, contact John McDuff at 512-457-1177.

Intellectual Property Laws Protect Business Owner Rights to Ideas and Creations

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Business owners must know how to brand. Today, with the proliferation of the Internet, successful entrepreneurs need customers to be familiar with their image. Brands, and other identity markers, differ from actual physical property that a business owns. They are a form of intellectual property, which is a legal concept that most people know exists but never really understand fully.

To help demystify intellectual property law for business owners, and others, here is an explanation of the subject, followed by three examples of specific types.

What are intellectual property laws?

This branch of law deals with the rules that protect rights to property that cannot be visible seen. Intellectual property differs from “real” property. Houses, cars, boats and computers are examples of real property. People can see and touch them. In contrast, intellectual property consists of things that society recognizes as existing, yet are impossible to physically handle.

Brand names, books, computer operating systems, songs, iconic symbols and inventions are all examples of intellectual property. Some, are physical items, yet it is the idea behind them, such as the story of a book, that the law covers.

    • Patents

Inventions are unique in that there is usually one person who is first in conceiving of the idea. Now, this fact does not preclude others from thinking about and creating a similar, if not the same, product. The two people may have no knowledge of the existence of one another. Human brains just have similar capacities to solve problems by inventing products. Nevertheless, one person did create the product first and, under the law, deserves his or her just reward.

To save the rights of the first inventor to the profits of their hard labor, there is the patent, a form of intellectual property. Inventors apply for a patent, issued by the government, to reserve exclusive ownership rights. The holder of a patent can choose to license out the use to others, including corporations for mass distribution of the invention.

Sometimes a company or individual business may want to prevent others from using the symbol that customers associate with them. The law refers to this unique identifier as a trademark, a symbol or name that the government allows one entity to use exclusively in its business affairs. Once a business registers a trademark, no other entity may employ it without expressed permission.

    • Copyrights

Original works of art, literature or music receive protection from illegal use or distribution under copyright law. In some cases, depending on the nation, copyrights expire. These rights keep others from claiming, as their own, the creative works of the entitled party, even if unintentionally.

The Value of Intellectual Property Laws

Without intellectual property laws it would be impossible for businesses to protect their financial interests in ideas, symbols and names. The laws prevent others from benefiting from the hard work of creative types. Society benefits as a whole because those who find solutions to problems that make life better, or more beautiful, feel free to do so. They know that no future business can come along and make use of the idea, without first paying them for permission.

What is a Hedge Fund?

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Hedge funds are privately held investments that use resources pooled together from investors to capture a particular market segment that offers high returns. Investors are therefore required to commit their monies for a minimum period after which they can redeem their investments. These funds are aggressively managed and are only open to select investors with a minimum set net worth.

The original purpose of creating hedge funds was to capture equity securities investments and to utilize leverage and short selling to monitor the movements of the equity market. This purpose has however been overridden to accommodate other investments that can offer higher returns. Aggressive managers observe the market trends and make speculative investments that at times carry a bigger risk to that of the overall market.

Hedge fund strategies

Their approach to the market structure can take any of the following forms:

    • Short selling

Short selling commonly referred to as shorting is a strategy whereby stocks that are not in use are sold and then bought later at a discounted price thereby making real returns. Only a few hedge fund managers can be entrusted with this high-risk venture.

    • Equity market neutral

This is an asset stock-picking with the aim of hedging against volatility in the market using the long-short method. The hedge-manager can buy one stock and, on the other hand, short another stock in the same asset class. Regardless of the performance of the individual markets, the investors will still make some money from the investment.

    • Market neutral arbitrage

This technique exploits the imbalances in the pricing of different securities. For instance, a manager may short sell a company’s stock and still buy the same companies bond.

    • Merger arbitrage

Merger arbitrage focuses on the companies on the verge of an amalgamation. For instance when a corporation Y announces that it is buying company Z at $100 per share, the stock price for company Z will rise by a margin let’s say at $105 by share. The difference between the two stocks is called the spread. A hedge manager can use this chance to make a short term profit from the spread.

    • Convertible arbitrage

It’s a corporate bond that is redeemed for a company stock in the future. The price of this bond can fall when the credit ratings fall or when the interest rates shoot up. Profit is achieved from the difference between the price of the bond and the stock it can be redeemed for.

