Kerstetter
Letter®
Issue
99-3
Fall
1999
©
10/28/99
8:37 PM
Ozarks Time 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, are available by sending a check for $19.95 to Kerstetter
Letter, 11802 Deer Road, Harrison, AR
72601-6550
Once again, we have a clickable table of contents that will take you directly to the particular article.
Tax
Guru Online * Tax Cuts * 16th
Amendment * IRS Hit List * PBS * College Or No? * Taxes Are Merely
Symptoms * It’s Not Just Income Tax * IRS Mileage Rate * Pension Changes
* Social Security * MedicAid * Y2K * Drum Beats * Property
Taxes * Time Horizon * Last To
Know * Investment Yield
Prologue
My deepest apologies for the extended delay in getting this issue out. At the beginning of September, I held off, awaiting the veto decision on the tax cut. Although he had vowed to veto it, any Clinton promise is more likely to be broken than kept; so I wanted to be ready in case he signed the bill into law. After he actually followed through on his threat, I just became too busy with double extended 1998 tax returns. As much as I enjoy producing this publication, it does have to take a backseat to serving my paying clients. As some say, “be careful what you ask for, because you may end up getting it.” So many of my clients have heeded my advice about filing their returns late in the year in order to avoid IRS audits that October 15 has become almost as stressful for me as April 15. As usually happens, I was forced to file several triple extensions, until December 15.
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I again encourage everyone to check out my website for more current information and KL articles in progress. It is evolving as I learn how to better work with its capabilities. The newsletters posted on the site are getting much more useful with each issue, as I have included several hyperlinks to outside resources, as well as an active hyper-linked table of contents that will take you directly to specific articles. I have also recently added a searching capability that should make it easier to locate specific articles and information on the site. I am working on establishing an e-mail version of this newsletter to be sent out on a monthly basis. Watch the website for the opportunity to subscribe to that new feature.
People frequently ask why my web site ends in dot-ORG rather than the much more prevalent dot-COM. The truth is that the web site registration system functions on a first come, first served basis and someone else beat me to the taxguru.com name. I was able to lock up taxguru.ORG and taxguru.NET. The entire purpose of the suffixes seems to have been tossed out the window. While dot-ORG was supposed to be for non-profit organizations, it is actually available to anyone. Likewise with dot-NET, which was supposed to be for Internet service providers. Most of them are using dot-COM. Government agencies at all levels, which were supposed to be using dot-GOV, have also set up websites with dot-COM, which was supposed to be only for commercial enterprises. As the catchy names ending in dot-COM are exhausted, you will see many more web sites using the dot-NET and dot-ORG names. If you haven’t already staked out your claim on a cyberspace name, it wouldn’t be a bad idea to do that as soon as possible. It only costs $70 for two years and you can keep it inactive if you’re not sure what you want to do with it. Just as I’ve often said that it wouldn’t be a bad thing if everyone had their own corporation, everyone having their own website URL would be a good idea as well. It has lot of utility even for purely personal reasons, such as families keeping in touch and maintaining better genealogical records. A family website can keep people much more up to date than the annual Christmas newsletter. (Back To Contents)
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Tax
Cuts
The tax cut plan passed by the Elephant Party was little
more than drops in the bucket of the overall increasing tax burden in this
country. It was a tiny step in the
right direction. However, by the
hysterical reaction from Clinton and his fellow travelers in the JackAss Party,
you would think that the federal government would have to shut down for lack of
funds. It’s just a classic knee-jerk
reflex reaction to any reduction in taxes for the big central government. They made it very clear that under no
circumstances should there be any reduction of any kind in the amount of money
sent to D.C. I found it quite
interesting that every dollar of proposed tax saving was a dollar taken from
the mouths of starving kids; while there is plenty of money to give to foreign
countries and anyone willing to vote for Queen Hillary for New York Senator.
If any tax cut during this time of great economic activity
is a “risky tax scheme” (to quote that robot AlGore), when is a good time for a
reduction in taxes? The JackAss Party
and their network spokesmen (Rather, Jennings, Brokaw) are continuing to be
idiots and outright frauds when it comes to discussing the fictitious budget
surplus. Doesn’t it strike anyone as
odd that every six months, Clinton announces they’ve magically found another
trillion dollars to be spent on new programs.
It’s all a sham. The phony
surplus is dependable enough to lock in grandiose new spending programs,
costing trillions of dollars; yet it’s too shaky to warrant a tiny tax cut,
costing a few billion. The gutless
elephants are little better.
It’s a classic Catch-22.
Any tax cut is stillborn according to popular culture if it benefits the
evil rich. Since the tax burden has
been almost completely pushed onto the backs of the evil rich, any across the
board tax reduction would have to save rich people money. Ergo, no tax reduction is politically
salable. If you are one of the millions
who don’t see any need to take steps on your own to reduce your tax burden
because you’re confident that our rulers in D.C. will take care of us. (Back To Contents)
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One of the few arguments long used by tax protestors that
has a foundation in fact involves whether or not the 16th Amendment,
legalizing the Federal income tax, was properly ratified. I never had the time to properly investigate
this angle and really wasn’t planning to because it wouldn’t make much
difference.
