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Kerstetter Letter®
Issue 98-4
Winter 1998-99
© 1/30/99 by Kerry
M. Kerstetter, MBA~CPA~ATP~ATA
This is the
complete text from the latest 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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FEDERAL BUDGET
There doesn’t seem
to be much difference in how the Elephant controlled Congress handles its
spending legislation than it was for the 40+ years before, with the JackAsses
in charge. In typical fashion, they threw together a humongous piece of
legislation covering everything possible. Nobody even read the actual law; so
it was a perfect opportunity for the representatives, their staffs, and their
lobbyists to toss in all kinds of special pet projects and payoffs for their
campaign contributors. Most of the news coverage was on the $520 billion of new
spending in the last budget bill that was passed before adjourning the 105th
session of Congress and all the good things the Feds will spend money on. My
perspective is slightly different. I can’t stop looking at this as over $520
billion that will be stolen from the producers of this country and given to the
leeches.
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PROPERTY TAXES
As expected, the
forces of high taxation prevailed here in Arkansas. The tax-supported leeches
banded together, using tax funds, and were able to have the Amendment 4
initiative that would have repealed property taxes tossed off the ballot well
before the election. They were very relieved because most of the opinion polls
were showing 65%+ approval ratings for the proposal. No petition could stand up
to the scrutiny that each signature on this one was subjected to. While I am a
big believer in following most rules, the entire purpose of the petition
requirement was overlooked. It does cost money to have something on the ballot
and could become very expensive for the taxpayers if everyone were able to
place every hair-brained idea before the voters, without showing that there is
at least some level of other support around the affected area. From the
groundswell of enthusiasm around the state for this initiative, it was very
apparent that there was strong support for that proposal and that it was
perfectly appropriate for it to be on the ballot even if some of the signatures
may have had problems. Of course, the rules were applied selectively and will
be tossed out the window the next time there is a ballot proposal to raise
taxes.
I have been giving
much thought to and done considerable research on the underlying issue of
property taxes themselves. I have come to the conclusion that property taxes
are completely incompatible with the concept on which this nation was founded;
that of private property ownership, as opposed to ownership by the government.
Think of it this way. Can you truly say that you own a piece of property if the
government has the right to take it away from you for not paying its
assessments? Of course not. Paying property taxes gives one the right to use
the property for the next year. It is in effect a type of lease. If you stop
paying the taxes, the government will use its brute force to literally take
that property from you. Does the fact that most states levy these taxes make
that the right thing to do? As they say "two wrongs don’t make a
right." What about 37 wrongs?
Is it fair to
assess taxes on property owned by private citizens? The types of assets
subjected to property taxes vary a little between states. Most jurisdictions
tax the value of real estate. Most also tax the values of motor vehicles. Some
states levy a tax on the values of business equipment and inventory. Contrast
the tax on owners of real property with the tax on the ownership of other
assets, such as cash or capital stock. A person with no assets other than a
million dollars of cash would be subject to no property tax, while a person
with nothing more than a million dollars of real estate would be forced to
scrape together several thousand dollars in order to pay the county its
extortion in order to be able to continue to "own" the property for
the next year. The tax is computed based on the property’s full market value,
even if it’s heavily mortgaged and the owner has very little equity in it. Does
this make any sense? The person who has plenty of cash has no property tax to
worry about. But the person with real estate and no cash is forced to do
whatever is necessary, including the sale of his property, in order to come up
with enough cash to buy some more time.
Please don’t
misunderstand my meaning here. Many, especially fans of big government, would
take this contrast as a justification for making things "equal" by
spreading the misery around by assessing taxes on the values of all assets. It
would be much more in the spirit of the private property foundation of this
country to address this inequity by removing property taxes from all kinds of
assets and allowing everyone the freedom to have clear and unimpaired ownership
of whatever kinds of assets they choose.
The Amendment 4
debate at least put the issue of property taxes on the front burner. The
governor and the legislature have both promised to do something about this
problem in the next session, in early 1999. Of course, this is Arkansas, so a
promise by the governor isn’t exactly that reliable; so the effort is already
underway to put this matter on the ballot for the next general election.
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CIRCLING THE DRAIN
I’m still inundated
with gloom & doom predictions of societal collapse due to the Y2K computer problem.
It is still over-hyped. I don’t dispute that things are heading in the wrong
direction and that our country could very easily collapse; but it won’t be
because some computers read the year 2000 as 1900. There is no better example
of the wrong direction than the cases of the two Bills.
Bill Gates is being
persecuted for being too successful and not paying protection money to the
Clinton Gang. He has done more than anyone to expand the economy and power of
this country.
Billary Clinton has
done more than anyone to destroy respect for the legal system and office of the
Presidency. Only in a world gone bonkers can a President be impeached and see
approval ratings skyrocket. If the Clintons are not punished for the multitude
of crimes which they have committed, our legal system is over. Why should
anyone ever tell the truth in any legal action, when everyone associated with
Billary Clinton can lie through their teeth and escape any repercussions? I
guess you could consider the positive side to this. If perjury is no longer
considered a crime, it might speed up trials by eliminating all that time for
swearing in witnesses. It would also eliminate the need for cross-examination
because whatever a witness says is accepted at face value with no ability to discredit
untruths.
The real problem is
that most people are too trusting that someone in the government or media will
see to it that nothing bad happens to them. Many people, including me, have
long believed that our Constitution would never allow our freedoms to be
destroyed. Nothing could be further from the truth. If you’re expecting someone
else to take care of you, or to even tell you the truth, wake up. Either you
take steps to provide for yourself or forget it.
If you have been
hoping for a tax cut any time in the next few years, that possibility has been
pretty much killed. The results of this past November’s elections have
continued the trend towards the left and its love of bigger government and away
from the Constitution. The Clintons seem to have slithered out of another
potential disaster, with the very able assistance of the mainstream press.
