Kerstetter
Letter®
Issue
99-2
Summer
1999
©
10/28/99
8:09 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 $19.95 to
Kerstetter Letter, 11802 Deer Road, Harrison, AR 72601-6550
For the first time, we have a clickable table of contents that will take you directly to the particular article.
Charitable Donations * Sympathy for IRS * NOL Carrybacks * Donft Use Employees * Corporate Tax Returns * Estimated Taxes * Why the Good Economy? * Tax Protestors * IRS Web Site * What Is Money? * Paying Taxes By Credit Card * Loan Sharks * Census Sampling * Internet Stocks * Short vs. Long term Outlook * Commodities * Limited Partnerships * Taxes On Social Security * Collectibles * Medi$care * College Funding
Prologue
After all the talk of budget surpluses and saving Social Security, it wasnft long until the shine was off that rose. Clintonfs little European military operation, destroying a tiny country, as well as what we will be paying to rebuild everything, will ensure that any chance of a tax cut is gone forever. In fact, as the volume of business conducted over the Internet increases, so will the desire by the government leeches to tax it.
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I wholeheartedly support the idea of sharing onefs wealth
with favorite charities, both during and after onefs time on this planet. I have mentioned before that
consideration should be given to what specific assets are donated to charity
because there are some big tax differences, especially with retirement
accounts. Leaving money or assets
through a will and/or living trust reduces the estate subject to taxes. A way to get a more immediate tax
deduction is to purchase a life insurance policy, naming the charity as the
owner and beneficiary of the policy.
Although the policy may have a face value of some large amount, such as
$500,000, you canft claim a tax deduction for that full amount. You can claim a deduction for the
out of pocket costs for the premiums you pay.
This needs to be distinguished from another technique used
by overly aggressive tax advisors, the charitable split dollar insurance
plan. Under this plan, a person
donates money to a charity, claims a charitable contribution deduction, and the
charity purchases a life insurance policy with that money that pays benefits to
both the charity and to the donorfs estate. What is amazing to me is that it wasnft until this June that
IRS officially ruled that this is illegal in terms of qualifying for a
charitable deduction. While many
people consider me to be overly aggressive in regard to tax avoidance
strategies, even I never liked this idea and never recommended it. It fails one of the basic tests of any
charitable donation. A donation is
only deductible if it has no conditions and the donor is not given anything in
return. A donation requiring the
money to be used to purchase insurance coverage for the donor completely fails
that test.
Publicity Seekers – Itfs a common feature in the news
for people to be celebrated for naming charities in their wills. Often, there are lavish ceremonies
where the benefactors are awarded plaques and other symbols of
recognition. I am all in favor of
this kind of generosity. My
problem is that the awards and celebrations are premature. Unless the donor has given the charity
some real money today, the donation is nothing more than a 
revocable
promise. While not always
publicized as thoroughly as the gift promise, it often happens that, after the
personfs death, it is discovered that the list of beneficiaries of the estate
has been changed. Ifve mentioned
before how some people (most often older men) keep people in their circle of
influence (mainly gullible bimbos) based on the promise of riches from their
estates. What normally happens in
these cases is that the final list of bequests is quite different. The same thing happens with charitable
bequests.
Tax Credits – There have been occasional proposals in Congress to
allow taxpayers to claim tax credits for charitable donations. Such a plan would be much more
lucrative than the current Schedule A tax deduction. It would be available to all taxpayers, not just those who
itemize. It would be a dollar for
dollar reduction in tax for the same amount of the donations, not just a
percentage reduction, as with a deduction. The logic behind this idea is that if money were given
directly to charities rather than run through the extremely inefficient
government bureaucracy, the charities would net more money. I believe that would be exactly the
case. If you were given a choice
of paying $10,000 to the IRS or the same $10,000 to your favorite charities,
which would you choose? The reason
that wefll never see such a change is that too many people would choose the
charities and there would be less money for the government bureaucrats. In setting official policy, nothing is
more important than money for government.
