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Kerstetter Letter®
Issue 98-3
Fall 1998
© 1/30/99 by Kerry
M. Kerstetter, MBA~CPA~ATP~ATA
This is the
complete text from the Fall issue of the Kerstetter Letter. Annual (four quarterly issues) subscriptions
to the blue-paper printed version, including all of the hilarious cartoons and
animal pictures, is available by mailing or faxing a check for $19.95 to
Kerstetter Letter, 11802 Deer Road, Harrison, AR 72601-6550 Fax: 1-800-839-3008
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This Fall’s series of public seminars is almost over. Audio tapes are available for those who were unable to attend. The Quicken video tape is selling quite well.
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$TOCK MARKET
As I’ve said on many occasions, I love to see radical gyrations in the stock market. As a financial advisor, it has always been extremely frustrating for me to advise people that such investments are extremely risky in the face of so much contrary advice. The collective memory of almost everyone in this country is getting shorter & shorter all the time, so most investors can’t recall anything but a bull market. I can’t tell you how many times people have told me I’m out of touch with the modern world because I say that stocks can lose money, when almost everyone else in the general & financial press are saying that the historical economic cycle (boom-bust-boom-bust…) has been eliminated forever.
I’ve described several times how the much publicized federal budget surplus is a big scam. The current surplus is only possible by keeping billions of dollars of expenditures off-line and by having the general fund steal from the Social Security “Trust” Fund. [Trust funds in Washington are never to be trusted.] In the past year, the Feds did come closer to actually balancing the budget than in a very long time; but not because of anything they did. Their projections were off by almost $200 billion. They benefited from a robust economy and over-active stock market that bumped up income taxes well beyond anything they had expected. Since the income was up so much last year, the financial geniuses in Washington made the assumptions that such inflows will continue. The projected budget surpluses, that some are pegging at $1.5 trillion over the next 10 years, are based on the ASSumption that the stock market will appreciate at a minimum of 10% per year from now until the end of time; an absolutely idiotic foundation on which to make financial projections.
Money in the capital markets is like a pool of water. It flows into the perceived best investments. With the stock market perceived for the past few years as a no-lose investment, trillions of dollars flowed right into it, at the expense of other investments that were perceived as riskier and lower yielding, such as cash, real estate, & precious metals. It doesn’t take long to change the flow of the capital pool. Now that stock investors have been given a long overdue slap across the face to alert them to the risks of stocks, money is already flowing into other things that make more sense. This will obviously help the values of wiser investments in tangible assets, such as real estate and precious metals. The stock market is very much like a pyramid scheme because it is only able to maintain high values as long as you can convince more money to come in to the market. As soon as new investment funds are spooked, the pyramid collapses.
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You may have noticed a recent rash of lenders willing to loan homeowners up to 125% of their property’s market value, either as a first mortgage or as a second on top of an existing first. This is a very generous development, considering that 80% or 90% used to be the most you were allowed to borrow. I have yet to see anyone explain this new concept and its consequences to the lender and to the borrower.
From the Lenders’
Perspective
The
reason lenders are willing to stretch these limits well beyond any prudent
common sense is good old fashioned greed.
One of the basic fundamentals of investing is the relationship between
risk and return. The riskier the
investment, the higher the potential yield.
Normal 75-80% loan to value (LTV) mortgages are so low that these
lenders decided to stick their necks out by offering much higher LTV at a
substantial premium (i.e. 12-14% vs. 7%).
While the economy is rolling along just fine and everyone has jobs and
real estate is appreciating in value, these lenders should do quite well. However, as soon as the economy hiccups and
people are laid off, we’ll be revisiting the early 1980s. [Those who claim that the Clintons have made
a downward economy impossible are full of crap.] People will walk away from their mortgages, essentially selling
their homes to the lenders for more than they are worth. The lenders will take it in the shorts
trying to unload these properties, and many will fold. Their investors, depositors and government
guarantors will end up eating these costs.
Does anyone else remember the savings & loans in the 1980s?
From
the Borrowers’ Perspective
First the good news. Loan proceeds are not taxable when received. However, there is a limit on the deductibility of mortgage interest to loans up to 100% of the property’s fair market value. I don’t think this is properly disclosed in the normal fine print of TV ads that tells readers that everything you are hearing is a big fat lie. [If you doubt this assessment, check the ads for car leases and psychic hotlines, catering to illiterates.]
If you borrow 125% of your home’s value, interest on the extra 25% is not deductible on Schedule A as home mortgage interest. That doesn’t mean that it’s not deductible at all. Under the concept of interest tracing, you can deduct that portion of the interest if you can trace the loan proceeds into business or investment expenses. For example, if you use the money to buy a bunch of high tech computer equipment for your business, the interest will be deductible on the same schedule where you deduct the cost of the equipment.
If you walk away from your mortgage, you will be considered to have sold the property to the lender for the amount of the unpaid loan balance. Relief of debt is treated exactly the same as a cash sale by IRS. This really shouldn’t be a problem tax-wise with the new rules for excluding up to $250,000 of gain per person per home sold. I guess if you wanted to maximize your yield, it would be preferable to take this route than to try to sell the home on the open market. If you do sell it, you will have to dig into your pocket to pay the lender off, as well as the real estate commission. Is that mean to stick the lender? They knew it was risky when they made the loan.
So, in conclusion, my opinion of who has the most to lose is a bit different than conventional wisdom (as is normally the case). Most people believe as in this comic that the evil loan sharks are preying on innocent victims to load them up with even more debt. While that may be the case, I think the borrowers have the best situation. Because there is some collateral, interest rates are much lower for these loans than with other kinds of unsecured debt, such as credit cards. If the borrower can’t handle the debt, s/he will be able to sign over the property to the lender and will be receiving much more cash for that home than if the house were just sold on the open market, especially with a Realtor commission reducing the proceeds.
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I have written a number of times on the matter of supposed hot stock tips. Magazines and newsletters with “inside” secrets of undervalued stocks have been proven to be hotbeds of conflicts of interest. The publishers are touting those stocks for the purpose of running up the prices for personal enrichment. In today’s information age, the fact is that anything published is old news by the time it reaches you. Any true inefficiencies in the market valuation of a stock have long ago been sucked out by the full time professional arbitrageurs.