Their stated goals for the next two years are to continue to expand the federal
government into every aspect of everyone’s life and to take as much money from
the producers of this country as such programs require.
As a tax advisor,
this is the best news possible. The higher taxes are and the more encroachment
the government does, the more need there will be for my services by those who
don’t follow the majority opinion that it is pure selfishness to want to hold
onto some of your own money.
However, as one who
still believes that our founding fathers were great men and that the framework
they established for this country was the best ever, it is an extremely sad
time. Maybe you could say that our founding fathers didn’t do a good enough job
in building the foundation for our government. At the time, they were thinking
like auditors. In auditing, we have a desire for what we call internal
controls in a company’s financial structure. This means that checks and
balances are established to prevent fraud and misappropriation of assets. Our
founding fathers did their best to design internal controls into the federal
government by dividing the powers among the three official branches and
allowing each of them to double check the actions of the other branches. Just
as in private industry, this segregation of duties is designed to prevent the
consolidation of power in one dishonest person or the collusion between just a
few corrupt people who control everything. Our founding fathers even
established as the very first item in the Bill of Rights the freedom of the
press in order to ensure a virtual fourth branch of government to watch over
and report on the actions of the other three branches. Their vision was that,
while one or two branches may collude to circumvent the Constitution, the odds
of all three branches doing so were unthinkable. Never in their wildest
imaginations did they envision the possibility that the press would join in
with the three branches of government to literally shred the Constitution and
hide it all from the people. Unfortunately, that is what has happened, as all
four branches of government are completely in synch for the goal of larger
government control over everything.
I wish this weren’t
true, but I’m not optimistic about reversing this trend. The two major
political parties have morphed into one. Fewer people bother to vote. The media
have assumed the duties of propagandists for the ever-expanding leftist
government. I don’t see how the forces of bigger government can be stopped.
Jesse Ventura
The only good thing
to come out of the recent election was Jesse Ventura’s win of the Minnesota
governor’s position. It gave hope to those of us who believe that it isn’t a
waste to vote for a third party candidate. There is a lot of confusion as to
which party Mr. Ventura represents. While he was technically listed on the
ballot as a Reform Party candidate, he has nothing to do with Ross Perot’s ego
party. In fact, Ross Perot denied Ventura’s request for any funds for his
campaign. Jesse Ventura’s platform and stand on almost every issue are right
out of the Libertarian Party’s platform. He would have preferred to run as a
Libertarian; but they had no official place on the Minnesota ballot. That is
the exact same problem we have here in Arkansas, and in many other states. Each
state has its own ballot access laws to prevent any serious challenge to the
Republicrats. However, in some states (i.e. AR & MN), a party is allowed a
slot on the next general election ballot if its candidate receives at least
three percent of the vote in the previous state wide election. In 1996, Ross
Perot did receive more than the three percent in many states, while the LP’s candidate,
Harry Browne, didn’t. Jesse Ventura used the slot that Ross Perot earned on the
Minnesota ballot.
A sign that this is
a step in the right direction is the massive criticism and ridicule from the
pundits in the media and government about a wrestler being in elective office.
In their view, the only people suited for office are the professional
politicians, such as the Clintons and Kennedys, who have never been tainted by
the real world. Keep in mind that this was the exact same criticism leveled at
Ronald Reagan when he ran for governor of California and for president of the
United States. Positive signs are very few and far between, so we have to be
grateful when they come along.
Which leads to what
the individual can do for his/her own situation. Most people are still sitting
around fat dumb & happy (FD&H) in the belief that their leaders in
Washington will take care of them. I have very little sympathy for those
idiots, who deserve the fate that awaits them. Those of us who recognize the
futility of putting our lives in the hands of a gang of immoral and corrupt
individuals in DC will continue to take aggressive steps to protect our
families and assets from them. As I have been describing over the past 20+
years, there are literally dozens of very easy things that can be done by
individuals to reduce the erosion of their wealth from government theft (taxes)
and the resulting loss of power and freedom. My mission in life continues to be
to describe those steps and support those who use them. Those folks who choose
to ignore such advice and continue on their FD&H path will receive no pity
from me. Choices have consequences. It’s no different than with people who
chose to drop out of school or who chose to get involved with drugs. Their
cries about having lousy jobs or needing more welfare fall on deaf ears here. I
realize this seems to justify the media’s portrayal of conservatives as mean
and cold-hearted, but I don’t care. Pleasing a bunch of folks who adore the
Communist Manifesto and despise the Constitution has never been high on my list
of priorities.
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GREATER FOOLS.COM
Washington isn’t
the only place that seems to have taken up residence in the Twilight Zone. Wall
Street has moved there as well. The insanely high appreciation in the prices of
IPOs (initial public offerings) and computer related stocks has almost all
financial advisors baffled. Some analysts claim that the cyberspace book seller
Amazon.Com is worth $400 per share, while others say it’s worth only $50. This
in spite of the fact that the company has yet to earn a dime in profit and is
not expected to for several more years, by their own estimates. This is a
classic case of style over substance. Many people say, and it seems to be
working, that the way to increase a company’s market value by several billion
dollars is to just add Dot-COM (.com) to its name. This is yet another example
of a pyramid scheme, or what most analysts call "the greater fool
theory." Shares of these stocks are only a sound investment if
there is a bigger idiot out there who will pay you as much or more than what
you paid for them. Such a fool will only pay that much based on nothing more
than pure speculation or the expectation of finding an even greater fool than
he is.