Cut Out the Middleman - A growing trend is for businesses
to claim that part of their sales price or net profits is to be given to
charity. Ifve noticed a lot of
this with online businesses. Many
of these are scams. One key to
detecting the scams from the more legitimate is if the promised donation is a
percentage of the net profit. If
so, odds are that creative Hollywood style accounting is being used to ensure
no profits for that specific item or service. Some of the amounts given are ridiculously low, such as five
cents per purchase. If youfre
tempted to buy something just because of a promised donation of part of the
purchase price to a charity, you would be better off skipping the purchase and
just giving something directly to the charity.
I can still remember a class I had in college where we
analyzed the issue of charitable donations by corporations. Many people claim that to be good
corporate citizens, they should give away all or most of their profits to
charities. That really isnft the
function of corporations, except for the ones specifically established to
support charities, such as Paul Newmanfs
food companies, where it is plainly stated that all profits are for his pet
charitable causes. A normal
corporation is established to conduct a business and to earn profits for its
shareholders. If the profits are
given to charities instead of to the shareholders, you end up with a microcosm
of the Federal government. Money
that really belongs to the shareholders is being given to charities that the
corporate officers deem worthy. It
is saying the same thing our leaders in DC say: gWe know better how to spend your money than you do.h What if the shareholders donft agree with the concepts
espoused by the selected charities?
People who believe that abortion is murder surely wouldnft appreciate some
of their money being given to abortion activists, such as Planned Parenthood. Likewise, supporters of the
Constitution wouldnft like to see their money given to gun confiscation groups,
such as Sarah Bradyfs Handgun Control,
Inc. The answer in a true
capitalist economy would be for the corporations to do their thing, whether
providing a service or producing a product, and distribute the profits to the
shareholders to spend as they see fit.
If they choose to support their own favorite charities with that money,
all the better.
Although I
have always been an unabashed supporter of free enterprise and capitalism, I
donft believe in profits above everything. There are some things much more important than profits. I do draw the line at illegal, immoral
and unpatriotic activities. The
last one is a growing problem with the blurring of corporate ownership across
national boundaries. There are fewer
true American companies that support American ideals. For instance, what is Chrysler? Since it merged with Daimler-Benz, is it an American company
or a German one? It is a truly sad
state when companies such as Loral Space
and Hughes Space will eagerly sell
nuclear missile technology to a government intent on destroying America and our
way of life. The fact that a
corrupt American President actively solicited bribes and sold them the right to
make profits by arming the Communist Chinese is no excuse. A patriotic American company would have
passed up the opportunity for short term profits in exchange for long term
peace and security. (Back To Top)
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Sympathy For IRS
I donft know why the mainstream media love the IRS and
high taxes so much. My hunch is
that it goes hand in hand with their love of big government and the growth in
programs. Of course, while our
superiors in the media, such as the nightly news readers (e.g. Brokaw, Rather,
Jennings), believe that we peons donft pay enough in taxes, they do everything
possible to minimize the tax bite on their multi-million dollar salaries. Two recent news stories, and their spin
on them, illustrate how they are very willing to act as IRS propagandists in
addition to their duties as mouthpieces for the Clinton Gang and their fellow
travelers in the JackAss Party.
Right around April 15, there was a series of stories about
how the number and rate of IRS audits has been declining and is projected to
decline even further if IRS is not provided with more money for its
operations. Even worse than the
reduced number of audits is the fact that the rate is even lower for the evil
rich than it is for the poor. The
tone is unmistakable; that everyone, especially the evil rich, is a tax
cheater, and without the specter of IRS review, the cheating will get even
worse. Absent from these stories,
which are still ongoing, is any mention of the fact that IRS has always been
unable to account for at least $60 billion in each of their annual audits by
the GAO. Logic never gets in the
way of fans of big government. The
answer for any money wasting program has always been to give it more
money.