Recognizing that the timeliness of hot tips is now measured in minutes, these same kinds of tipsters have moved to the Internet to hype stocks in such places as e-mails, chat rooms and discussion boards, as well as in online newsletters. These give the appearance of being top secret independent evaluations, when they are just as bogus as the stuff that is printed in scam-sheets, such as Tax Wise Money. The Wall Street Journal has run several articles revealing that most of the independent online advisors have been paid big bucks plus shares of stocks for their endorsements. The typical solutions are already being discussed. Many are clamoring for the government to police the online world in order to protect the gullible investors who fall for the bogus tips. While it is very tempting to want the big central government to act as savior for every kind of problem we encounter, such thinking is what has caused its massive growth. The best libertarian solution is to let the markets take care of themselves. The massive instantaneous dissemination of information can work in both directions. After people are ripped off, that word will spread and hopefully people will learn who they can and cannot trust. If the same people invest their money on the same kind of bogus advice and continue to lose, as cruel as this may sound, they deserve to lose. Once bitten, twice shy. A reminder of one definition of insanity: doing the same thing and expecting different results. People who are stupid enough to follow the advice of online tipsters or rely on information passed around the Internet need a slap in the face. I have very little sympathy for greedy idiots.
What never ceases to amaze me is the long parade of people who lose their life savings to scam artists of all kinds and then just take it in stride. The scam artists usually escape any retribution and continue to live lavish lifestyles and rip off other unsuspecting victims. The victims often appear on news magazine shows to attract some sympathy. What amazes me is that nobody snaps to the point of fixing the problem by blowing the scamster away. I am a law abiding, peaceful person; but if I were to lose everything I had to some jerk who thumbs his nose at me, I doubt that I would rely on the government to punish him.
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When we first moved here to the Ozarks more than five years ago, it felt like going back in time, to what it was like in California 20 years earlier. The locals like to brag that Arkansas is 20 years behind California. They say that when the world ends (because everyone knows the end of the world will start in California), Arkansans will have 20 years to get themselves ready. To borrow Yogi Berra’s oft-quoted line, “it’s like déjà vu all over again” here in the Ozarks. Recent developments such as the growing backlash against the influx of illegal Mexican workers are obvious repeats of California history.
Another big parallel is the growing resentment against increased property taxes. Since 20 year anniversaries are in fashion (i.e. Halloween H20), I should mention that this year marks 20 years since California voters passed Howard Jarvis’ ballot initiative to curtail property taxes, the infamous Proposition 13. [A little historical reminder. The name “Proposition 13” became so famous because of that one ballot initiative that a few years later, California changed its policy for numbering them. Instead of starting off each election with a new number one, two, three, etc, they began using consecutive numbering. In other words, they don’t reset the odometer after each election; which is why California is now in the 200s. It is rare that I have anything positive to say about government officials, but this was a smart move.]
Proposition 13 was a reaction to the previous practice of California counties raising the assessed values of real estate based on the increase in the market values of nearby properties. This caused huge increases in taxes for property owners. People who may have paid $10,000 for their home 20 years earlier were forced to pay taxes as if their homes were worth $150,000 if their neighbors had sold their homes for that much. There was also no maximum by which the taxes could be increased each year. Many people were actually forced to sell their homes because their incomes couldn’t support the several thousand dollars a year that they had to pay to the counties for the privilege of owning a home. As often happens when such problems reach a critical mass, a groundswell of opposition formed. Howard Jarvis and his associates were able to obtain enough signatures to place the initiative on the 1978 ballot. I can still remember the cries of doom & gloom from everyone in state and local governments predicting the end of the world if any limitations were placed on government’s ability to steal money from the people. [Another historical reminder: Governor Jerry Brown was among those predicting utter disaster if Prop. 13 were to pass. However, when it passed by a huge majority, he jumped to the front of the parade and claimed it was all his idea. Who does that remind you of in Washington DC?]
The result of Prop. 13, after it was challenged in court by several of the blood-sucking government agencies, was to roll back the property assessments to their 1975 values. Annual increases in the taxes were capped at two percent per year unless the property was sold. Over the next two decades, more ballot initiatives were passed to allow special exemptions from the reassessments, such as when property passes from parents to their kids or when senior citizens sell and move to a new home.
Now that we have 20 years of hindsight, how accurate were the pre-Prop 13 predictions of Armageddon? California obviously survived. There were some inconveniences as the government agencies adjusted to their new funding rules, but the state did not fall off into the Pacific Ocean. After failing to get very far as a presidential candidate, Jerry Brown is now Mayor of the great city of Oakland, where he is pushing for more mayoral powers so that he can work the kind of magic on the east side of the bay that his partner in crime, Mayor Willie Brown, is doing to San Francisco.
Why is this history important? For the same reason I have always mentioned. History repeats itself. Here in Arkansas, it is right on schedule, 20 years later. There is an initiative on the November 1998 ballot, Amendment 4, that will change the state’s constitution by repealing all property taxes and replacing them with an increase in the sales tax. The hullabaloo that has arisen since the initiative was certified makes me feel like I’ve been transported back to 1978 California. Every government official, sensing less money to play with, is sounding the alarm that this will be the end of the world. Several taxpayer-funded agencies have announced the formation of a coalition to mount an all-out attack on this ballot initiative. For those of you who don’t grasp the extreme irony here, let me explain. Government agencies are using tax dollars to fight for more tax dollars and are ignoring their purpose for existing in the first place. School kids are being indoctrinated to call their parents selfish & evil if they even consider voting for this amendment. In case anyone thinks this kind of animus towards taxpayers is just at the Arkansas state level, it’s happening even more at the federal level. Federal agencies routinely use taxpayer dollars to lobby for more tax dollars and to fight any attempts to reduce the size of their budgets or any attempts to privatize any part of their jobs. It’s just another illustration that they don’t exist to solve society’s problems, but to perpetuate their own existence.
Contempt
For Voters
In California, voters are routinely made powerless by courts that toss out election results that go against the expansion of big government. Here in Arkansas, they don’t wait for the election. They file lawsuits to have the initiatives that they don’t like thrown off the ballot for some technical impropriety. In the five years we have lived here, more than two-thirds of the initiatives on the ballots I have seen had been tossed off for various technicalities. To categorize office of the Arkansas Attorney General, which is in charge of certifying ballot initiatives, as Mickey Mouse would be sacrilege to the memory of Walt Disney. [I’m sure it’s just a coincidence that Arkansas Attorney General was Bill Clinton’s first elected office.] What government officials are saying is as plain as day. The voters have no right to voice their opinions on these kinds of issues. Is it any wonder why so much of the country considers Arkansas to be a one party Banana Republic?