When the stock
market dips, the press is full of reports of how many billions were lost by the
super rich guys, such as Bill Gates. What they fail to explain is that most of
what they "lost" was nothing but artificial paper appreciation. With
all of the discussion about Bill Gates’ wealth, little mention is made that it
is almost all on paper, in shares of Microsoft. If he were to try to cash out
by selling off his shares in the company, that fact alone would drive the market
value of the stock down drastically for obvious reasons.
While I have always
been a big supporter of high tech, there is a big potential problem with so
much of the stock market’s overall value being in intangibles. In investing,
the ultimate safety net has always been the liquidated value of the underlying
assets. In a worst case scenario, if a company tanks, its property and
equipment are sold off, the creditors are paid, and anything left is
distributed to the shareholders. Most of the high tech Internet companies have
tons of debt, but no assets to speak of. So much for a safety net. On 12/22/98,
it was announced that the capitalized market value (number of shares times the
market price) of Amazon.com was $17 billion, higher than Sears, Roebuck & Company’s
value of $15.8 billion. There could be no better contrast between an investment
in hard tangible assets (stores and equipment) and pure speculation.
Unlike other financial publications, most of which have conflicts of interest in their "advice," I have made an effort to not recommend any stocks or specific investments. I also have a selfish reason. Hit a home run and everything is fine. Watch the value drop and it’s lawsuit time. My point: with so much invested in imaginary companies, the low tech companies with such unsexy assets as real estate and equipment must be undervalued.
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ELECTRONIC FILING
IRS has publicly
announced its goal of having 70-80% of tax returns filed electronically and is
mounting a huge PR campaign to encourage its use. They are even planning on
disparaging tax preparers who don’t offer electronic filing services in an
effort to incite client pressure on the practitioner community. While I’m a big
user of computers, and I even acknowledge that the IRS system will slightly
speed up refunds, I am still holding firm in my belief that electronic filing
could very well increase chances for being selected for audit. A technique that
I have long used to keep tax returns below the IRS radar has been to attach a
lot of detailed explanatory information with the return. The electronic filing
format doesn’t allow anything but limited expense and income categorization.
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KNOW YOUR BANK CUSTOMERS
In the mindset of
the government, everything that is owned or earned by anyone in this country
automatically belongs to it. If our leaders feel benevolent, they allow us to
keep some of it. Part of maintaining such control is knowing everything that is
going on, especially involving finances. As part of this goal, the government
has "deputized" more and more members of our society to inform on
others. The requirement to file W-2s and 1099s for amounts paid to others is a
long standing informant program.
New ones are in the
works. In its goal of controlling all financial transactions, the use of cash
is being phased out at an increasingly faster pace. Recent rules allow
confiscation of any large sums of cash held by anyone because it is now
official policy to consider anyone holding such large sums to be a dastardly
criminal.
The Internet has
been abuzz with discussion of the latest encroachment by Big Brother. The FDIC
has implemented a requirement for all banks, savings & loans, and credit
unions to develop intimate profiles of all their customers and inspect all of
their financial transactions. If anything out of the ordinary, such as overly
large deposits or withdrawals, happens, the government is to be notified and
the customer is to be investigated as a potential criminal. As with long
standing tax law, the Constitutional presumption of innocence no longer
applies. Individuals will be required to prove their innocence against the
accusations of criminal activity.
This new program is
just getting started, so no real horror stories have surfaced yet. The
financial institutions are mixed in their feelings about this new task of
theirs. Some are horrified at this intrusion into the lives of their customers.
Others, especially the larger institutions, have already been amassing such
detailed information on their customers over the past few years as part of
their marketing efforts. Sharing that data with Big Brother won’t require much
additional effort on their part.
For those of us who
want to maintain some semblance of privacy, waiting for a White Knight to ride
in and save us is pure folly. As always, we need to take our own steps to
protect our privacy. Rather than simply refuse to deal with banks, which could
cramp our style, I see more potential in following the lead of many
celebrities, who hide behind trusts and corporations, sometimes many layers, as
I have discussed on several occasions.
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EARNED INCOME CREDIT
I have explained
before how it is possible to understate your business deductions in order to
qualify for the Federal government’s generous earned income tax credit (EITC).
This credit is most lucrative on a tax return for a married couple with two or
more kids; often well over $3,000. As one of the few refundable tax credits,
this is one of the biggest tax breaks around because it doesn’t just offset tax
liabilities. Millions of people actually receive refunds of money that they
never paid in. This is the exception to the normal rule that tax refunds are
just a return of money that you overpaid in.
One of the
limitations on qualifying for the EITC, starting in 1996, was investment
income. Tax return filers (I am intentionally not using the term
"taxpayers" because most of these people don’t pay any income tax)
who have investment income of more than a certain amount ($2,200 for 1996 &
$2,250 for 1997) on their 1040s are classified as "evil rich" and not
entitled to any EITC. While I don’t think anyone earning $2,200 a year in
investment income should be considered rich, that logic has never stopped
Congress from sticking it to what they consider easy targets.
The definition of
investment income is what prompted this piece. For the past several years, it
has included interest and dividends received (including the tax free kinds),
net income from nonbusiness rents and royalties, passive income (usually from
K-1s), as well as capital gains from the sales of assets. In an unusual flash
of generosity with the taxpayers’ money (let’s not forget that the money does
come from somewhere), IRS has recently (12/1/98) announced that it has decided
to remove gains from the sales of business assets (usually reported on Form
4797) from the definition of investment income. Farmers and small business
owners who sold animals, property, vehicles or equipment at a gain after
adjusting for depreciation have had that count against them when determining
whether or not they qualify for the EITC.
In another
uncharacteristic spin, in its announcement of this new change, IRS said that it
was retroactive to 1996. It encouraged anyone who was disqualified from
receiving an EITC on either their 1996 or 1997 tax return because of gain from
the sale of a business asset to file an amended return. I plan to go back over
the 1996 & 1997 tax returns I prepared to see if this applies to any of
them. If your 1996 or 1997 return had gains from the sales of business assets
that put your total investment income over the threshold, you may want to
contact your preparer about filing an amended return rather than hope that s/he
finds it for you.