The truth is that, with the need to reorganize in
compliance with recent tax laws, IRS has had to reassign some of its audit
resources to those tasks. Their attempts
to once again bring their computers up from 1960s technology to 1980s, as well
as address their Y2K weaknesses, have also diverted their attention. So, is this a terrible situation, as
the media would have us believe?
It depends on your perspective.
I would hazard a guess that there may be a few folks out there who may
not consider it such a bad state of affairs if their chances of being harassed
by IRS are lessened.
Hamstrung IRS Agents
Which brings us to the second issue. Newspapers all around the country have
run editorials on how Congress went too far in harnessing out of control IRS
employees and that has made it impossible for them to do their jobs at
all. As a result, the media
believe that nobody will pay their taxes properly ever again. They are lobbying for more IRS power to
harass and scare the tax cheaters.
They completely misunderstand the new law. IRS employees have historically been allowed to use the
strongest of tactics, up to and including violence, with no consideration for
fair play or Constitutional rights, in order to extract funds for the
government. People get upset when
police officers use excessive force when making arrests. Why is it not proper to expect IRS to
also be reasonable in its interfaces with taxpayers?
Reality Check - From the coverage given this
issue by the press, it would seem that lawlessness is rampant and nobody is
filing tax returns or paying their fair share of the increasing tax burden;
that IRS has transformed into a sweet, toothless and clawless pussycat. I wish that were the case. The truth is very different. With the dozens of cases I have been
working on lately, I have not noticed any changes in the IRSfs demeanor. They are still routinely violating
taxpayersf rights, or at least trying to until I lodge protests. Basic protections, such as the three
year statute of limitations for audits, and official notification of
examinations, are being ignored at an increasing rate. They refuse to put things into writing
so they can lie about what was said later on. Likewise, there has been no reduction in the number of
erroneous penalty notices sent out by IRS computers. (Back
To Top)
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Tax news is slow to filter out around the country. Many people are unaware that income
averaging, which smoothed out the tax bite from a large increase in income, was
eliminated in 1986 because it saved people too much in taxes. Of course, the official explanation
from our leaders was that they were simplifying things for us by eliminating
that complicated schedule.
The next best thing to income averaging has long been the ability to carry net operating losses (NOL) backwards and forwards. A small tax change in regard to the carryback slipped by many practitioners, causing IRS to reject about a third of the 1998 NOL carrybacks it has received. For as long as I can remember, the rule was that the loss had to be carried back to the third prior year and forward for 15 years. The new law says that for losses arising in tax years beginning after August 5, 1997, NOLs are to be carried back two years and then forward 20 years. That means that 1998 NOLs are to be carried back to 1996. (Back To Top)
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I have often discussed the perils of using employees in
onefs business and the benefits of using independent contractors instead. One of the big benefits has been the
huge tax savings possible for both parties under this method. As always when the central government
isnft receiving as much money as possible, our leaders in D.C. have been on the
warpath. Two recent developments
in this arena are important warnings for business owners.
Microsoft was recently forced to treat its temps as full
time employees, with all of the same benefits. They should have had everyone incorporated, as Apple has
long done. Corporations cannot be
employees. Only humans.
Time
Off – As predicted by many, the
law forcing employers to allow their employees unpaid time away from work,
without fear of dismissal, for such emergencies as haircuts for their poodles,
has been expanded to make it paid time off. This is the tried and true pattern for the liberals in D.C.
that illustrates the gcamelfs nose under the tenth analogy. What this means is that employers will have to pay
double. Pay their worker up to 14
weeks of time away, while also paying his/her replacement to do the actual work
required by the job. The media
spin has already started. Anyone
who complains about having to do this is a mean evil capitalist who cares more
about profits than compassion. (Back To Top)
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There is a common misconception that corporation tax
returns (1120) are more difficult to prepare than individual returns
(1040). When I had other tax
preparers, including CPAs, working for me in California, they were scared to
work on corporate returns. After
forcing them to do it, they were amazed how easy they are. What is ironic is that several clients
hire me to prepare their corporate tax returns while they prepare their own
personal returns.