The current revolt against property taxes has been simmering for the past few years. Stories have been all around of people whose property taxes have increased by 100%, 200% or 300%. As an outspoken critic of taxes, I have been repeatedly approached to become involved in fighting these higher property taxes. I have to admit that I have turned down those offers because of my perspective. While a 300% increase in one’s property taxes is shocking, the dollars involved are still peanuts compared to what I am used to in California. An increase from $50 per year to $150 is a lot on a percentage basis, but it pales when compared to the several thousand dollars that same property would be taxed in a state like California. Of all the battles I am already involved in waging, I chose to remain on the sidelines of this one.
However, now that others have gone to great lengths to obtain the signatures to put the issue of property tax repeal on the Arkansas ballot, I have a responsibility to endorse it 100%. The Arkansas incarnation of Howard Jarvis is Oscar Stilley, a Fort Smith attorney who has made it his mission in life to fight against high taxes and over-stepping governmental agencies. His web-site for the Arkansas Taxpayer Rights Association, with their side of the property tax repeal issue, is at www.ostilley.com. With most of the media only presenting the gloom & doom perspective on this issue, it helps to be able to refer to the other viewpoint.
Of
all the types of taxing schemes governments have for stealing money from people
– income, sales, property, estate, excise – I have to put property taxes at the
top of the list as the most evil and immoral kind. It strikes at the very foundation of private property
ownership. It taxes people just for
owning property. Other kinds of taxes
allow people more discretion over whether or not to be subject to them. You can avoid income taxes by not earning any
money. You can avoid sales and excise
taxes by not buying things. Estate (or
more commonly referred to as inheritance or death) taxes can’t be avoided
without taking certain planning steps, which is why it is number two on my list
of evil and immoral taxes. I guess you
could say that property taxes could be avoided if you choose to not own
anything. However, even if you lease
assets, you’ll end up paying the property taxes on those items.
So, brace yourselves for the growing media onslaught between
now and the November election. It has
already begun with daily reports of impending disaster. All the
stops have been pulled out around the state to describe in terrifying detail
all of the horrible tragedy that will result from the repeal of property
taxes. Schools will collapse. Police & fire services will wither on
the vine & blow away. It will be
utter chaos. The media are in complete
cahoots with the politicians and are doing their best to fan the fires of
fear. Chicken Little would be the
proper mascot for the pro-tax group.
They are using such inflammatory descriptions as: “it would be like an asteroid hitting the state” in a direct
comparison to the movie Armageddon.
Just as it was in
California 20 years ago, I am more than confident that the Earth will still
revolve around the sun after there are no Arkansas property taxes. If state and local agencies end up receiving
less of our money from the new sales tax than they are accustomed to under
property taxes, I consider that a positive step as well. As much as the mainstream media try to
convince everyone that we are under-taxed in this country, that is absolutely
not the case.
Grasping at straws, some
defenders of property taxes are using the argument that sales taxes are not tax
deductible. Business taxes are
deductible either way. However, for personal
expenditures, the deduction for sales taxes was eliminated in the wonderful
1986 Tax Reform Act. [This brings up
the intriguing issue of double taxation, which I will explain at a later time.] Property taxes have survived repeated
attempts to make them nondeductible.
Only someone who is desperate for a reason to defend property taxes
could conceivably use their deductibility as such a reason. An analysis of that argument isn’t that straight
forward. First, fewer & fewer
people are itemizing their deductions each year because of the elimination
& restrictions on so many personal deductions. If each person were to pay the exact same dollars in new sales
taxes as they were previously paying in property taxes, it would be possible to
see a higher net after tax cost for the sales tax. However, that will probably not be the case. Just as with the analyses I and others have
done on the concept of replacing the income tax with a national sales tax, it
is fairly obvious that, given a “penalty” on purchasing consumables, there
would be an incentive for more people to save and invest more of their
money. The less they spend on
consumables, the less they will pay in sales taxes. Even with a deduction, the government “subsidy” would only be
about 35% (Fed & State) in terms of a tax savings. The other 65% would be out of the payer’s
own pocket.
As I often mention, I
like to look at the long range consequences of actions. One final issue that I have to address is
the long term effect on real estate values if the state’s property taxes are
repealed. I have always been a big
believer in the powers of basic economic fundamentals in terms of supply and
demand. It seems fairly obvious that if
the cost of owning property is reduced, that will encourage more demand for it,
which will increase values. Combining
that with the increased penalty on spending money on consumables, it’s a recipe
for a healthy appreciation in property values.
On the flip side, if property taxes are not curtailed in this state, and
they are allowed to continue to increase at triple digit rates, the complete
opposite will be the result. It will
discourage investment in real estate and cause values to drop. Please keep that in mind when evaluating how
this initiative would affect your personal wealth. Unfortunately, groups that would benefit greatly from the repeal
of property taxes, such as Realtors and senior citizens, are sitting on the
fence, afraid to speak up and incur the wrath of government agencies.
I seriously doubt that
Arkansas’ current Republican Governor, the Reverend Mike Huckabee (a.k.a.
Huckabuck), would appreciate being compared to California’s former Democrat
Governor Moonbeam. I’ll bet that if we
could unearth tapes from 1978, we could do a split-screen with both of them
saying exactly the same thing prior to the election about the impending end of
the planet if any government agency were to receive even one penny less in tax
funds. I don’t know Huckabee that well
to predict if he will follow in Jerry Brown’s footsteps and claim credit for
the repeal of property taxes after it is voted in.
There is a big
difference between California’s Prop 13 and Arkansas’ version that the
opponents don’t mention. In California,
property taxes were reduced drastically, with nothing added to taxes to
offset. The governments were forced to
learn how to live with less money. Here
in Arkansas, the sales tax will be raised by 1 & 7/8 cents to make up the
revenue. In a completely unjustified
reliance on government projections, the critics are saying that this won’t be
anywhere close to the same amount of money.
The truth is that they don’t know how much it will be. No government prediction of future tax
revenues is accurate.
The news media around
Arkansas are completely against this proposal.