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IRS AUDIT SERVICES
Among the biggest
fears people in this country have is being audited by the IRS. Some of these
fears are genuine for several reasons, including IRS’s own decades long public
relations campaign to fear them. Well publicized cases of celebrities caught
cheating go a long way toward putting the fear of God into the average citizen.
Likewise, Congress, the President and the courts have traditionally allowed IRS
to do whatever it takes to steal money from the public. When it comes to money
for the Federal government, no Constitutional protection is more important.
Prepaid Audit
Protection
You may have heard
or seen ads for such services as National Audit Defense Network
(1-800-AWAY-IRS), (www.awayIRS.com) that
sell audit insurance for several hundred dollars. It isn’t insurance that you
won’t be selected for audit. The only way to buy that kind of insurance is to
bribe the administration in the form of campaign or legal defense fund
contributions. What companies such as NADN offer is essentially a prepaid
defense plan. If you are selected for an audit, one of their staff will
represent you. At first blush, this seems like a bargain. Having handled
several hundred IRS audits over the years, I know that the average cost for my
firm’s time to prove a client’s innocence has been several thousand dollars,
many times the cost of an NADN membership. How can they do that? It’s very
simple and is no different than with any group membership, such as AAA, life
insurance or even fire insurance. It’s a numbers or odds game. It’s a method of
spreading the cost among several people. If enough members pay into the pool,
the cost of paying off for the few members who actually suffer a loss will
still leave a healthy profit for the organizers. With IRS audits, it is well
publicized by IRS itself that they only select one percent of individual tax
returns for an examination. That means that the other 99% of members who are
not selected will be in effect subsidizing the defense costs for the unlucky
one percent. Let’s attach some dollar figures. If 100 members each pay in $500
for a year’s prepaid audit defense, that is $50,000 in dues/fees/ premiums;
whatever you want to call them. If one member is selected and it costs the plan
$5,000 to pay for someone to handle the IRS interface, that leaves a pretty
hefty profit for the plan organizers. The $5,000 figure for defense is even on
the high side, as I’ll explain next.
If that were all
that you need to consider, I’d probably be inclined to recommend joining one of
these plans. However, there is an underlying assumption as to what the payoff
consists of. This is where I have my biggest concern. With other kinds of
insurance (medical, auto, fire, life), the payoff for the premiums is more
straight forward, payment to compensate for your loss. However, even then, insurance
companies have all kinds of legalese for exceptions as to why your particular
loss isn’t covered by the plan. It’s like Bill Clinton’s definition of what is
and isn’t sexual contact. The other concern with insurance is whether or not
the company will even be capable of paying for your loss. It is fairly well
known that when the BIG earthquake hits California and knocks it into the
ocean, not even the largest insurance companies will be able to financially
cover the losses they will be covering.
I’m not trying to
pull a Clinton here and split hairs over definitions, but it is crucial to
understand just exactly what is involved with an audit defense. It would be one
thing if there were such a thing as a generic one size fits all
defense. Nothing could be further from the truth. Over the past 20+ years, I
have seen how others, such as H&R Blockheads, defend their clients. Back in
Oakland, California, where I handled hundreds of IRS audits, the Office
Auditors were in huge rooms with five-foot high dividers. I could plainly hear
what was happening on the other side. I heard countless cases where the
representatives just allowed the auditors to run the show and explain the
rules, with no arguing. Since moving here to the Ozarks almost six years ago, I
am constantly seeing the results of similarly poor representation by CPAs,
Enrolled Agents, and other tax practitioners who should know better than to
accept decisions and viewpoints from auditors.
Let’s get this
straight. It is an adversarial relationship between IRS and you. They want your
money and you want to keep it. At least half the stuff coming out of the mouths
of IRS auditors is pure garbage. However, most people make the very expensive
ASSumption that IRS employees are the definitive experts on all tax matters,
and thus do not question anything they are told. Your representative has to be
willing to fight on your behalf, including challenging IRS mis-statements and
interpreting the infamous gray area (at least 80% of the tax code) in your
favor. It is no different than hiring an attorney to defend you against a bogus
murder charge. Do you want someone who will use every trick in the books to
secure your freedom or a free overloaded and underpaid public defender who lets
the police and district attorney run the whole thing? "So, Officer
Riley, you have a hunch that my client killed that woman? That sounds good
enough for me. Take him away and lock him up."
Why I have serious
concerns in this area about such companies as NADN is because of their ads. The
number one point they stress in their ads is that their representatives are
former IRS employees. I have written several pieces on why this claim to fame
is wrongly perceived; so I’ll just summarize here. It has been my experience in
the past 20+ years that even when a former IRS auditor or other employee goes
into the private sector, their loyalty remains with IRS. They consistently
interpret the gray area in favor of the IRS. They accuse their own clients of
being tax cheats, the classic mindset of IRS employees (that everyone is a tax
cheater). It is the most insidious kind of brainwashing this side of a doomsday
cult. Since my earlier lengthy articles, I have encountered several more
examples of former IRS employees poorly representing clients; so my opinion on
this matter hasn’t changed.
This is why I said
the $5,000 representation costs are on the high side. Cases that I have handled
that cost that much were because I fought the IRS and mounted a vigorous
defense for my clients. If I had approached it in the style of H&R
Blockheads or former IRS employees, the cost would have been under $1,000
because I would have accepted everything the auditor said and did without
question. I think it’s a travesty that honest citizens are forced to hire
people like me, and pay us thousands of dollars to defend themselves against
bogus charges and tactics that would be completely illegal in any area except
for taxation. However, that is the world in which we live.