The truth is that there are very few twists with corporate
tax returns, after the first one is filed, locking in the corporationfs fiscal
year. I often experiment with
different cut-off dates for the first return in order to maximize tax
savings. There are literally
hundreds of variations in 1040s in reporting almost everything. So many things are inter-related that
itfs almost impossible to check all of the variations without a computer. Doing it by hand is asking for trouble. (Back To Top)
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I donft want to waste valuable space repeating myself on
topics which I have already explained in great detail. However, I do find it frustrating when
I continue to see people (some of who are readers) doing unwise things that I
warned about. In last Summerfs
issue, I described in great detail the rules for paying estimated taxes. I am still finding people paying in way
too much, often upon advice from their tax advisors. If your taxable income will be higher this year than it was
on last yearfs tax return, you should use the safe harbor and pay in what last
yearfs taxes were. There is no
bonus or savings of any kind for paying more than is required to avoid
penalties, other than a type of savings plan (with a zero percent interest
rate). The best thing to do if you
have a large increase in income this year, is to work with your tax advisor to
get a good handle on what your taxes will be with the return or extension you
file next April 15, see what steps can be taken between now and December 31 to
reduce that figure, and bank the excess over the minimum penalty-free amount.
On the same subject, itfs not necessary to make four equal installments of estimated taxes unless your taxable income is earned absolutely equally throughout the year. Likewise, if your income changes during the year, you are not required to remain with the same payment schedule you started earlier in the year. Youfd be amazed at how many people believe that they will be thrown in the slammer if they donft make four equal payments and that once the first payment is made, they are committed to paying that same amount three more times. (Back To Top)
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I often encounter people who despise the Clintons, yet
feel secure with them as president because the economy is doing so well. Clinton and Gore worshippers like to
claim that theyfre responsible for the healthy economy we have. When asked what either one of them
actually did to cause it, they draw a blank. Besides being a sign of blind devotion to their heroes, itfs
also an indication of the absolutely terrible knowledge level in this country
as to how a capitalist economy is supposed to function. The truth, which their fellow travelers
in the media either donft understand or choose to hide, is that the current
upturn started during the Bush administration and it has continued up in spite of the Clinton agenda of higher taxes and bigger government; definitely not
because of it. Giving them credit
for a good economy is as appropriate as giving them credit for the sun rising
in the East every morning or the ebb and flow of the tides. Their tax hikes and record number of
executive orders and regulations have actually stifled what would have been an
even more robust economy. They
have enlarged the government more than ever, sucking more money and life out of
the economy than any other administration. (Back To Top)
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It seems like I have to address the issue of tax
protestors on an ongoing basis because they continue to lure gullible people
into their circles. IRS has been
doing a terrible job in addressing these schemes in terms of public relations. I have written IRS on a number of
occasions suggesting that they include tax protestor information on their web
site and that they include us tax practitioners in their information loop. I canft obtain a firm answer as to why
they are so low key about addressing the claims made by tax protestor
promoters. My guess is that they donft
want to give those schemes any more publicity. Unfortunately, that silence on IRSfs part compounds the
problem. Promoters of these
schemes use the silence as a sign of assent; that IRS canft dispute their
claims.
The two plans that I have been encountering a lot from all
over the country are the Global
Prosperity Group and people pushing tax statements instead of returns. Both of these schemes are using multi
level marketing to spread their message; so odds are that you will come across
one of their downline.
What these tax protestors are is very much like cult
leaders who base their entire religion on one isolated word or passage in the
Bible, such as handling snakes.
These people focus on one word, such as gvoluntaryh or gstatementh and
base their entire strategy on that being a way out of having to file tax
returns and pay taxes. Just as
with the bible, the big message cannot be obtained from one tiny excerpt. Everything must be taken in context of
the entire tax code and system.