During the Summer, WorldNetDaily.com
ran some reports on some very in depth studies of this issue. It appears to me from studying the results
of those investigations that there were some shenanigans pulled and the 16th
Amendment wasn’t properly ratified as it should have been according to the
Constitution. Accepting that as true, I
differ from others as to how individuals should deal with that.
What do real people do about it? There are literally hundreds of examples where the government
acts in 100% unconstitutional ways (asset forfeiture being one of the most
egregious). If you stand up for your
constitutional rights against these illegal actions, you will lose your freedom
and/or your life. They have no qualms
about killing people to enforce their illegal actions. The same thing applies with IRS and taxes.
I’m not a constitutional lawyer; but
I’m sure if this 16th Amendment issue were to ever be brought before
the Supreme Court, it would be deemed to have been de facto ratified just
because so many people have complied with it for so many years. If the Feds can routinely get away with
violating the Constitution in so many areas, there is no way the income tax
will be ruled illegal. If you want to
reduce your tax burden, you need to take steps of your own, such as forming a
corporation. Refusing to file tax
returns based on improper ratification of the 16th Amendment will
accomplish nothing more than the loss of your freedom and/or your life. (Back To Contents)
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Richard Nixon was castigated for using the IRS to attack
his enemies. The Clinton Gang have made
Nixon look like a Boy Scout by using the IRS against their enemies to an extent
Nixon couldn’t even imagine. Along with
the FBI files that the Clintons have used to blackmail their friends and foes,
they have been very aggressively sicking the IRS on any organization that dares
criticize anything the Clintons have done.
The JackAss Party can hold campaign rallies and raise campaign funds in
churches; but if a church dares speak ill of our illustrious two-headed
president, its non-profit status is in serious jeopardy. Non-profit organizations supporting the
JackAss Party are not bothered by IRS; while those that support the
Constitution have been viciously harassed.
IRS claims of coincidence in audit selection are laughable.
Congress is well aware of these abuses of the IRS and has
promised to investigate. When push
comes to shove, they have chickened out in regard to doing anything about
it. Could it be that our Congressmen
and Senators are themselves afraid of IRS attack, as well as the damaging
information contained in their FBI files?
…(Back To
Contents)
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Recent revelations that PBS
stations around the country have been providing their donor lists to the
JackAss Party confirm my earlier comments that PBS
is a leftist propaganda arm of the JackAsses.
In consistent double standard fashion, nothing will be done to punish
these blatant illegal actions. You can
be sure that, had this been a conservative non-profit organization lending its
donor list to the Elephant Party, all hell would break loose and heads would
roll. (Back To Contents)
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High visibility role models are often counter productive
nowadays. I feel very sorry for parents
whose kids say they want to grow up and be president based on the current
example they have. It’s completely
different than when I was a kid, when the standards were much higher.
In the business world, there is a similar, although not as
deviant and perverted, evolution in the national role model for kids to aspire
to. Specifically, it’s a little harder
than normal to motivate kids to suffer through four years of college with so
many examples of people succeeding without it.
When Bill Gates is referred to as the most successful college dropout,
it erodes all of the efforts of parents, teachers and guidance counselors to
motivate kids to attend college.
In spite of all my years in college for my Bachelors and
Masters degrees, I don’t have an easy answer to this question. There are pros and cons on both sides of the
question. Assuming the student will
actually be learning what is taught and is not just coasting through on an
athletic scholarship waiting to be drafted by a professional sports team, I
still see some benefits to a good four or five year college program. It’s really difficult to understand what
will be best for a person’s future career in those young years. Many of these insights don’t become apparent
until long after the school experience.
For example, during my four years at Cal State Hayward as
an accounting major, I resented having to take so many courses that were not
specifically related to accounting.
Looking back, some of the most valuable skills and education I acquired
were from the general education classes I took just to comply with graduation
requirements. Classes I took in speech,
journalism, science, and drama have actually come in extremely useful as my
career evolved from a classic accountant into professional writing and
speaking.
In a tight job market, as we currently have, employers are
glad to accept any warm body. When
things slow down, they will revert to using college degrees as a discriminatory
factor. The widely held perception is
that anyone who has the discipline to stick it out for four or five years in
college is more likely to survive in the corporate world. That’s why a more long term outlook is
important when making this decision.
When starting college, it’s not as important to decide on one’s major
area of study based on what profession is in hot demand today as it is to
predict what will be in hot demand in four or five years. If I were advising a recent high school
graduate today, I would recommend taking the general education classes at a
junior college, as long as they were guaranteed to be transferable to a
four-year college. Junior colleges are
much less expensive, so some serious money could be saved. After the first two years are almost
finished, it will be easier to make a good decision on what would be a good
major area of study. The time horizon
will be only two years instead of the four years if one went directly into a
four year college. (Back To Contents)
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Too many people consider high taxes to be the problem. They are really just the symptom. The real problem is the growth of
government, infringing into areas that have no constitutional authority. Money is wasted just as much now under the
Elephant Party led Congress as it was when the JackAsses were in control. Until some control is exercised over the
impulses to stick Uncle Sam’s nose into every aspect of our lives, you will
never see any reduction in the tax burden.