To summarize,
before enrolling in one of those prepaid audit defense plans, I would get some
references of people who actually used their services in a real life messy
audit situation. This may be difficult because of confidentiality issues. You
might not be able to obtain any actual client names, and you will definitely
not be given any for clients who were reamed by IRS while the audit defense
reps just stood by and watched. If you do obtain some names, ask the clients to
summarize the issues involved in the audit, and whether the rep fought
aggressively on the clients’ behalf. I am not advising for or against the use
of a prepaid audit insurance company. I just wanted to inform you as to how
they function.
CPAs &
EAs
I recently had a
client express displeasure that I don’t provide free audit representation for
tax returns that I prepare. He implied that this meant that I don’t stand
behind the returns I prepare. The following is how I explained my position in
this matter, which should explain how things are with your tax preparer as
well.
I do stand behind
everything I do and will defend any position I take. I always have legal
liability with IRS and with clients for malpractice if I do things wrong. If
you know of a tax preparer who does offer free audit representation, I can tell
you for a fact that that is very unusual. H&R Block doesn’t count because
they simply bend over and let IRS run the show. I review the work of dozens of
other preparers every month and I can’t recall seeing any who don’t charge
extra for audit work. In fact, I have learned that many Arkansas CPAs and tax
preparers are so afraid of IRS that they specifically refuse to offer any
representation services, even for high fees.
I do recall a
practice management seminar 15+ years ago, where it was suggested to include
audit representation in preparation fees. I know of only one person, an EA who
was in the same office building in Fremont, CA as I was, who had actually
implemented that policy. What he did was charge all of his clients an extra 15%
that essentially became his reserve for audit work. With an audit rate of one
percent, that means that 99% of the clients are in effect subsidizing the one
percent who are selected. I understand that is how insurance works, but I have
never believed that to be fair to everyone.
Offering free audit
representation is a little too open-ended to let me feel comfortable. First is
the unpredictability of selection. I do everything I can to maintain a low
audit profile and I have had a very good track record of submitting returns
that are not selected (in the past five years, only three out of about 600
returns prepared); but I would never guarantee a return wouldn’t be selected
for some extremely obscure reason. The other problem is that if all audits were
the same, there may be a way to work that into my fee structure. I have worked
on hundreds of IRS audits over the years (most for self-prepared returns). Some
take a half hour with the auditor. Others drag for several years. The people at
IRS are unpredictable and very inconsistent in what they will and won’t accept.
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PROPERTY OWNERSHIP
I have talked a lot
about using corporations and trusts for privacy and tax breaks. More and more
people, especially rich celebrities are buying their homes through corporations
and trusts that don’t have their names on them. A little digging into the
corporate ownership structure can reveal the true ownership; but it does help
maintain some sense of privacy.
Likewise, hiding
investments behind a generic corporate or trust name can help shield from
copycat investors. There are a lot of people who do nothing but play
"follow the leader" in their investment decisions. They buy and sell
the same stocks that savvy investors, such as Warren Buffet and Bill Gates, are
buying and selling. In fact, there are even unscrupulous folks who float rumors
of an investment by Buffet or Gates in order to drive up the prices of stocks.
They then unload at the peak, just before it is revealed that Gates and Buffet
have no such involvement. It’s a good way to screw the copycat investors.
Another benefit of
anonymity was learned decades ago by the Walt Disney Company. Any time property
owners sniff a possibility of Disney interest in a piece of property, asking
prices skyrocket. That is why they do as much of their property acquisition
incognito as possible.
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SONG PARODIES
For many people,
the best (or only good) thing about the Rush Limbaugh show is the hilarious song
parodies that he plays making fun of the Clintons and their Socialist gang in
Washington. For quite a while, I tried to capture them by being lucky enough to
turn on the tape recorder at the right time. Luckily that isn’t necessary any
more because the people who actually produce those songs sell them on cassettes
and CDs. Besides the ones that have become famous on Rush’s show, there are
several other hilarious ones. I have also discovered some other sources of
parodies that are just as funny and well made as the ones played on the radio.
I encourage you to call, write or visit these companies on the web to check
their products out before they are banned.
Songs by
Robert Lund & The Interns
Gullible Press –
181 South Countryside Lane, Orem, UT 84058
1-801-225-0183 www.aVillageIdiot.com
Songs by Paul
Shanklin -
Narodniki Records –
P.O. Box 1359, Cordova, TN 38088
1-800-955-9188 www.PaulShanklin.com
Songs by Paul
Silhan
Noteworthy
Productions – P.O. Box 455, Ridge, NY 11961
1-800-PARODIES www.clark.net/silhan
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SOCIAL SECURITY REFORM
The issue of this
country’s Social Security system has been one of my biggest concerns for well
over 20 years because of the huge amount of money involved. It is the largest
tax paid by most working people and is the largest portion of income for
retired folks. I have already described ad nauseam why the entire program is so
fundamentally flawed as to be irreparable. Please don’t fall for the current
line that our leaders in Washington are going to salvage it. Nothing could be
further from the truth; but for the past six years, Billary has received credit
for solving problems just by claiming they want to.
They are planning
to do just what I have been warning about for decades to further squeeze people
on both ends of the program.
As I’ve said far too many time, if you trust Billary Clinton to take
care of you in your retirement years, just go on as you are and pay them as
much of your income as possible. If you trust yourself more than the Clintons,
there are many techniques available to reduce or eliminate your payments into
the Social Security pyramid scheme and to maximize your benefits received from
it. A plain vanilla C corporation is the most effective and least expensive
mechanism to accomplish this.