Things look much different when the entire picture is looked at. Itfs like examining a fine painting by
standing right next to it with a microscope. To be appreciated, it must be viewed in toto from a
distance. Thatfs how the tax
system is in this country.
The whole issue of tax protestors gives me conflicts on
many levels. First, itfs no secret
that I have always believed that the government takes too much money from the
producers of this country. However,
as corrupt and distorted as the rules of the game are, the tax protestors
arenft even close to complying with the rules. Next is the issue of greedy gullible people. One part of me says that they deserve
what they get if they fall for anything as crazy as these schemes. My other side feels sorry for the
feeble-minded and considers it a humanitarian duty to warn them of
shysters. One part of me is
grateful for the diversion these protestors cause for IRS. If theyfre busy chasing these lawbreakers,
therefs more chance theyfll leave us honest folks alone.
I caution everyone for the umpteenth time. If you follow the lead of someone who
claims to have found the magic answer with his microscope on the tax code, you
are setting yourself up for disaster.
When these gwise menh take your money for their super secret system, and
claim to guarantee it, beware.
When the IRS comes a knockinf on your door, you will be all alone. I have seen literally dozens of cases
where the followers of tax protestor schemes have lost everything, including
their lives in many cases, due to IRS harassment. I am not a big fan of the IRS. It is tough enough dealing with them while complying with
the laws. Itfs deadly if you
refuse to comply or follow the lead of some scamster.
A common technique these pyramid and untaxing programs use is telephone conference calls to make the sales pitches. The person running the call has a script to read. I detest this approach for a couple of reasons. First is that I can read and digest information much faster than I can by hearing someone else read it. The other reason is the more important. People can make all kinds of promises verbally. It amazes me that they expect people to invest large sums of money, or trust their freedom, based on such verbal promises. If there is ever a disagreement, it will be a classic case of gI never said that.h If they are afraid to provide all of their information and promises in writing, they are not to be trusted. Plain and simple.
Global Prosperity
Group - This one has all of the danger signs. Markets with phone conference calls; so they can promise
anything without written documentation.
Nothing in writing means itfs your word against theirs. The course is $1,250, with $1,125 of
that (90%) going to the distributor.
This MLM opportunity is being pushed harder than the information. The material, which many consider to be
brand new ground breaking exposés of the government and tax systems, has been
around for decades and is readily available all over the country, for much less
money. Another tip off that this
is a scam is the gmoney back guaranteeh they provide. Itfs a whole ten days, which barely covers shipping
time. From numerous messages I saw
on the Internet, almost nobody is actually given a refund.
Tax Statements - This group has taken one sentence from the IRS
instruction booklet for Form 1040 and built a veritable religion around
it. On page 51 of the 1040
booklet, in the section for IRSfs official Disclosure, Privacy Act, and
Paperwork Reduction Act Notice, are the following two sentences. gOur legal right to ask for information is Internal
Revenue Code sections 6001, 6011, and 6012(a) and their regulations. They say that you must file a return or
statement with us for any tax you are liable for.h These
people claim that this allows an option between filing a tax return or a
statement. They admit that they
have been unable to determine from IRS what a statement should consist of. However, they are selling their idea of
what a statement is.
They are just like advocates of MLM and pyramids, who are
quick to claim that their plan is not a pyramid or MLM scheme. This latest wave of tax protestors
claim that they are using the tax code, while protestors donft. They have picked out one word from the
millions of them to claim they can submit a tax statement instead of a
return. Ifve checked out their
statement and itfs nothing more than the same old tax protestor arguments; that
taxes are voluntary and only required to be paid by Federal government
employees and corporations in the alcohol, tobacco and firearm businesses. I listened to an explanation of the tax
statement scenario by one of its promoters. He claims not to be a tax protestor, yet describes the IRS
as a Puerto Rican corporation that doesnft give any of the money it collects to the United States Treasury. (Back To Top)
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IRS Web Site
Itfs not often I pay IRS a compliment, but they are doing
a pretty good job in utilizing the web to disseminate tax forms and
information. Their website (www.irs.ustreas.gov) is very useful. I often visit it to download the weekly
Internal Revenue Bulletins (which used to cost me over $100 a year for the
snail-mail paper version) and tax forms.