Hedge funds are like a double bladed sword. When you make the right bet, then you are sure to smile all the way to the bank. If you are not lucky, then your lifetime savings can be swept with the speed of the lightning. In the 1990’s, Manhattan investment fund clearing through Bear Stearns lost close to $400 million of their investors assets. The firm, however, collapsed in the 2000s having made $2.4 million and with losses of up to $160 million which the court ordered they should pay.

Non-Competition Agreements and Your Business

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Non-competition agreements are sometimes used by businesses to protect themselves in the area of their relationship with their employees. They are basically an agreement secured by the employer from the employee that they will not compete with this employer after their employment with that particular firm ends. The more high stakes the type of business or industry in terms of the harm competition from recently discharged employees could do, the more likely such agreements will be commonplace. They are also likely to be obtained when someone sells a business, including their client or customer list. The person who buys that business will need to know that you can’t set up shop down the street and continue selling to that same client list.

The Enforceability of Non-Competition Agreements

There is some variability in state laws as pertains to these types of agreements. In California, for instance, they are illegal except for limited situations having to do with selling a business or dissolving a partnership or LLC. In most states, however, they are generally enforceable as long as they are considered reasonable by the courts in terms of the three criteria of time, distance and type of business. In order to be considered valid, the length of time that such an agreement restricts a former employee from engaging in a similar type of business needs to be seen as reasonable and only what is minimally necessary to protect the company’s vital business interest. Similarly, geographic area restrictions also may come into play. If someone is working for a law firm in Miami, for example, then they quit and move to Jacksonville nearly 350 miles away, a court may find an attempt to enforce a non-compete agreement on that relocated former employee to be an unreasonable restraint of trade because they are now too far to be reasonably competing for the same clients. These agreements also only come into play, of course, if the former employee is going into the same type of business as the former employer.

Protections Afforded By a Non-Compete Agreement

A business spends years and untold dollars of advertising revenue building up a customer or client list. The law sees this as an asset that is worthy of legal protection. This is why one of the most common uses for these types of agreements is to keep an employee from simply leaving after a few months working somewhere and taking the Rolodex of clients or customers with them to open up a competing shop down the street. An employer may also invest a lot of time and money in specialized training for an employee to work for them, and this would simply be lost to no return for the company if they quit and immediately went into business for themselves. In addition to training, company’s will also have certain trade secrets that they don’t want employees learning only to leave and start using them to their benefit.

They are Not a Panacea

Non-Compete agreements are not a magic bullet but rather another tool in any businesses’ arsenal to legally protect themselves and retain valuable employees. A company still has to prove in court that a former employee used some trade secret of theirs in their business or any other legal claim made against them. Non-compete agreements are a vital instrument in helping a business protect its investment in its confidential information, employees and customer lists, and as long as they are carefully worded in terms of reasonableness of time and geographic restrictions, they can be an enforceable and effective tool.

If you or your business need any help with non-compete agreements, contact us online or give us a call at 512-457-1177 today.

Research & Development Tax Credit

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The research and development (R&D) tax credit is one of approximately 50 “tax extenders” periodically employed by the U.S. Congress for temporary periods of time at its discretion. The tax incurs an annual cost in excess of $9 billion, which serves as the fourth-largest corporate tax expenditure in the United States. The tax credit endeavors to stimulate the economy through providing private companies with incentives to allocate capital in technological innovation and investment.

Though the intent of the legislation seeks a positive outcome, some analysts and experts question the efficacy of the measure in the long-run. The Mercatus Center at George Mason University, for instance, published a survey on research development investments and their relationship to tax incentives. Some of the challenges this type of legislation faces in practical application are ambiguities surrounding policy, legal matters and definitions of what constitutes R&D. In fact, the study found that the tax credit often features stealth costs that erode its desired outcomes, and thus argued that the credit should be eradicated with a subsequent cut in corporate taxes across the board.

Analysis of the Study

Below are some key findings related to the study:

  • A) The credit lacks empirical data to prove its efficacy. Research in the field illustrates that that tax incentives aimed at stimulating R&D precipitate insignificant investment in private research. In other words, each dollar stemming from the incentive fail to illuminate augmented innovation and, in fact, may erode the caliber of research produced.
  • B) Under the law, “R&D” lacks a clear definition. This lack of precision impedes the development of the R&D sought. The lack of clarity also raises confusion with other parts of the tax code that corporations and affiliated parties must spend time and capital discriminating.
  • C) The credit creates more costs for companies to manage. Firms spend a great deal of money for lobbying and attorneys to best interpret and execute their efforts within the law. In effect, these costs erode the desired effects of the credit and thus undermine macro economic expansion.
  • D) Tax policies of a temporary nature precipitate uncertainty, which businesses respond to with lack of action. Many organizations, especially large ones, prefer to wait to see what the structural conditions of the economic climate will be before allocating resources and making investments.
  • E) The benefits of the credit favor large businesses, as it is employed predominately by the largest corporations or top 1 percent of American firms.