They are referring to the initiative as the most idiotic and
irresponsible issue ever to be on an Arkansas ballot and anyone voting for it
is stupid and selfish. Panel shows
discussing it are five against and nobody in favor of it. While they do mention that it is a popular
idea that could win, they are obviously either trying to give the impression of
strong opposition or they simply can’t find any journalists who will publicly
support it. In case the second option
was the case, I have volunteered to be the token supporter that the others
could beat up on. My offers have been
turned down, lending support to the
first argument, that they are trying to manipulate opinion.
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I am constantly being asked about other professional speakers and seminar leaders, especially those who have supposed formulas for striking it rich. Full time professional speakers are fond of bragging about how many days on the road they are giving speeches. While that obviously impresses most people, what it says to me is that they are out of touch with the real life tax world and are relying on info they have read or heard from others. Most of you know that in 1989 & 1990, I spent a number of months traveling around the country teaching tax preparers for Gear Up Tax Seminars. It paid very well and I was offered the opportunity to do that full time with a larger seminar company, as do many other speakers. I declined because I knew that my knowledge of the real life tax world is dependent on my staying involved with it on a daily basis. Any speaker who brags about giving 200 to 300 speeches a year is admitting that s/he hasn’t participated much in real life. I’m not saying it’s not possible to learn as a seminar presenter. I learn a lot from the stories people tell me and the questions they have that make me think of things in a different way or do research.
After the last issue came out, I faxed a copy of the article I wrote on other tax publications to the Kiplinger Tax Letter. The editor wrote back and was quite offended that I characterized their publication as dry with no aggressive tax advice. He said they took pride in their humor and he had no idea what I meant by aggressive tax advice. I sent him the complete issue along with a note that I didn’t expect him to be able to offer the kind of real life aggressive advice that I include in KL for two main reasons. First is the fact that he and his staff are not real life practitioners and so have an ivory tower perspective. Second is the fact that they have to cover their rear ends in regard to practicing law or accounting without a license. As a CPA, I can do that.
Many of the get rich quick seminar leaders make it sound so lucrative and easy for anyone to do. I have worked with some of these people (names are confidential) and with very few exceptions they make most of their money from their seminars and sales of their books and tapes. They rarely even do those things that they preach about.
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Media Distrust
In the recent slew of
revelations about the major media’s falsification of data for their stories,
their bias to tell a left-wing story and slant everything against those of us
who believe in the Constitution are now impossible to hide. I’ll repeat a common refrain I like to
use. Any journalist who claims to have
no personal bias in his/her reporting is either a liar or an imbecile, or most
likely both. Either way, that person is
not to be relied on for the truth. The
core beliefs of every human being, especially those involving religion and
politics, will color the ways in which they report the news. That is not an opinion. That is a straight forward fact of life.
I really don’t think it
was intended as such, but the scandals involving major media outlets and their
intentional distortion of the news have made it so that it’s nearly impossible
to know when they are telling the truth or not. CNN, which used to have a very good reputation, has now been so
tarnished by its criminal handling of the fictitious Tailwind case (the U.S.
military use of Sarin nerve gas against Vietnam war deserters) that nobody
(with any common sense) will believe anything reported by CNN without
corroboration with other more reliable sources. This is definitely a setback for Ted Turner’s plan of using CNN
to mold public opinion in favor of a one world government, his and Hanoi Jane’s
primary agenda. For the past few years,
it has been referred to as the Clinton News Network. With the Tailwind story, it is now called the Comedy News Network
and the Contrived News Network.
Matt Drudge’s June
speech to the National Press Club in the devil’s den in DC was
magnificent. I downloaded the
transcript that day from NPC’s web site & watched it on CSPAN when they
replayed it. Basically, he was
confronted with explicit hostility from many in the audience, as well as the
person who introduced him. One of his
best responses was when a questioner asked how he could survive working for a
media organization that requires 100% accuracy. The question received thunderous applause. The response didn’t because it was too
true. Drudge said he didn’t know of any
such organizations and listed a few examples of big media companies that had
lost lawsuits for libel.
Coincidentally, it wasn’t long after this that the mainstream press
reported the story of Bob Hope's death, a perfect example of their 100%
accuracy.
Drudge had too many
excellent points to include here, but his quote of Queen Hillary's pretty well
summed up how the establishment views the new media outlets popping up on the
Internet. She said that “we may have to rethink this Internet
thing.” This was in obvious
response to the fact that the Monica Lewinsky story was brought to light by the
Drudge Report. The Royal Family's
ability to limit what the public is told by its cozy relationship with the
mainstream press who have done an excellent job covering up their multitude of
crimes, is at risk. That is also the
very reason for the hostile reaction to Matt Drudge’s appearance at the
NPC. The old guard gatekeepers who were
able to decide what we the public should know and what we should think about
it, feel threatened. As the old saying
goes, knowledge is power. If
everyone has that knowledge, they will lose their power superiority.
Several
questioners at the NPC attempted to discredit Matt Drudge by mentioning the
libel suit he is facing from one of the Clinton attack dogs, Sid Blumenthal. That case resulted from some erroneous
information that was given to Drudge.
He issued a formal apology and retraction the very next day, a much more
responsible move than ever shown by the big mainstream press when they screw
up. This lawsuit is being pushed by the
Clinton gang (with a taxpayer funded legal attack team) for one reason; to
stifle any future news people who may consider saying anything negative about
the Clinton organized crime family. Blumenthal,
who has always had a reputation of being a James Carville like slimeball, was
not harmed by Matt Drudge. This is
being used as a mechanism to harass any independent reporting that has not been
vetted through the normal establishment gatekeepers of approved
information. Anyone who knows how the
media function in Communist countries should appreciate the similarities.
My
response to those who deny any slanting of the news is a little more
confrontational now that I am a quasi member of the fourth estate. I state that much of what is reported as
fact in the mainstream press is outright wrong. Now, is it wrong due to incompetence on the part of the media to
get the facts right or due to an intentional effort to mislead the public? This shuts them up. If they deny that the news contains errors,
I list just a few of the dozens of errors in that day’s news. That’s not hard to do. I do my part to bring errors to the
attention of the network or publication that published it. The response tells me whether the error was
intentional or not. If I receive a
Thank You and they correct their data, I accept it as an innocent (incompetent)
mistake. If they ignore me (which
happens most of the time), it is obvious that they intended to deceive and have
no desire to let the facts get in the way of their objective of molding public
opinion.