The fans of big government have their tactics down to a
science. Fill the airwaves and news
pages with stories of some “crisis,” such as people without medical insurance
or reliable and “affordable” (a very subjective term if there ever was one)
child care. The press love to fan the
fires of these crises. Next is the
inevitable solution to these crises.
What do you think it is?
Surprise. It’s always that the
only reasonable solution is to have our leaders in Washington take it over and
provide those essential services. The
impression is always made that this is part of the purpose of the Federal
government and that the price is just another essential cost of running a
civilized society. With the education
level regarding the Constitution continuing to decline, that is rarely
challenged. What few people want to
discuss is exactly where the money for those programs is going to come
from. To do so is not merely
politically incorrect, it’s downright mean and selfish to think about money
when lives are at stake. The fact that
the government has compounded every problem it tries to solve is also
conveniently forgotten.
Sorry; but I can’t help it. The money will come out of the pockets of the producers and go
into the pockets of the leeches. As
I’ve said many times, most people choose not to have health insurance because
they would rather spend those funds on other things. If they put such a low priority on their risks, why should the
rest of us be forced to pay for it?
As I was writing this, the news story hit that the Feds
are considering redefining the official poverty level. This again has the same purpose. Create the perception of a massive problem
that only the Federal government can fix.
It’s also part of the incremental progress of hooking as many people on
the Federal teat as possible. The
similarities to the tactics of drug pushers are not accidental. With all of the hysteria regarding the
addictive nature of cigarettes and the tactics used by the tobacco companies,
does anyone else find this technique by our leaders to be slightly ironic?
This is just another example of how our leaders use
supposedly unbiased statistics to advance their agenda. They know all too well that numbers can be
twisted any way they want. They
essentially work backwards. How many
people do you want to be technically impoverished? Just adjust the calculation to come up with that result. The same thing has been done with our
educational system. The SAT exams were
weeding out too many students, so they have been dumbed down. As I mentioned last time, this is why we
need to fight the Clinton gang’s attempt to use statistical sampling for the
2000 census. They plan to back into the
numbers they desire. Cynical? You bet.
Recent news stories played up the horror of Internet
addiction. All of the publicity and
fear, and the finding of the “scientific study” was that six percent (6%) of
Internet users displayed addictive tendencies.
The groundwork was being laid for the Federal government to step in and
protect us all from this fate worse than death. As usual, I saw that study with completely different
feelings. If at most six percent were
potentially addicts, that means that 94% were handling the Internet just
fine. However, in typical big brother
nanny fashion, we will all have to adapt and conform to new government
restrictions to protect the stupidest people in our society.
There is also a new slant to the continuous stream of
“haves vs. have-nots” stories.
According to some government studies, there is an increasing gap between
people who are on the Internet and those who aren’t. It seems that some people actually choose to spend their money on
other more important things, such as drugs and cigarettes. Of course, with this growing crisis, the
only solution is for the Federales, in their official Robin Hood role, to take
from those who have Internet access and give to those who aren’t as
fortunate. That is the publicized
motive behind one of many plans (schemes) to tax Internet activity. (Back To Contents)
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It’s
Not Just Income Tax
While most discussions around the country in regard to our
tax system revolve around the income tax, that is a very short-sighted
outlook. While everyone likes to focus
on rates and unfairness, I prefer to concentrate on the bottom line;
specifically how much TOTAL tax is being paid by people. One of the main reasons I haven’t jumped on
board the movements to replace the current income tax structure with either a flat
tax or a national sales tax, is the fact that neither change would address a
much more costly tax to many people; the payroll tax.
Whether you are self employed and pay 15.3% of your net
self employment income into Washington’s Ponzi scheme, or are a W-2 wage slave
and pay 7.65% of your gross salary (with your employer paying an additional
7.65%), there is a very high likelihood that the total dollars paid in far
exceed your income tax. I see it all
the time.
Over the course of a year, I normally review several
hundred tax returns that were prepared by other tax preparers. A common mistake I see on their part is too
much focus on zeroing out the income tax and not enough on zeroing out the
TOTAL tax. For example, I recently
reviewed the 1996, 97 & 98 tax returns for someone who had attended one of
my seminars. Because of some large net
operating losses being carried over from the late 1980s, the taxable income for
all three years was negative, with zero income tax. However, the client still had to pay in about $8,000 for each
year in SE tax, as well as penalty for early withdrawals of IRAs. The preparer had completely ignored perfectly
legitimate deductions that could have drastically reduced the SE tax. He also ignored acceptable exceptions that
IRS allows for the early withdrawal penalty, such as medical costs and severe
financial hardship. Needless to say, I
amended these returns and recouped several thousand dollars. The real shame is that, for any year before
1996, which were prepared by the same CPA, all those extra taxes are unable to
be recovered because of the three year statute of limitations.