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JUST SAY NO
As I mentioned last time, more and more companies and people are
routinely asking for Social Security numbers (SSN) from those they do business
with. Most of us sheepishly comply, assuming there must be a legal reason for
everyone to have our identification number. The truth is that, for most cases,
there are no legal requirements to supply a number. People do it as overkill in
documenting their business records.
So, what’s the harm in giving out your ID number? The fact is that if
someone were to obtain your number, it opens a lot of doors into your finances
that are literally impossible to shut. Identity theft is a growing crime that
is rarely prosecuted. People can actually use your number to obtain credit
cards and other debt that you will be saddled with forever. It’s also very easy
to wreak havoc on someone by using their SSN to submit phony tax forms to IRS.
So, how do you handle requests for your SSN? For the past several
months, I have been leaving that section blank on forms and refusing to give it
to verbal requests. For the few who refuse to do business without a number, I
often give a fake number. If I think they will be actually checking the number,
I use one of our corporations’ numbers. It’s not like I’m testifying under
threat of perjury. So far, no problems.
With the ever-expanding proliferation of information over the Internet,
once the genie’s out of the bottle, it’s pretty much public information for
anyone to use. If you want to protect your privacy, you’d better not wait for
the government to install the necessary protections. It’s up to you.
IRS is starting to help in protecting the privacy of SSNs. You may have
noticed that a few years ago they stopped showing the numbers on the outside of
your tax forms booklets after enough people complained about having such
personal information in public view. For decades, those of us who
professionally prepare tax returns have been required to include our personal
SSNs on every return we prepare. If we omit it, we are subject to some hefty
fines and potential loss of our right to practice before IRS. IRS has just
announced that we will be able to obtain a new special tax preparer ID number
that we will be able to use in place of our SSN starting some time in 2000.
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Y2K
It looks like this is going to be a recurring topic of discussion for
at least the next year. Not a day goes by without a question on this from a
client or associate. I don’t want to waste valuable space repeating my previous
comments; so I will just add to them. The hype continues to grow on this issue.
Again, I am not too worried about the possibility of the earth ceasing to
rotate on January 1, 2000. What many fear-mongers are using to stir up hysteria
is the great number of computer chips embedded into so many things in our
society. Their claim is that those chips will lock up on 1/1/00 and shut
everything down. It is absolutely true that more and more things have little
computer chips in their guts. The list includes almost everything that is
electrical. My question to those fear mongers is this. Given that your coffee
maker is controlled by a computer chip, do you think that chip cares what the
date is? Where, on most things with embedded chips, do you even enter the date?
The truth is that your coffee maker and refrigerator couldn’t care one iota
less whether it’s 1998 or 2098. The functions that are controlled by those
chips have nothing to do with the date.
Where will you be on September 10, 1999? According to COBOL programmers
in the know, that’s a date to fear even more than January 1, 2000. It seems it
was a common custom for mainframe programmers to make the upper date limit for
a field 9-9-99 or use all 9s as place holders. That means come the dreaded 10th
of September, a lot of mainframe applications just won’t compute.
There are a couple of clichés that fit here. FEAR = False
Expectations Appearing Real. Perception = Reality. I
expect there to be some disruption in our society; not from the inability of
computers to distinguish between 1900 and 2000; but from the actions taken by
the people who panic because they believe it will happen. In their minds, the
looming disaster is real, and they are taking steps to survive it. Their
hoarding of freeze dried food has already hurt supplies and driven prices up
and caused much longer waiting times than normal. There are bound to be similar
shortages and price hikes in other kinds of survival related items, such as
generators and water purifiers. I do need to mention that I am in no way advising
against survival preparedness. I have always believed that the more self
sufficient one is, the better things will be. I just don’t see the Y2K problem
as causing the end of the world. A big earthquake or meteor is a more likely
cause.
While it hasn’t had a big market effect yet, many people will be
liquidating computer-sensitive investments, such as stocks and bank accounts,
and converting them to real hard assets, such as gold and silver. I in no way
intend this to be any kind of investment advice; but merely a comment on the
effects of mob psychology.
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WEB SITE
I’m working on upgrading my web site. I have purchased some easier
domain names that will be revealed soon. I am also working on setting up on a
faster and larger host server. One of the reasons I haven’t been updating my
site as often as it needs is that the program I have been using requires the
full site to be uploaded after each change, a very time consuming process. I
have been learning HTML and web site design and soon should be able to modify a
page at a time, so that I can make more frequent updates of breaking news. An
archive of past issues of these newsletters is also part of my game plan.
Cyber-Squatters
I’m always fond of hearing of new and creative ways that the average
person can make some legal money. The current domain name registration system
has some loopholes that have been exploited, for very little cost, for some
very attractive profits. For those of you who haven’t registered an Internet
domain, a short summary. For $70, anyone can own the rights to any unclaimed
domain name for two years by signing up with Network Solutions, Inc. As I
mentioned earlier, the most valuable names end in dot-com (.com), so those are
usually taken first. The other endings (edu, net, org) are also available
without having to prove that you are an educational institution, network or
nonprofit organization, the intended users of these designations. The
registration process also doesn’t require any proof of any legal right to use
any trademark names, causing some big companies to be extremely upset.
Cyber-squatters buy names of sites that they think will be needed by a large
company and then hold them hostage for a handsome payoff. Earlier in 1998,
Compaq paid someone $3 million for the rights to www.AltaVista.com. A smart person bought
some variations on the name of Exxon-Mobil as soon as the merger was announced
and expects to receive over a million dollars for it. This window of
opportunity won’t last much longer. Big companies are starting to use trademark
law to sue cyber-squatters to force them to release the names.
I am in no way endorsing this as any kind of get rich quick scheme.
However, hearing about these may get the creative juices flowing and stimulate
other ideas.