Their email newsletters, which anyone can subscribe to on the site, are
also a very good method for IRS to keep everyone informed. Ifm sure the private companies that
package this information and sell it to practitioners are not pleased with this
free competition.
As a
side note, an excellent web site that leads to the various state tax agencies
can be found at Sister States Tax Directory at www.sisterstates.com. Itfs my starting point when I need
state tax information and/or forms.
(Back To Top)
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One of the arguments used by tax protestors to evade their
tax obligations is that they havenft earned any taxable income because the
Federal Reserve Notes used in our current society are not actual money. Some even use the term gFRNsh in place
of dollars. Of course, when I
offer to take all of their gworthlessh FRNs off their hands for them, they no
longer consider them to be worthless.
I really donft want to go into a lengthy discourse on the
history of money. One of the
reasons the gworthlessh argument sounds plausible is the fact that the currency
we use is no longer backed by any real tangible assets. A long time ago, they were actually
called gGold Certificatesh and gSilver Certificates.h It meant that holders of such certificates could actually
redeem them for a certain amount of gold or silver. Since there are no such hard assets behind the current
money, with the actual value only based on the Federal Reservefs promise to
honor the currency, some people claim itfs worthless. While it is true that government promises are basically
bogus, that doesnft necessarily invalidate the currency used by a group of
people in a society.
The truth is that anything mutually agreed on by two
parties can be considered currency.
Seashells and beads can be valid currency if mutually agreed on. An often used new version of currency
is shares of stock in new Internet related companies. As Ifve mentioned before, most of those companies have no
real tangible assets to support those shares. Yet, those shares are being used
to acquire billions of dollars worth of real assets because the sellers have
agreed to accept them as payment.
Some may call that idiotic; but itfs their choice to accept it or
not. (Back To
Top)
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In its move to being more service oriented, for the first time,
with 1998 1040 returns, IRS has allowed people to pay their taxes with credit
cards. Actually, IRS isnft doing
the processing itself. It has a
contract with a few outside companies to process the charges and pay the money
to IRS. For this service, these
companies do charges fees, ranging from $3.00 for the smallest payments, up to
thousands of dollars for very large payments. The largest such service provider is US Audiotex in San
Ramon, California (www.usaudiotex.com).
Deciding whether this approach is a good idea depends on
alternatives. Taking a cash
advance on a credit card is one other option to accomplish the same
result. Its fee would need to be
compared. What surprised everyone
at IRS and the processing companies this past tax season was the huge volume of
usage for this new service. Some
people were charging hundreds of thousands of dollars. They were using the large charges to
generate large benefits from the credit card companies, such as rebates and
frequent flyer miles. Again,
whether the processing fees are offset by these benefits needs to be evaluated
on a case by case basis.
As with any new program, this didnft escape without some
screwups. Although the official
instructions and rules only allowed these payments to be applied against the
taxes due on 1998 1040 forms, US Audiotex and IRS accidentally posted several
payments towards the taxpayersf 1999 taxes. This started a chain reaction of IRS nasty-grams and
collection action, that IRS has recently proclaimed as corrected. (Back To Top)
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Any time there are laws to protect people from
unscrupulous individuals, there are going to be those who look for ways to
avoid those laws, especially when there is a great deal of money involved. I have been noticing advertising for
some new types of loans that are intended to get around usury laws, while
posing as great conveniences for consumers. Commercials are running for companies where you give them
your jewelry to put in a safe deposit box as collateral for a loan. They return them when you repay the
loan. Doesnft this sound like pawn
shops?