Estate taxes (a.k.a. death or inheritance taxes) are also
part of the overall tax picture for many people. Any tax advisor who doesn’t consider the ramifications of those
while working with clients is not doing a complete job. (Back To Contents)
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IRS Mileage Rate
Proving once again that the tax game has multiple moving targets, IRS has already announced that it has once again changed its standard mileage rate for business miles. As of January 1, 2000, due to rising gasoline prices, IRS has increased the mileage-rate tax deduction allowance for cars used for business back up to 32.5 cents a mile from 31 cents in the last part of 1999.
Here’s a quick recap of the IRS’s standard business mileage rate:
January 1, 1998 to December 31, 1998 32.5 cents per mile
January 1, 1999 to March 31, 1999 32.5 cents per mile
April 1 to December 31, 1999 31.0 cents per mile
January 1, 2000 to December 31, 2000 32.5 cents per mile
Any employer who bases mileage reimbursements on the IRS rate should make the appropriate adjustments before January 1, 2000. This new rate was announced far enough in advance that there won’t be another three month delay as there was for 1999.
A recent change that slipped by many people has to do with who is eligible to use the standard mileage rate. For decades through 1997, it was only available to owners of vehicles. People leasing vehicles were required to use the actual cost method. As of 1998 tax returns, lessors have also been allowed to use the standard rate method of calculating the mileage deduction. When I prepare tax returns, I like to use the straight line depreciation method, which allows me to switch methods between the actual cost and standard rate methods each year, depending on which has the higher total deduction. That is another commonly held misconception; that you are locked into whichever method you use on the first year’s return for that vehicle. It is also true that each vehicle’s deduction is calculated separately from all others. One tax return could very easily have some vehicles using the standard mileage rate and others using the actual cost method.
Since IRS has long known that vehicles run more efficiently when used for medical, moving and charitable purposes, the lower rates for those usages will continue. IRS has not changed the 14 cents-per-mile rate for charitable use of vehicles. The rate for medical and moving expenses will stay at 10 cents a mile.
This is as good a place as any for another reminder about leasing vehicles. With very few exceptions, leasing is a big rip-off. It is a very very expensive way to buy a vehicle. The limits on mileage before penalties kick in have gotten lower every year. Leasing companies are charging people huge amounts for wear and tear when they are turning their vehicles in. Overall, my opinion hasn’t changed one bit. You can still buy a vehicle for much less cash down and a much lower interest rate. (Back To Contents)
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One consistent thread through all of my advice is how dangerous it is to rely too much on others. While most of my focus has been on avoiding too much reliance on the scoundrels in government to provide for your well being, I have also mentioned the same risk with employers. Specifically, unless you are an owner or top executive of a company, there is a good chance you will be screwed over by the supposedly generous company provided pension plan. It’s very easy for employers to short change their little people. I know because I have helped clients do just that (I am a hired gun).
A recent wave of pension plan conversions to what is called a “cash balance” arrangement is just another illustration of this problem. As an indicator of the youth in top decision making positions, these new plans short-change older workers in order to save huge sums for the employers. In this case however, it has been so blatant that IRS and Congress have been alerted. However, with their illustrious track record of helping the workers, I wouldn’t expect much in the way of assistance. Guess who makes more campaign contributions, employers or employees?
Some call this an abusive practice that can reduce middle-age employees’ pensions by as much as a third to a half. Hundreds of companies have already converted from traditional pension plans to cash-balance pensions. Unlike old-fashioned plans, in which employees earn most of their retirement benefits toward the end of their careers, under cash-balance plans, employers set aside the same percentage of an employee’s pay every year. As a result, pensions of younger workers grow faster, but older workers can, and in some cases do, lose hundreds of thousands of dollars in retirement benefits.
As usual, the only reliable solution is to provide for yourself. Your own IRA. Maximize your contribution to deferred compensation plans (401k & 403b). (Back To Contents)
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The Social Security Administration is on its biggest
publicity push to instill confidence in its Ponzi scheme and head off any
attempts to change the program. It has
been running news stories, letters to editors and has been mailing out more
benefits analysis notices than ever before.
My opinion on the benefits of Social Security haven’t changed one bit.
Most of the discussions are missing the entire
picture. They only consider the taxes
withheld from employees’ paychecks and ignore the same amount being paid in by
their employers. While the standard
approach is that this isn’t the employee’s money, I have always disagreed with
that idea. That money doesn’t
materialize out of nowhere (contrary to popular belief). That is actually additional money being
taken from the employees. Most
employers would prefer to give that money to their employers rather than pay it
into the Washington Ponzi scheme.
According to a recent study by the Heritage Foundation: A 30-year-old married couple who each earn just under $26,000 will pay about $320,000 in Social Security taxes over their lifetimes. They can expect to receive Social Security retirement benefits of about $450,000. If they could place the payroll taxes for retirement into IRA-type investments the total accumulated by retirement would be approximately $975,000.