Recommendations for Policy

Based on the analysis of the policy and its efficacy, the group argues that ideally the R&D tax credit should be eliminated completely, while the corporate tax rate should be subsequently lowered with the savings created from the change in policy. This proposal would benefit the whole economy, because lower corporate tax rates have been shown to encourage research and development.

If the desired outcome described above is not feasible, then the following alterations to the current R&D should be made to improve its efficacy in terms of reducing ancillary costs and producing enhanced economic expansion:

  • A) The credit should be made permanent, thereby providing tax certainty and greater transparency for business leaders to make more impactful investments rather than having to try and predict when the tax incentive will be implemented or repealed.
  • B) From a tax code perspective, credit claims on amended returns should be eliminated. The meaning of research from the Internal Revenue Code section 174 should be the standard for defining of what is considered eligible research and development initiatives. In addition, making the alternative simplified credit (ASC) the only option for firms reduces compliance and administrative costs that erode efficiency.

Source: https://www.mercatus.org/students/research/research-papers/can-research-and-development-tax-credit-be-properly-designed

Sherman Anti Trust Law and Apple

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What is the Sherman Anti Trust Law?

US history books tell that Senator John Sherman, an Ohio Republican, was the main author of the Sherman Anti Trust Act of 1890. Originally, Robber Barons of oil, steel, banking and railroads created “trusts.” These trusts were similar to today’s “cartels” where wealthy principals use hostile buyouts of companies to form “trusts.”

The Sherman Anti Trust Act’s chief aim was to destroy monopolies by outlawing every business contract or combination, or conspiracy in “restraint of trade.” The Sherman Anti Trust Act was supposed to expose the evils of big business and to control big business in the public interest. In 1914, The Federal Trade Commission Act created a five-man Federal Trade Commission whose primary duties were to prevent unfair methods of competition in trade and business that included:

  • Miss branding and adulterating goods
  • False and misleading advertising
  • Spying and bribery to secure trade secrets
  • Closely imitating competitors’ products

Court Decides Apple is in Violation of Sherman Anti Trust Law

The circumstances surrounding court decision that Apple is in violation of Sherman Anti Trust Law are based on the Supreme Court case, the United States of America v. Apple Inc., et al., 12 Civ. 2862 (DLC). The court upheld the violation that Apple and five book publishing companies had conspired to increase the prices on e-books. The lawsuit was filed April 2012. The five co-conspirator publishers with Apple were: Harper Collins Publishers, Penguin Group, Inc. Simon & Schuster, Inc. Hachette Book Group, Inc. and Macmillan Publishers.

According to US Court records, these publishers sold these books from $9.99 to $14.99 as recommended in a meeting with the five publishers and Eddy Cue, Sr. VP of Apple’s Internet Software and Services for which Apple would receive a 30% commission. When Amazon.com discovered this Apple agreement with these publishers, it tried to discourage authors from selling their books directly to online buyers. Amazon later sent another letter to the US Federal Trade Commission regarding the agreements between Apple and the five publishers.

As the case proceeded, the court determined that the Sherman Anti Trust Act had been violated as a result of Apple creating an agreement that created unfair competition due to publishers withholding books from Amazon and fixing the prices to appear equal to that of the prices Amazon was selling their e-books.

The entire premise of the Apple and five publishers’ agreement was based on a mutual adoption of an agency “model.” Amazon hadn’t adopted the agency modeling allowing the publishers to withhold e-books from sale on Amazon. This is where the crux of the violation of the Sherman Anti Trust Act lies. By disallowing Amazon to sell the publishers’ e-books, this created unfair methods of competition in trade and business for related e-book sellers.

The Verdict by the Court

The court uncovered considerable evidence that clearly showed that Apple and five publishers had, as a result of their meeting with Eddy Cue, joined together in “a horizontal price-fixing conspiracy.”

Evidence also showed that “Apple violated Section 1 of the Sherman Act by conspiring with the Publishers to eliminate retail price competition and raise the price of e-books.” The court concluded through evidence that “Apple was a knowing and active member of the conspiracy, proving by the Plaintiff, “a per se violation of the Sherman Act.”