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BOGUS IRS
PR
In what is a blatant attempt to reinforce the public’s fear of the IRS
and make sure everyone knows that it is in control of everyone’s money, there
have been some recent news stories that have received a lot of attention. Of
course, since the IRS started the stories, the mainstream press accepted the
facts as gospel. Both of the following are actually bogus in regard to the
actual law as it applies to real life people, but are good illustrations of the
wide divergence of opinions on supposedly straight forward matters. These
examples have to do with a fast growing portion of taxes in this country, gift
& estate taxes. While you may never encounter these exact same
circumstances, odds are good that similar ones will face you. The following
advice could save you millions in taxes. Besides illustrating the range of
interpretation of tax law, these also reinforce the importance of working with
a tax advisor who understands his/her duty to be a strong advocate for the
client and to not act as a deputy of the IRS.
First, a little refresher on gift & estate taxes. The transfer of
assets to other persons, either after death or while alive, is subject to a
heavy tax, ranging from 37% to 60% of the assets’ current market values. The
reason for this tax is consistent with the underlying premise that all wealth
in this country belongs to the central government and that it is in the best
common interest to have a redistribution of wealth from those who have it to
those who don’t. Obviously most Americans believe in this principle because
their elected representatives continue to support it. Anyone who doesn’t believe
that everything belongs to the government and wants to preserve his wealth for
his own family is tarred & feathered by the media as being mean and selfish
(unless they happen to be members of the American Royal Family, the Kennedys,
who use trusts to preserve the wealth Joseph Kennedy amassed through
bootlegging and insider stock trading).
Mark McGwire’s Home Run Ball
IRS did a good job of capitalizing on the media hysteria surrounding
the 1998 baseball season and the chase to break Roger Maris’ single season home
run record. IRS exploited the widespread speculation on the market value of the
record breaking ball, and the debate over whether the person lucky enough to
find the ball should keep it or give it to the hitter (McGwire or Sosa). IRS
issued an announcement that whoever gave that ball back would be taxed on a
gift of a million dollars, the most frequent hypothetical number being bandied
about. The press picked up this story and it made headlines for several days,
even prompting the geniuses in Congress to propose a special law for a tax
exemption on the ball.
If I were working with a client who found himself in that situation, I
would tell IRS to stick that where the sun doesn’t shine and I would win on a
number of logical stands. First is the determination of the value. All the
discussion of the million dollars was nothing more than mere speculation. It
would take an actual sale of that particular ball to formally establish its
value. Even more crucial than that is the issue of ownership. If someone picks
up a baseball and gives it to the hitter, did he ever actually own that ball,
to establish legal and taxable liability for it? I think not. If the ball had
clobbered someone in the head, would the groundskeeper who picked it up have
been legally liable for the resulting medical costs? No way. Likewise, he never
truly owned that ball for any tax obligation to accrue to him.
Nicole Simpson’s Estate
IRS has announced that it wants the estate of Nicole Brown Simpson to
pay $6.5 million in taxes, a claim based on the $12 million civil judgment
against OJ Simpson from the more intelligent of his two juries.
When someone passes away, the executor or administrator of the estate
is required to take an inventory of everything owned by the decedent and
establish its fair market value at the date of death. If the cumulative value,
after deducting liabilities and charitable bequests, is large enough, IRS will
demand anywhere from 37% to 60%. While the values of liquid assets, such as
cash and publicly traded stocks, are easily determined, many assets are not so
easy to appraise. IRS has an entire department to deal with the appraisal of
artwork. They lowball the values when people claim charitable donations and
they overvalue the pieces when people pass away.
What about a promissory note that a person owned before passing away?
Should the full value of the note be included in determining the taxable
estate? I have actually had some recent experience with this very issue so I
know that it is quite common. While not everyone has a multi-million dollar
lawsuit judgment, many people do have large structured payment notes. The most
common are carryback notes from the sales of properties and businesses. Some
lucky folks have lottery and sweepstakes winnings that are paid out over 20 or
30 years.
In dealing with the Nicole Simpson estate issue, I would use the same
reasoning I do for others. Basically, the value hinges on the collectability of
the note and what the actual current cash value is for it. There is a very
active secondary market for purchasing structured payment plans. They advertise
everywhere to purchase such things as seller carryback notes, lottery winnings,
insurance settlements, and lawsuit judgments. Many of these investors have even
expanded into viaticals, where they purchase life insurance payouts from dying
people; but that’s a topic for a future article. If you have ever inquired as
to how much you could sell a note for, you will discover that these investors
normally offer about 40-60% of the face value. Some of this is normal
discounting for the time value of money. The other part is just a way to earn a
higher rate of return on the investment. However, any smart investor is going
to do a little research on the note before determining its value. Most important
to that investor is how likely the note will be paid off according to its
schedule. The collateral is also important. If it is a $100,000 note that is
secured by a piece of prime real estate, the odds are good that the investor
will ultimately be paid off. However, what about OJ Simpson? Do you think any
investor with half a brain actually expects anything to be paid on that $12
million judgment? OJ has been doing what other deadbeats do; hiding his assets
with family members and friends.
I have had cases where IRS has tried to value carryback notes in
decedents’ estates at their full face value. My alternative was to obtain
quotes on the current cash value of the notes from a number of secondary market
investors. I’m sure the Brown Estate’s advisors will be doing the same thing.
In fact, this could work out to the estate’s benefit. If the IRS appraisers are
able to do their job and actually find someone stupid enough to make a
multi-million dollar offer for the judgment, the estate should take them up on
it and sell it. If they back down, that will prove that is was a bogus offer
that was probably made because IRS paid them to.