I stand by my earlier predictions. Means testing will be tightened up. People who receive too much income will no longer be eligible for SS benefits, regardless of how much they have paid in. While at first blush this sounds like a good idea, to freeze out billionaires like Ross Perot, the devil is in the details. The evil rich threshold will most likely be similar to the one currently used for taxing SS benefits. The current definition is $25,000 of gross income (including the SS benefits) for a single person and $34,000 for a married couple. This will just increase the need for impoverishment planning. (Back To Contents)
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In previous issues, I have discussed the concept of
impoverishment planning, the intentional reduction of a person’s net worth in
order to qualify for the government’s Medicaid program. Since those earlier articles, there have
been a few changes in the rules that I have discovered are not widely known by
some who should (i.e. financial planners and attorneys).
Look-Back Period - In order to catch people who give
away too much too quickly, the government has long had a rule that allows it to
add back in assets that had been transferred prior to the application for the
program. This look-back period has
gotten longer over time. For most
transfers, this period is 36 months.
However, for transfers to a trust, an increasingly popular technique,
the look-back was lengthened to 60 months as of August 1998.
Advice - In 1997, Congress passed a law
making it a federal crime for anyone to give advice on how to transfer assets
to qualify for the government’s long term care program, including CPAs. While this didn’t deter me in the least from
sharing my knowledge, it did have the intended chilling effect, frightening
many advisors. In an extremely rare
example of defense of the constitutional freedom of speech, this law was tossed
out in 1998. …(Back To Contents)
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Y2K
I was actually able to
put out the last issue without discussing this topic. However, it is still the number one question I receive. I’ve lost track of how many people who have
told me they are afraid to buy a computer because of fear that it will stop
working. The fear mongering hucksters
are going into their final push to scam money out of gullible people. One of the better Internet news sources, WorldNetDaily.com, used to just have one
or two Y2K horror stories a day. It’s
now so thick, it’s hard to find any other news. I long ago tired of all the Y2K jokes based on the assumption
that we will have no electricity on January 1.
They are about as fresh as a David Letterman
joke about taxis. Those all end up with
some crack about the driver’s turban.
Most banks, airlines,
utilities, stock markets and other high risk systems have been tested for the
ability to handle the year 2000 with very little problem. However, as I have consistently explained,
the biggest potential problems are with government computers. Private companies, in most situations, are
very competent in dealing with technology.
Government agencies have proven themselves time and again as paragons of
incompetence.
DMV – In Maine, owners of new 2000 model year
vehicles were surprised to have the DMV computer classify them as horseless
carriages.
IRS – The country’s least state of the art computer
system continues to be the IRS’s. I was
recently discussing the pending Y2K computer problems with an IRS auditor in my
office. He actually became rather
insulted when I explained my prediction that their computers would have serious
problems come 1/1/2000. He explained
that his computer was perfectly Y2K compliant.
He was referring to his government issue portable computer. Without any further prompting he said, “but
the service center computers are a completely different story. They are going to be a disaster.” Since almost all tax information is
processed by the service center computers, odds are high that they will have
serious problems dealing with the big rollover. While I can’t guarantee it, there is a possibility that the IRS
computers will consider you as owing no taxes in January because you weren’t
around in the year 1900. Is that a good
thing or not? You decide.
SSA - Last year, when the Clinton gang announced
that the Social Security Administration’s computers would be Y2K compliant, it
didn’t take long for the truth to be revealed.
SSA’s computers are about as ready as are IRS’s for the year 2000. Those of you surviving on Social Security
checks would be well advised to be prepared for a slight delay in your payments
staring in January.
It’s not the
millennium. I realize I am a bit of a snob when it comes
to the proper usage of the English language.
I do base my opinion of people, media and companies on how well they use
it. Anyone who calls December 31, 1999
the end of the 20th 
century or millennium is just illustrating their
ignorance when it comes to numbers. The
next century doesn’t start until January 1, 2001. Anyone who persists in proclaiming it as beginning a year earlier
taints his/her overall credibility.
You have nothing to worry
about with your copy of the Kerstetter Letter.
It will function just as well in the year 2000 as it does in 1999. Guaranteed & Certified.
The dreaded 9/9/99
date came and went with no problem whatsoever.
The fictitious date that more computer programmers use as a place holder
is 99/99/99, which isn’t likely to occur in the real world.
When asked what special
precautions we are taking for Y2K, the answer is nothing different from what we
normally do in regard to living in the boonies. Power disruptions are just a normal part of life here at the KMK
ranch on top of Gaither Mountain. We
have no plans to stock up on cash or gold or extra weapons and ammunition, as
many doomsayers are advocating. (Back To Contents)
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You may not have noticed the increasing volume of attacks
on capitalism by the media; but I sure have.
Constant mentions of income inequality, how the “haves” have too much
and “have-nots” don’t have enough, are blatant attempts to foment wealth
redistribution.
Euphemisms are used more often to disguise the true
intentions. Our illustrious leaders in
DC frequently refer to taxes as “investments.” Anyone unwilling to invest in
his/her country is branded an evil selfish traitor. I guess it goes back to my business school education. An investment was defined as the purchase of
an asset that would return future benefits.