One
of the arguments against Matt Drudge being considered a bona fide journalist is
his lack of official credentials. This
brings up an interesting question. What
exactly are the official requirements to be a member of the press? We know that one has to graduate from law
school and pass the bar exam to be a lawyer.
One needs a college degree, including so many hours in accounting in
order to sit for the CPA exam and then become certified. Some states, such as California, also
require previous professional experience before issuing CPA certificates. What certification do news reporters and
anchors have? How about a college degree
in journalism? I have no idea how many
members of the press have such degrees; but I guess the percentage would be
rather small. Most news people come
from all sorts of backgrounds. I
actually think this is a good thing because it broadens the perspective. I can still remember a story I read a few
years ago where J-school graduates were asked about their plans. Many said they were going to fix all of the
problems in the world. I don’t have a
degree in journalism, but I did take some college classes in that area. I can still remember one of the basic tenets
being that journalists are supposed to report on what they see, not take part
in the activity. I can only assume that
current J-school curricula has changed from the role of observer to that of
activist.
This
diatribe has a couple of purposes. One
is the obvious comparison between Matt Drudge and myself as being among the
growing number of independent voices who refuse to follow the official
establishment scripts. It’s also meant
to encourage more of you to seek out more alternative outlets for your
news. New ones are popping up almost
daily on the Internet, which as I have mentioned for years, is the most
powerful medium for disseminating information to emerge in my lifetime. Anyone who is interested in the list of
excellent news web sites I check out daily, send me an e-mail. If you rely on the mainstream press for the
bulk of your information, you have only yourselves to blame for the growing
ignorance and deception.
You may be wondering why
I devote so much space to bashing the media in a financial-oriented publication
such as this. It's simply a matter of
knowledge is power. There is no way you
can make wise decisions as to how to invest if you don't know what is going on
in the world around us. Too many things
are inter-related. When the media make
mistakes, lie to you, or hide information from you, you are less able to make
the best decisions for your situation.
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I’ve described on several occasions the two-way communications I have with IRS employees. I spend a lot of time teaching them the proper application of tax laws, such as with 1031 exchanges and the special rules for family employees. They tell me about the internal workings of the agency everyone loves to hate. They often reveal where they will allow deductions without any documentation, such as the dollar per week in the church plate and $500 of non-cash donations.
I was told of a new internal IRS policy when I was at an IRS office for an audit of a 1995 1040 this past July. The auditor had just been to a big training workshop & she told me a lot of the new guidelines that had been established. One that came up during the audit was to do with cell phones and how to allocate between business and personal expense. She said that the new IRS policy (not published anywhere) was to allow the same business percentage as the taxpayer’s vehicle.
While this may sound reasonable to you, it illustrates a couple of things about IRS thinking. First is the fact that most cell phones are of the portable variety and are not built into vehicles. I bought my first cell phone back in 1985 and it was the portable type; so I have never had a phone installed in a vehicle. This is an issue I would definitely fight IRS over if the vehicle business percentage was low. In the case I was working on, the client had 90% business usage of her car & she didn’t feel like fighting over the extra 10% for the phone calls; so I accepted it.
Even more ridiculous than the linking of cell phone usage to vehicles was the effective date of this new policy. The class this auditor had attended was in 1998. The tax return being audited was for 1995. Does the application of a rule established in 1998 to three years earlier strike anyone as unfair retroactive changing of the rules? Welcome to the world of IRS. My advice, as always, is to use this rule in whichever way best suits your needs. If your vehicle usage is high & you think that your personal cell phone usage is low, accept this new allocation method. If your vehicle business usage is low and you use your cell phone a much higher percentage for business, I would definitely fight IRS on this point. I’m confident I would win such an argument for the reasons I mentioned above.
During this same audit, I was expecting the auditor to try to allocate some other expenses between personal and business; namely the costs of computers and online services (AOL, Prodigy). The auditor didn’t even bring that up. She accepted 100% deductions for all computer related expenses. I bring this up because I have noticed on many returns I review that have been prepared by taxpayers themselves or by IRS-leaning preparers, the tendency to self-censor their computer deductions and back out a personal usage percentage. IRS won’t say that is wrong because you would be over-paying your taxes. On returns I have been preparing, I have always claimed 100% business deductions for computers and have never had any IRS challenges.
As I have always believed, in spite of popular belief that everyone is a tax cheater, more people overpay their taxes by not claiming all of the deductions to which they are perfectly entitled. I can still remember a lady at one of my seminars explaining that she allocated part of her office space to personal non-deductible usage because of the personal files she had on her computer’s hard disk. If this sounds like a reasonable idea, please explain this to me. How much physical space does a computer take up with your personal files on its hard disk compared to the space it takes without any personal files? It seems to me that they’re the same either way.
One more thing of interest that came up during the audit. I have explained on several occasions over the past 20+ years that I have been able to obtain IRS approval for extensions until December 15, an eight month extension. This is in spite of the fact that all IRS literature claims that there is no statutory authority for any extension beyond six months (October 15). This requires a very good excuse, such as a death, illness, flood, fire, marriage, divorce or marriage, all things that make tax return preparation difficult. In July, when I was in the IRS auditor’s office, she noticed that I had attached to the taxpayer’s 1995 tax return an approved extension (Form 2688) from IRS allowing until December 15, 1996. The auditor was blown away, claiming that such an extension is impossible, even while looking right at the form itself. This is just another illustration of how little IRS employees know about the real world of tax returns (an issue that bugs me when I hear someone brag about being a former IRS auditor as if that makes them special).
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As you can see from the
contact info on page 1, I have recently set up a new web site and a new e-mail
address. It has the latest on my
upcoming speeches & seminars, as well as my books & tapes that can be purchased.
The price was too good
to pass up. For a $20 set-up fee and $5
per year, MailBank (www.MailBank.com)
allows 5 megabytes of space on their web server. The hitch to this price is that you’re on your own in terms of
designing, uploading & maintaining your website. I found it very easy to do using a couple of very inexpensive
Microsoft programs. Their Publisher
program, which I have been using for several years, now includes a web-site
designer with several preformatted styles that I found easier to work with than
their more highly publicized Front Page program. Web Publishing Wizard was part of the Windows 98 utilities. I have found that the Web Publishing Wizard
occasionally has problems uploading all of the files without crapping out, so I
reviewed several FTP programs to allow direct access to the MailBank web
server. One of the nicest things about
the growth of the web is the ability to download all kinds of programs for free
testing. The FTP program that I found
to be the best was much more powerful in terms of the information it provides,
and was even much less expensive, than the others I tried out. AceFTP is available from Visicom Media at www.visic.com.