Pawning cars (car title loans) is another way lenders are
sticking it to desperate people. With the fees and short term nature of the
loans, they are charging over 200% interest and repossessing cars like
crazy. In some states, when the
cars are sold, the excess above the loan balance is to be returned to the
previous owner. In others, the
lender get to keep the extra. With
loans for 50% of the low blue book values, these lenders are making some
excellent profits from selling off repos.
(Back To Top)
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There has been a lot of discussion about the Clinton
gangfs plans to use statistical sampling in the 2000 census. They claim to want better
accuracy. As always with them, the
truth is 180 degrees from that. As
Ifve discussed on several occasions, statistics are easily manipulated for
whatever goal the people that produce them have. We just went through one of the most brilliant uses of phony
statistics for manipulation purposes with the impeachment sham. The Clinton gang and their pals in the
media bombarded the country throughout the scandal with the message that the gAmerican people want this behind them and that they
consider Bill Clinton to be the greatest president in history.h Those popularity polls were utter fabrications; but they did
serve their intended purpose; scaring enough Senators to wimp out from
defending the Constitution.
What the Clinton gang has also been very effective at is
the manipulation of the vote. Former
Chicago Mayor, Richard Daley, Senior, was an amateur in using dead people and
pets to turn elections his way.
The Clinton gang uses those tricks to great effect. They have also been very effective at
using illegal immigrants for additional votes for the JackAss Party. That is why they have decimated the border patrol. Robert Dornan, firebrand conservative
congressman from Orange County, California, lost his seat because of illegal
immigrants voting for Loretta Sanchez, the Clinton gangfs candidate. It was recently announced that the
Clinton gang wants to remove the voting prohibition from convicted felons and
prison inmates, an obvious attempt to recruit even more voters for the JackAss Party.
Here in many counties in Arkansas, itfs possible to easily
vote twice in elections. You can
vote prior to Election Day at the county court house. Since they donft cross your name out, you can vote again at
the regular polling place on Election Day. This is obviously done a lot because, while most locations
around the country are lucky to achieve a 50% turnout of registered voters,
many elections here have turnouts of 120% or more.
Which brings me to the issue of census sampling. As you may recall if you studied
civics, congressional seats are allocated across the country based on the
official population counts every ten years. There has also been a long running tradition of
gerrymandering the boundaries of congressional districts in order to manipulate
which party will control them. The
growing amount of largesse doled out by the central government in DC is also
often controlled by population statistics, which is why some cities in high
growth areas, such as parts of NorthWest Arkansas, paid for new censuses in the
middle of the 1990s. The higher
numbers made them eligible to take more money from federal taxpayers.
The Clinton gangfs plan for statistical sampling is to
estimate millions more members of their JackAss
Party in certain parts of the country, ensuring that their candidates get
elected and also get plenty of Washington pork with which to buy votes. This is very dangerous. The sides have been drawn in the debate
and supporters of this manipulation plan have already started accusing their
opponents of not wanting to count the poor minorities who are supposedly
undercounted. That is pure bunk. Welfare payments are normally based on
the number of people in the household; so if anything, those numbers are
already inflated, not undercounted.
The latest argument by the Democrats has to do with the
cost to taxpayers. They claim that
to do an actual head count would cost $1.72 billion more than originally
planned on, while to use made up numbers would be virtually free. Under their logic, it is wasteful to
spend money to comply with the Constitution when they can produce the numbers
out of thin air for free. As
always, the media have taken up the battle for their fellow travelers in the JackAss Party.
So, unless you tell your representatives that you want the
census to be an actual head count, as required by the Constitution, they may as
well just save the money by calling the whole thing off and just let the
Clinton gang tell us what the numbers are. Thatfs what theyfre planning to do anyways. (Back To Top)
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As a financial advisor, I have to frequently comment on
the strategy and wisdom of investing in high tech stocks, which have made many
people into billionaires, at least on paper and in the hype. Ifve mentioned before that the stock
values for such companies as Amazon.Com
defy all rational financial analysis.