How paying for some high school dropout to murder her baby, or paying an
artist to smear elephant poop on the Virgin Mary, could be considered an
investment for the country escapes me.
The drumbeats and attacks on the successful seem to have
worked on enemy number one, Bill Gates.
After constant stories about how he has too much wealth, he has recently
started his own publicity campaign announcing his plans to give away his wealth
to charities. He is literally following
in the footsteps of the robber barons (Carnegie, Rockefeller, Getty, et
al). (Back To Contents)
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Here in Arkansas, the folks who tried to allow the voters
to decide whether we should have property taxes in 1998 are trying again. Petitions are circulating to place it on the
2000 ballot. As before I am hoping for
the best, but expecting the worst. The
media horror stories have already started for this new attempt. The same rhetoric as was used last year is
being bandied about. Supporters of this
plan are being branded by the media (who do nothing to hide their love of big
expensive bureaucracies) as nothing less that pure evil and selfishness
incarnate. As I did in 1998, I intend
to do whatever I can to support this measure.
As one who was in California during its Proposition 13 property tax
revolt, I can shed a lot of light on the truth of this plan.
I haven’t been successful in getting the Arkansas
Libertarian Party to officially endorse this initiative due to some
philosophical differences between some officers and myself. While I believe that removing all property
taxes and adding a little to the sales tax rate is an incremental step in the
right direction, there are some purists in our party who are firmly against
supporting the increase in any taxes.
Since our current tax system is the product of decades of incremental
growth, I think it’s foolish to imagine overturning it in one fell swoop and we
should work towards incremental change.
It is also true that the public detests radical change and will only be
comfortable with gradual modifications of the current system. I believe that any political party will need
to work in gradual steps to be taken seriously and have some real effect beyond
academic discussions of how things ought to be.
As before, those of us who want to remove property taxes
are fighting an uphill battle. The
taxpayer supported bureaucracies are once again using our own money to fight
us. I’m sure there will be attempts to
sabotage. One tactic that was used a
lot in California is to encourage opponents to sign petitions repeatedly in
order to tarnish the lists. The mistake
the supporters made last time was to not get two or three times as many
signatures as needed. I hope they build
themselves a healthy cushion this time.
The other kind of sabotage that is used very effectively
here in Arkansas has to do with the wording of the initiative. I’ve lost count of how many times I’ve seen
this happen in my six years as an Arkansan.
When the initiative is being drafted, the state Attorney General blesses
the language, and often even drafts the language itself. Before the election, opponents of whatever
the issue is bring suit and the Supreme Court tosses the initiative out for
poor or misleading language. I have my
worries about this one. The Attorney
General, Mark Pryor, son of former United States Senator David Pryor and a
classic liberal Democrat, wrote the language for the current ballot initiative
to eliminate property taxes in Arkansas.
Since he would be among the thousands of professional politicians
fighting any attempt to rein in uncontrolled spending, I wouldn’t put it past
him to intentionally use language on the initiative that will be tossed out by
the Supremes. For those of you who
doubt that individuals in high office would be so underhanded, a little
Arkansas history. A former Arkansas
Attorney General was one William
Jefferson Clinton. A former Chief
Justice of the Arkansas Supreme Court was one Webster Hubbell. Would you trust someone with the character
of either of these men to act in the best interest of the public? (Back To Contents)
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With the ever increasing influence of the Internet on
almost every aspect of life in this country, the pace of change in the business
world has never been faster. That’s why
I have a hard time with long term business commitments nowadays. Anything involving software or high tech
that is stretched out over more than two years is a recipe for a rip-off.
For example, I have been researching various ways to be
able to accept credit cards for our businesses. Almost all of the companies offering this service require three
to five year leases of their equipment and/or software for $50 to $60 per
month. I refuse to accept such a
commitment because I have no doubt that whatever technology they are providing
will change within two years.
I have similar reservations about long term leases for
copiers and computer equipment.
Internet companies, such as CompuServe
are offering free computers or large rebates towards the purchase of computers
if you sign up for three years of service at today’s market rate. Almost everyone expects those rates to
continue their steep decline. Locking
into a long term arrangement to pay higher rates will probably end up costing
much more in the long run.
Which brings me to the CompuServe
deal. It’s rare to see an ad for a
computer that doesn’t publicize in huge type the net price after the $400
CompuServe rebate. In very tiny print
is the actual cost you have to pay. Is this
a good deal? I checked the fine print
of this offer. You have to commit to
pay $21.95 per month for the next 36 months for CompuServe’s service. That adds up to almost $800 ($790.20 to be
exact). You save $400 now and repay
almost double that over the next three years.
Is this a good deal? If you
would be paying the average $20 per month for Internet access and can use
CompuServe in place of another ISP, you would probably be saving some
money. The incremental extra cost of
using CompuServe would be just about two dollars per month. However, there are new free ISPs popping up
on almost a weekly basis. That makes
the entire $21.95 a cost you could avoid.
(Back To
Contents)
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Those of you who have been with me for the past few years
know that it has been a continuing frustration for me in having to spend my
valuable time teaching IRS agents their own rules and procedures. While it is only a mere annoyance to me, for
others who encounter this kind of ignorance, it can be very expensive.