I still believe the web
is the most powerful tool around. Since
it really hasn't been around very long, nobody has that much of a head
start. Small one-person companies are
popping up daily, any one of which could be the next Microsoft in a few years.
For those of you who
have been holding off breaking into the world of the Internet because of the
cost of buying a computer, you are in luck.
As you may have noticed, prices of very powerful brand new computers
have been dropping like a rock. They
have fallen so far that they will actually be free in a short time. If you can remember back just about five
years ago (ancient history in technology), the small cellular phones cost over
$1,000 to purchase. Then some of the
service providers got the idea to give the phones away or sell them for a
ridiculously low price (I recall seeing some for a penny) if users would sign
up for a year’s commitment to use the service.
Computer & Internet companies are planning to follow this exact same
game plan. For around $30 or $40 per
month for basic service, they will provide their customers with free
computers. What they are really doing
is building the cost of the computer hardware into the monthly service fee. There are obviously some pros & cons to
going this route instead of just buying your own computer. The result should be a floodgate of new
users, increasing the volume of web-based commerce exponentially.
The one big concern I
have with this explosive growth in the Internet as a medium for commerce &
communication, is that becoming too dependent on it could literally shut the
country down if the system crashes, either accidentally or intentionally. The Federal government set up the Internet,
so if they want to, they could shut it right down. With the Clinton gang upset at uncontrolled news distribution
over the Internet, and Queen Hillary actually saying that there is too much
freedom out there, who’s to say the plug couldn’t be pulled? The far-thinking companies are already
planning for such an event & setting up their very own independent systems
between their locations using fiber optics and satellites. Not many of us can afford to do that, so we
are at the mercy of Queen Hillary until the price of networking drops even
further. The best solution to allow
something of an independence from Big Sister is an informal network like there
is with ham radio operators. They can
literally cover the globe with information.
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Just about everyone has given up on the old government lie that the Social Security number (SSN) would never be used an official identification number. As Queen Hillary works to resurrect her plans to socialize all medical care in this country, her followers have been promoting the idea of how convenient it will be to have a national data base of everyone’s medical identification number, which will most likely be the SSN, so that everyone’s life history is immediately available to anyone.
For decades, as the
minimum age for children to be assigned their SSNs has been dropping, I’ve been
joking about how one day, newborn babies would be tattooed with their SSNs as a
normal procedure at the hospital for every birth. This comic shows that, with Hillary’s plan, this seems to be
coming true.
For those who would like
to at least try to maintain some level of personal privacy, I have two
reminders of how to use new identification numbers. First is the use of a corporation for business and other
transactions. It is assigned its own
Federal Employer Identification Number (FEIN), which just happens to have the
exact same number of digits as the SSN.
What many people still don’t know is that an individual can also obtain
a FEIN and use it in place of their SSN.
Credit repair companies charge $100 or more for this, but it is actually
free from our good friends at IRS. Just
file Form SS-4, available from any IRS office or by phone (1-800-829-3676),
with your IRS service center and they will supply you with your new FEIN. Since it is impossible to put the toothpaste
back in the tube, in terms of how widely available your SSN already is, this
will allow you a clean start. The key
is obviously to be very careful how often you reveal your new FEIN. I have been finding that many people who
request it as a routine part of their business will back down when challenged
as to why they want it. Another
reminder that payments made to corporations are not required to be reported on
1099s (per IRS’s own instructions); so if you are working through a corporate
structure, payers have no legal need for your FEIN, and need this explained to
them.
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I've discussed many times how important it is for both
spouses to know the details of their financial matters because normally one
spouse handles everything while the other spouse remains blissfully
ignorant. As I explained, in my unscientific
observations, it is the financial spouse who normally dies first, leaving the
other one in the dark and at the mercy of con artists.
If the spirit of well
balanced coverage of all sides of this issue, I have decided there is a time
when it does work out in the non-financial spouse's interest to remain
ignorant. If the other spouse is
cheating on his/her taxes in any number of ways, the other spouse can escape
criminal prosecution by claiming to be completely unaware of what s/he was
doing. The cases where this works are
where the innocent spouse can prove that s/he didn't have enough education to
understand complicated tax matters (which includes 99% of the population) and
had no direct or indirect knowledge of what the financial spouse was up
to. The cases that haven't succeeded
were where even the biggest imbecile should have known something wasn’t
Kosher. The classic case is of a
janitor’s wife who lived in a big mansion, drove fancy cars, had fancy jewelry
and furs and claimed she had no idea that her husband had been under-reporting
his income on the couple's joint tax returns.
While I don’t know this to be true, it would be
reasonable to expect life insurance companies to charge non-financial spouses
lower premiums much as they do for other risk-related things, such as smoking
and sky-diving.
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I have been trying to put this issue to rest as a source of concern for the past couple of years; but it refuses to die. One of the most contentious issues that I have been covering in my seminars is the growing hysteria over the big cosmic odometer roll-over on January 1, 2000. Some people are calling this the “Millennium Bug.” However, since the next millennium doesn’t really start until January 1, 2001, I prefer the more accurate designation of Year 2000, or Y2K. As I foretold, the charlatans, fear-mongers & hucksters are out in droves. Now that the world’s number one con man, Bill Clinton, has chimed in, it’s official.
My opinion on this hasn’t changed any, but I am greatly outnumbered. People are asking me why so many people could be saying the opposite. I ask them to think about what the other people are selling. Is it a coincidence that many of these people are simply using a classic scare tactic to sell their products, such as gold and freeze dried foods for when the massive riots begin? It is my belief that most of the people freaking out the most about the Y2K crisis are those who understand the least about computers. People who haven’t actually worked on a computer believe them to be much more powerful than they are and impute more societal disruption than is really possible.
I could very easily join the crowd and start selling products and services to help people weather the Y2K crisis. I just can’t bring myself to stoop this low and am sticking to my burning desire to tell the truth and debunk the mistruths being bandied about in the mainstream media.