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NEW MILEAGE
ALLOWANCE
IRS has just announced the standard mileage rates for 1999. For the
first time that I can recall, it is lower than it was in the previous year. In
fact, the rate has been reduced to 31 cents per business mile (CPBM), the same
rate it was for 1996. It was 31.5 CPBM for 1997 and 32.5 CPBM for 1998. I
haven’t seen the official explanation for this, but I can assume that the lower
fuel prices probably had a lot to do with this reduction. While interest rates
on car loans are the lowest I have ever seen (some at 0.9%), that has no effect
on the IRS rate because the allowance only covers depreciation and operating
costs (fuel, repairs, insurance). Interest on vehicle loans is an additional
deduction for self employed individuals and corporations. For W-2 employees,
there is no deduction for vehicle interest, even if it’s used 100% for
business.
Consistent with past practice, IRS allows only 14 cents for charitable
miles and 10 cents per mile for personal medical and moving because the brains
at IRS have determined that such usage incurs less wear & tear on vehicles
than does business use. Whenever possible, it’s best tax-wise to claim a trip
as business related instead of for charity, medical or personal moving.
For companies that set their employees’ expenses reimbursement in line
with the official IRS rate, the rate will have to be dropped to 31¢ or else the
excess will have to be treated as taxable wages, subject to all of the related
payroll taxes and withholdings.
Shortly after the new lower rate was announced by IRS, they were
forced, by widespread public criticism, to delay the effective date until April
Fool’s Day. Thinking ahead, this will
make preparing your 1999 tax returns that much more interesting, because you will
have to do separate calculations for the miles driven from 1/1/99 to
3/31/99 and from 4/1/99 to
12/31/99.
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HOME
OFFICES
Starting in 1999, the eligibility for a home office deduction is
scheduled to be liberalized for more people. Up until now, the deduction was
contingent on where the income was actually earned. If it was earned away from
the office, such as at an outside location or at customer locations, no
deduction was technically allowed even if there was a home office for other
business tasks, such as bookkeeping and research. Starting in 1999, home office
deductions are allowed for these peripheral tasks.
Just a reminder that it has been possible to deduct home offices even
when most of the income is earned at outside locations. You may think that this
is a Clintonesque interpretation of the law ("misleading but legally
correct"), but it has worked for decades for my clients. I have
continuously harped on the excellent tax benefits in hiring family members
(spouse & kids) as employees of your small business because of the
thousands of dollars of extra deductions for medical, education and child care
costs. I have had to educate several IRS auditors on this very lucrative tax
break when they tried to disallow it, and they have always backed down when
confronted with selections from IRS’s own official publications. Once you have
such family employees, you have to provide them with working space. If your
shop or store is five or ten miles from your home, it would be ludicrous, to
say nothing of life threatening, to expect your kids to commute that far. A
home office for them to work in is perfectly acceptable (and deductible) even
if you earn your income outside of the home.
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The Taxpayer’s
Lament:
What I
Could Do With Few Extra Grand!
By F.R.
Duplantier - of America’s Future
Of my annual earnings Uncle Sam will extract
Fully two-fifths, as a matter of fact.
That’s quite a large portion, but what’s got me burned;
I’ll never see that much in service returned.
Domestic tranquility and the common defense
Are the only two items that are worth the expense.
And who can depend in his golden old days
On the pittance that Social Security pays?
We all know the system is not even sound.
By the time we retire, it won’t be around.
What would I do with a few extra grand?
For such a sweet surplus, here’s what I’ve got planned.
I’ll feast on filets and heave out the hash.
I’ll chuck my old chinos and dress with panache.
I’ll make a deposit on the decent sized house
I’d love to provide for my children and spouse.
(If we just had the money, if only we could,
We’d much rather live in a nice neighborhood.)
Uncle Sam takes too much of the money I’ve earned.
He must have forgotten what the British Crown learned.
Life would be rosy, for the first time in years,
If I were in the black, instead of arrears.
I’d pay off the balance on each credit card –
Visa, Discover and Montgomery Ward.
I’d pay off the note on my Chevy "Classique"
And buy me a car that’s not an antique.
I’d undo the default at my old alma mater
And attend our homecoming a persona who’s grata.
Of what would be left – a handsome amount –
I’d put every cent in a savings account!
Well, not every cent – there’s so much to do
With a few grand a year, and for many years too!
I might make provision, in case of disaster,
To ensure that yours truly remains his own master.
I might purchase a policy, term or whole life,
Benefiting my children, grandchildren, and wife.
I might line up a health plan that covers things dental
(Even more comprehensive, in case I go mental).
I could afford these things now, were it not for my tax –
I’m one of those wretches who’ve fallen through cracks.
There are other investments I’d make with each grand –
If my after-tax income exceeded demand.
I’d buy stocks and bonds with my yearly rebates,
Rare books, stamps and coins, and collectible plates.
I’d invest in myself, maybe learn a new skill,
Some trade to fall back on when I’m over the hill.
I’d invest in my children, to help them excel,
And then, in my dotage, they might treat me well.
(Yet another investment that pays dividends
Is to spend some time traveling and making new friends.)
With a few extra grand, I’d no longer be penniless.
For once in my life, I could afford to be generous.
I could give to my church a sizable sum,
Or set up an annual scholarship fund.
I could sponsor a mission and some needy child,
Or save some rare species at risk in the wild.
I could hire some musicians to play in the park
Or pay pyrotechnicians to light up the dark.
I could spend my own money however I please!
Why should I scrimp to put tyrants at ease?
Mr. Duplantier has been an excellent supporter of
the Kerstetter Letter, providing several of his very witty Politickles over the
past few years. I highly endorse the
efforts of America’s Future to spread the word of freedom. For information on their publications and
media broadcasts, check out their web site at www.AmericasFuture.net or send a self
addressed stamped envelope to: America’s Future, 7800 Bonhomme Avenue, St.
Louis, MO 63105
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