The specific example this time has to do with the
qualification for the Federal Earned Income Tax Credit (EIC). In previous issues I have explained how it
is possible to go lightly on deductions in order to fine tune the numbers on a
tax return to receive a pure refund of thousands of dollars. My definition of a “pure refund” is getting
money that was never paid in; as opposed to the normal refund, which is just
getting back overpaid estimated or withheld taxes.
The EIC is really a welfare program that uses a
complicated formula to take money from the producers and give it to some lower
income individuals. As with almost
every part of the tax code, this break is not intended for the evil rich. Each penalty on evil rich folks in the tax
code has its own definition of exactly who is so classified. For EIC purposes, an evil rich person or
couple is anyone who received more than $2,300 in investment income during 1998
($2,350 during 1999). For most folks,
investment income consists of interest, dividends and capital gains.
Last year in KL 98-4, I explained that IRS had issued a
ruling declaring that any gains from the sales of business assets would not
count as investment income for this EIC limit.
IRS even encouraged people who had been disqualified to file amended
returns and obtain their refunds. In a
classic case of the right hand not knowing what the left hand is doing, the IRS
service centers have been sending notices out to people disallowing their EIC
because of too much capital gain income.
It has already happened to two of my clients.
Again, this is just an annoyance for me because after I
write to the service center and explain their own rules to them, the clients
eventually receive their money. What’s
really frightening is how many people, including some professional tax
practitioners, accept the IRS disallowance as valid and forfeit their EIC. One of my clients was all set to forfeit
over $1,800 based on an IRS letter saying that their capital gain income made
them ineligible. Since the gain was
from the sale of a rental property, I wrote to IRS and explained that they were
wrong to disallow the EIC.
There are too many people, including professional tax
practitioners, who labor under the major misconception that IRS will look out
for them and ensure that they get every tax break to which they are
entitled. That is so wrong as to be
laughable. To be fair to IRS, there is
one area in which they often save taxpayers money. As I’ve mentioned on many occasions, one of the biggest reasons
people pay too much in taxes is just from lousy bookkeeping. Legitimate deductions slip through their
fingers. I have also found that many
people are not very good about keeping accurate records of the estimated taxes
they have paid in to IRS and the State.
Every year, some of my clients receive checks from the IRS & State
for taxes that had been accidentally overpaid because they forgot to tell me
about one or more estimated tax payments.
I hope this doesn’t give them any ideas; but these moneys wouldn’t have
been missed if IRS & the State hadn’t been honest enough to disclose them.
To wrap up this general discussion, following are some of
the other areas on which I frequently have to educate IRS agents, as well as
many other tax practitioners who seemed to have learned the rules from the IRS.
·
IRS does not
require a receipt for up to $75 per expenditure.
·
Cash logs and
other reconstruction methods are perfectly acceptable means of documenting
deductible expenditures.
·
No 1099s or W-2s
are required for family wages paid to spouses or dependent children.
·
Section 1031
(Starker) tax deferred exchanges are allowed between different types of real
estate.
·
Real estate
professionals are not automatically treated as “dealers” for sales of their own
properties.
·
100% of the
premiums on group health insurance are deductible as a business expense if at
least one covered family member (spouse or child) is a family employee.
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Even before the American public learned from the Clinton gang how to parse sentences and analyze to death every single syllable, I have had a skeptical attitude towards how some people and organizations twist the language. I could give dozens of examples; but I want to focus on a financial oriented one right now.
As part of my job, I frequently review financial, business and investment opportunities. As I have often mentioned, anyone who guarantees profits is to be avoided like the plague. A big business during the current bull market is training people on how to play the financial markets; stocks, bonds, commodities, options, etc. Most of these seminars and training materials are fairly expensive, often several thousand dollars. The promoters often have free teaser mini-seminars to entice enrollments. The high fees are intended to impart a perceived value well beyond the course’s true tangible cost. They are also marketed as a test of your own commitment to self improvement. A $5,000 weekend workshop must be so much better than a $100 course covering the same material. If you’re not willing to invest $5,000 in your own future, you must not be much of a person. Perception equals reality in our world.
A final selling point by many of these promoters is that they have a money back guarantee. They don’t just imply; they state that it is a no-brainer, can’t lose decision to enroll in their courses. I described earlier (KL 99-2) the unobtainable ten day money back guarantee from Global Prosperity Group. For illustration purposes, I am going to analyze the guarantee given by the Wade Cook organization because they are probably the most pervasive around the country and I have studied their marketing materials extensively.
Following is Wade Cook’s guarantee for his $5,000 investing seminar from one of the free audio tapes they send out, “How To Make Money In A Sideways Market.” I transcribed this myself word for word from the audio tape.
“At the Wall Street Workshop, at the two days there,
within three months of the Wall Street Workshop, we will show you three
transactions wherein you will get over a 300% annualized return or we’ll give
you your money back.”
Mr. Cook goes on to brag about how great this guarantee is: “Tell
me who in this country would ever make a guarantee like that. Three transactions, over 300% annualized
return, or you get your money back.”