I have a lot of faith in
private industry to do what is needed to survive. Although Bill Clinton is just now acknowledging this issue,
private companies have been addressing it for more than five years. Private industry is also able to remain
state of the art in hardware & software by purchasing the best available
& not just the highest seniority, as government agencies do. The recent test by Wall Street trading
houses, where they simulated the end of 1999 & beginning of 2000, with over
90% of their transactions handled properly, was a good example of what can be
accomplished by companies that do things with the best people and equipment.
If there is any area
where major problems may crop up, they will be with government computers
because of the long-running tradition of incompetence in government. A few years ago, IRS flushed over $6 billion
down the toilet in its attempt to upgrade its computers from 1960s technology
to 1980s. Now, IRS’s own optimistic
projection is that its computers will be capable of handling four digit dates
some time around the year 2008. Most
people don’t seem to be too concerned about this, for some reason.
I have heard that the
big CPA firms are shying away from doing any Y2K work because of fears of
lawsuits. I also receive a lot of
lawyer-related info & they are gearing up to sue everyone they can over
Y2K. They’re even holding seminars on
how to best exploit this for profit.
Cyber-ambulance chasing.
While it’s obvious that the private sector hucksters are just exploiting this to make a dishonest buck in the true spirit of free enterprise, I have my hunches about the motives of government fear mongers. I’m not yet signing onto the theory that this will be an excuse for the government to suspend the constitution and put us under martial law. I do see it as just another diversionary tactic to keep us from seeing the real scum going on. The Monica Lewinsky affair was used quite effectively to divert any attention from the treasonous actions undertaken by the Clinton gang.
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The leeches in D.C. were
in a dither over Congressional efforts to kill the Internal Revenue Code by
2002. Head leech, Bill Clinton,
classified such behavior as irresponsible.
Before anyone gets too worked up, let’s take a little closer look at
what Congress was really doing. The
legislation that had Mr. Clinton in such a tizzy (and which failed to pass the
Senate) had the tax code terminated in 2002 only if a suitable replacement is
found. What kind of commitment is
that? They might as well be promising a
million tax free dollars for every person if a formula is devised to turn sea
water into gasoline. A contingency like
that effectively nullifies the entire proposal.
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Politics & Taxes
For those folks who
consider it wrong for me to discuss politics in the context of taxes &
financial planning; that’s as valid as someone selling or investing in real
estate and ignoring location. For those
of you not familiar with the three most important aspects of real estate, they
are: location, location & location.
In case you didn’t know,
this is an election year for most federal offices (one third of Senators and
all representatives). I’m not planning
to endorse anyone except for the only Libertarian in Congress, Ron Paul of
Texas. However, I do want to refresh
some memories of four years ago, when Newt Gingrich led the Republican
Revolution into power in both houses of Congress. Their promise was to save the Constitution. What have they accomplished in the past four
years? Official Washington policy went
from tearing the Constitution into teeny tiny pieces under the JackAss party to
tearing it into slightly larger pieces under the Elephants. There is only one political party that has a
different answer. Rather than arguing
over how much the Constitution should be torn up, the Libertarian Party
considers that document to be sacred and that it should not be touched in any
manner. Why is that important to a
crass financial oriented person such as myself? Because every single tear in the fabric of the constitution is
going to cost us more money out of our pockets and the loss of more of our
freedom.
Those folks who were snookered into voting for the Clintons in 1996 and now regret that have an excellent opportunity to vote against them in effigy. Any elected official who refuses to do their sworn duty and defend the Constitution by impeaching the co-presidents should be voted out.
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Have you noticed how
different the shading is when our leaders discuss money? When Hillary wants the Federal government to
raise all of the children in Federal Day Care, its cost of $15 billion per year
is considered insignificant. When
Clinton attack dogs try to make the case of harassment by Ken Starr, they make
a big deal of the $40 million cost to the taxpayers. They never mention that most of this cost is because the Clinton
gang have been doing everything possible to delay and thwart the
investigation. In a strange coincidence, the Feds have announced that
the Clinton gang’s trip to see their masters in Communist China cost the
taxpayers $45 million.
Numbers are described based on the intended effect the writer or speaker wants to make. One common way they make small numbers sound large is to discuss a multi-year cumulative figure, such as a $10 billion tax cut over the next 25 years. Brought back to an annual figure per person, that is peanuts. To make large numbers sound small, such as Queen Hillary’s proposed $15 billion annual federal child care program, the numbers don’t sound so bad when you boil it down to per second per person.
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Just another sign that
our society is “circling the drain” is the wide-spread embrace of communism by
so many of our leaders in government and the media. I’m only 43 years old, but I can still remember when it was a bad
thing to be called a commie. The 150th
anniversary of the publication of Marx & Engels’ Communist Manifesto is
actually being celebrated around the United States, with designer editions of
the book produced and being sold as a fashion accessory. In the media, communists are portrayed as
kind & considerate, and capitalists are mean & cruel.
For those of you who believe this to be merely an abstract academic exercise in political differences, let me remind you how it affects you. The Clintons, Gores and their economic advisors are all followers of Karl Marx and his game plan for a utopian society. This game plan includes such real world concepts as government ownership or control over all property; distribution of wealth from the haves to the have-nots; central government control over education and all economic activity.
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Family Limited Partnerships (FLP), a popular technique for estate planning purposes, are under open attack from IRS. As with most tax saving strategies, people often stretch things a bit beyond their original intention. I have done my share of that. In this case, the valuation discounts allowed by IRS for interests in family businesses are being stretched way too far. While it was acceptable for IRS to allow 10% to 20% discounts on the asset valuations for family businesses, many people have been extending those discounts up to 90%. The result is that IRS is on the warpath against these valuations. The attack is normally on gift or estate tax returns, where those values are formally claimed. IRS has announced that it will be examining all gift and estate tax returns that have family limited partnerships; so it may be time to scale back on those discounts if you are using FLPs.
This is why, as I have been saying for decades, the new exotic vehicles, such as offshore trusts (also under heavy IRS attack) have high potential for IRS scrutiny. If you want to maintain a lower profile and stay well under the IRS radar, plain Jane vanilla corporations still have a lot of unused potential.
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There are a number of
reasons that will work in getting IRS to drop or reduce penalties. Contrary to popular belief, IRS does care
about the personal plights of taxpayers.
They are very understanding in regard to late filing and payment if any
of the following life-altering things have occurred during the tax year or the
filing time afterwards.
Marriage – Divorce –
Death – Illness – Move – Casualty (fire, flood, theft)
Don’t use these as excuses if they didn’t happen to you. They are also reasons that are accepted by IRS for allowing an additional two month extension of time to file tax returns (i.e. until December 15, 1998 to file 1997 1040s). This is something that most IRS personnel will say is impossible to do, but I have done it hundreds of times.
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ARE YOU UNDERTAXED?
According to our leaders in DC, and our intellectual superiors in the mainstream media, most Americans do not want tax cuts, and in fact consider themselves to be undertaxed. They consider anyone asking for a reduction in taxes to be selfish. This attitude is openly expressed as our leaders debate what to do with the imaginary $1.5 trillion surplus projected by DC accountants.
As with the oft-repeated polls rating the Clintons as the best president in the history of the world, I am having a very hard time making sense of this. My question is the same as it has for the past several years. On what planet do these poll respondents live? I speak to thousands of real life Americans every month. I have been asking everyone in my seminars. I have yet to meet anyone who agrees with the results of these polls. It is becoming more and more obvious that these poll statistics are entirely bogus. The Clinton gang is providing these figures to the media, who are shoving them down our throats as how we should be thinking. In this Alice In Wonderland world in which we find ourselves, polls have evolved from reflections of how real life is to an instruction list of how it is mandated to be by our moral superiors. If this isn’t right out of George Orwell’s 1984…
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There
were two major developments in the treatment of capital gains in the 1998 tax
law that has been signed by the president [meaning that these are real].
Holding
Period
Part of the 1997 tax law that cut the tax rate on capital gains changed the definition of “long term” from the long standing 12 months to 18 months. Investors hated this change and were able to muster enough support in Congress to roll the definition back to 12 months. Making things easier for 1998 tax returns than they were for 1997 (which had three different holding periods to keep track of), this change was made retroactive for any sale as of January 1, 1998. The president and his socialist pals had fought this change as being a windfall to the evil rich. He threatened to veto the law if it contained this change; but he had other things on his mind and went ahead and signed it into law. [This does raise a dilemma as to what we want to be done with the Clintons. There are some benefits to their status as politically impotent laughing stocks.]
Residence Sales
In KL 98-2, I described how IRS had interpreted the new law for people who sell their homes after less than two years of occupancy. IRS was very generous in its interpretation, allowing a pro-ration of the gain limit rather than the actual gain. In the 1998 tax law, Congress formalized this as law. This means that if you do intend to follow a pattern of serial home selling to liquidate a lot of properties tax free, you can very easily determine how long you need to reside in each one before selling if you estimate your capital gain first.
To follow up on the effect of this change in the law for residence sales, you may recall that Bill Clinton proclaimed that the much more generous exclusions would have no effect on home sales and purchases because people under 55 always bought more expensive homes than the ones they sold. It was a classic example of Washington thinking (on which major decisions are made) that believes that people don’t modify their behavior based on tax laws. You may also recall that the initial reaction to the generous gain exclusion by Realtors was that it would be good for the market by encouraging more sales. My prediction back then (a year ago) was not as optimistic. I knew that, especially in areas of relatively low real estate prices, people were overpaying for homes just to comply with the requirement to purchase equal or higher than what they sold. I believed that removing such a requirement would allow people to buy the smaller, less expensive, homes they want and not what they are forced to. Having worked with hundreds of transplants to the Ozarks, I knew that a common goal was to buy a much less expensive home for cash, with no mortgage to worry about; something that was impossible under the old reinvestment rules.
Now that more than a year has passed since the law was changed, what has really happened? During my seminars around the state I have been asking about this. It seems that I was exactly right in my prediction. Transplants from expensive areas, such as California and Chicago, have been buying much less expensive homes here in the Ozarks than before. While this hasn’t necessarily depressed property values, it has stopped the rapid rise that we had in the five or so years before the 1997 tax law.
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IRS REFORM
The new tax law, signed by the President on July 22, supposedly changes the IRS so that we will never again be hearing stories of their abuse of innocent taxpayers. We all believe that because that is what our leaders, as well as the media, are saying. Right. They also said that the stock market could never go down.
Despite the promises and reports, this new law does very little to change how IRS conducts business. In fact, if you think the IRS is disorganized now, just wait until they implement their newly mandated reorganization. The new law requires them to change their organizational structure from one based on geography to one based on types of taxes. While such a structure would make sense in a real world commercial business, IRS does not have a very good track record when it comes to making changes such as this. While I’m sure we all wish IRS well in their shuffle, I can’t help but recall their last big effort to change, their computer modernization program, which cost over $6 billion, with absolutely nothing to show for it. For some reason, the old cliché about rearranging the deck chairs on the Titanic comes to mind.
Burden
of Proof
During
my recent series of seminars, I confirmed that the media did their standard job
of misinforming the public. Almost
everyone believed the media’s analysis of this new tax law that the infamous
burden of proof issue had finally been fixed.
Under long standing law, mass murders have had more rights than do tax
filers. O.J. Simpson killed two people
in cold blood; but he is out playing golf because the burden of proof was on
the government and an incompetent district attorney’s office to prove that he
was guilty. In tax matters, all IRS has
to do is accuse you of making a mistake.
It is then up to you to come up with enough evidence to prove that you
were correct.
According to the coverage of this new tax law, it reverses this policy so that taxpayers will now have the same rights as a mass murderer. Unfortunately, as is too often the case, this is wrong. At the audit level, the burden of proof is still with the taxpayer. At the next level, Appeals, the burden of proof is still with the taxpayer. Only if a case is taken to the next level, Tax Court, does the burden of proof potentially change. However, it’s not automatic. Only if taxpayers can prove that they have enough documentation does the official burden of proof switch sides to IRS. The reason this new law will have very little effect on most people is that very few cases make it al the way to Tax Court. Of the thousands of IRS audits I have been involved in over the past 20+ years, there were only two that we couldn’t settle at the Audit or Appeals level and had to take to Tax Court. While I have filed several hundred Tax Court petitions for clients, those served to notify IRS that we were serious about our claims and they sent the cases back to Appeals, where we settled all except two of them.
Confidentiality
One good long overdue change is that other tax practitioners, such as CPAs and Enrolled Agents, have been given the same degree of protection for their clients as tax lawyers have long held. This means that CPAs and EAs cannot be forced to reveal anything their clients tell them. Attorneys have long fought against this break in their monopoly and have already mobilized their forces to repeal this change.
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