That sounds pretty good, doesn’t it? However, take a close look at those words. What do they mean? Here’s where the parsing comes in handy. Just as with tax matters, too many people focus too much attention on the percentage rates and not enough on the actual dollars involved. This guarantee has two weasel terms that effectively make the guarantee worthless.
Percentage Return: What is a 300% return? How much money is that? If you invest one dollar with me and I give you back four dollars, how much was your percentage profit? On a simple interest method, you earned 300%.
Annualized Return: Here’s where more people get ripped off than just about anything in the financial world. If you invest one dollar with me and I give you back $1.10, what is your annualized yield? It depends on how long it took for me to pay you that money. Say it was one day after you gave me the dollar. Your yield on a simple interest basis was ten percent. However, annualized yields are computed by extrapolating the simple amount over a 365 day year. If you earned ten percent in one day, that equates to a 3,650% (10% x 365) annualized return. Supposes it took an entire week to receive your $1.10. The annualized yield then would be 521% (10% divided by 7 multiplied by 365).
So; if you spend $5,000 to attend one of the Wade Cook two-day workshops, and they show you three transactions over the next three months that return a 300% annualized profit, does that mean that you have recouped all of the workshop’s cost? Not likely.
I don’t mean to single out the Wade Cook organization for this kind of misleading guarantee. Investors Business Daily is filled with ads for newsletters and seminars offering very similarly worded performance guarantees. I’m also not saying not to attend the training workshops if you think you need them. However, if you are counting on the stated guarantee as a safety net against loss, it’s not. You should also remember that companies such as the Wade Cook organization make their money teaching others what to do and not by actually doing those things.
Mutual Funds – On a similar theme, it’s important to have as much information as possible when comparing the track records of different mutual funds. While they are required to include the warning that “past performance is no guarantee of future results,” mutual funds love to brag about their performance results. Here again is where the use of percentages can be very misleading. Say that a mutual fund earned a net profit of $100,000 for a calendar quarter, the normal measurement period. Is that good or not? It depends on how much money the fund had invested. If there was $1 million invested, the return would be ten percent for the quarter, and 40% on an annualized basis. However, if there was only $300,000 at risk, the percentage yield would be 33.33% simple return, and 133% on an annualized basis.
Some newer mutual funds have gotten into trouble with the SEC for touting very high percentage returns while not disclosing as much information as they should, such as their relatively small portfolios. So; before relying simply on a comparison of investment percentage yields, make sure you are comparing apples and apples (similar sized portfolios).
Ponzi Schemes – While I’m on this subject of measuring investment returns, I must comment on the never-ending willingness of people to fall victim to Ponzi schemes. Almost every week I run across a story of one of these being exposed, with investors losing millions of dollars. Many are run under the auspices of religious or charitable organizations, lending investors a very false sense of security. For those of you not familiar with how this arrangement works, here’s a little summary. The Ponzi name came from a specific case decades ago; but the concept was around long before him and continues to this day.
An investment person or company offers investors a much higher rate of return on their money than they could obtain from more conventional investment vehicles. The promoter claims to have some top secret formula that enables him to beat all of the markets and guarantee a specific high rate of return. I have seen some recent cases where the investors were promised a return of 50% on their investment per month. While the investor thinks the promoter has taken his money and is working his magic on it, the truth is quite different. The new investor’s money is spent on two things. Part of it is used to pay investment returns to earlier investors and the rest is spent on fancy cars, homes, boats, and babes for the promoter. None of the money is actually invested.
These investment plans fall apart and investors lose for two main reasons. First is the obvious limitation to any pyramid plan. Eventually, the supply of suckers dries up and no new money is drawn in. The other reason people come out losers is good old basic greed. If you were given 50% of your money back each month, it would only take you two months to recover your investment, with everything additional considered pure profit. However, that’s not how it works out for these people. Most of these investors are greedy to start with, which explains their initial involvement with a “too good to be true” investment. Almost always, when they are presented with their first dividend payment of 50%, they are so pleased that they instruct the promoter to reinvest it. So happy with the results, they then give the promoter even more of their money, usually their life savings. To compound the problem, they recruit their friends and family members, extending the life of the Ponzi scheme. Eventually the promoter is exposed as a scammer and he files for bankruptcy protection. The wiser promoters salt away some of the money in offshore bank accounts that can’t be touched by any creditors here in the States.
What I find relatively amusing when the brown stinky stuff hits the fan is the reaction of the scammed investors. When they make their claims for the amounts lost, they actually add in the 50% promised return as if that were real money taken from them. Their real losses are the funds they gave the scam artist.
Twisting the language to mislead investors isn’t a new development. Clinton’s play on what the definition of “is” is was nowhere near the first such use of deceptive language. It reminds me of the classic investment opportunity from several years ago. A fine metal engraving of one of the country’s best presidents was offered for something like $129. What buyers received was a penny. The description was literally true. (Back To Contents)
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--That’s All Until Winter--
Kerstetter
Letter 11802 Deer Road Harrison, AR
72601