The combined market value of their stock is in the tens of billion
dollars, although they own very little tangible assets, and they themselves predict
that they will be losing money forever.
I often consult with people regarding the purchase and
sale of small businesses, with calculations of a fair price for the
business. From a buyerfs
perspective, one of the most important issues is the income generated by the
business and how it compares in relation to alternative uses of the purchase
money. One floor level for
comparing investment options is to just put the money into a bank CD, which is
now earning about 4 to 5%.
Suppose you had the chance to buy a bookstore. You hire a financial guru to check out
the companyfs books and work up some financial projections for the next ten
years. At no time over the next
decade does it appear that the store will earn even one penny of profit. How much would you be willing to pay
for such a business? If you say
anything more than gtheyfd have to pay me to take
it over,h youfre a prime
candidate for Brooklyn Bridge salesmen.
So, why are people willing to pay billions of dollars for the privilege
of losing money with Amazon.Com? Itfs another classic scenario, the
greater fool theory (a.k.a. a pyramid scheme). As long as there is someone else out there stupid enough to
pay you more than you paid for your stock, youfre safe. Eventually, as with all pyramid
schemes, you run out of fools (although it often appears to be an unlimited
supply in this country) and the mysterious valuation collapses like a house of
cards. High tech stocks have been
good short term investments, where you make your profit, sell to a bigger fool
and bail out. Ultimately, with no
tangible assets to support any real valuation, the stock prices will experience
gravity and plummet to Earth. The
new billionaires, whose full portfolios consist of those stocks, will see their
wealth evaporate (without any help from the IRS).
Lately, Ifve been noticing some smart moves by some of
these high tech companies that are floating on a cloud of speculative
value. Rarely does a week go by
without some news story about a huge merger or buyout. What the mainstream media often fail to
report is that these purchases are done not with cash, but with corporate
stock. EBay, an Internet auction company, recently
announced it is buying the real auction company, Butterfield & Butterfield. Amazon.Com
has been snapping up all kinds of other companies with its overpriced stock as
well. These are very smart moves
in striking while the iron is hot.
Itfs a kind of money laundering that they are doing. They invest their fictitious wealth
into real assets that will be there when the bottom falls out of their fairy
tale world. (Back
To Top)
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Short Term vs. Long Term
Outlook
Having missed out on making money from multi-level pyramid
plans and high-flying Internet stocks, Ifve realized that I just canft invest
without thinking long-term.
Pyramids - Over the past 25 years, Ifve resisted every attempt to become part of
literally hundreds of MLM pyramid programs. Good friendships have been destroyed because of my
skepticism. Almost all of those
people ended up losing a lot of money and appreciating my wisdom, in
hindsight. What presents more of a
dilemma are the few who have actually made a lot of money in some of these
programs. Who was right
there? Again, it depends on your
outlook. In the short haul, they
did make a lot of money. However,
in the long term, I am still confident that the pyramid will collapse within a
few years. Which brings up the
dilemma. What about the people you
recruit into the pyramid to sustain its profitability? While you may make a lot of money as an
early member (top of pyramid), what is your sense of responsibility to those
beneath you who will not be as successful and will most likely lose a lot of
money? While I am probably among a
rare minority in this regard, I just canft help looking ahead five years when
approached about joining an MLM program.
I ask myself: gwill I feel good five years
from now about what I have encouraged others to do?h I just canft advise people to get into something that is
destined for collapse. Most other
people obviously take a gbuyer bewareh attitude to this.
Internet Stocks - This is a slightly different situation. While I would have personal knowledge
of and accountability to anyone who were to follow my lead into a pyramid, the
stock market is much more anonymous.
If I were to buy some stock and then sell it for a hundred times my
cost, is it any concern of mine if the stockfs value plummets by 90% or more a
month later? Unfortunately, I
do. I am also having difficulty
overcoming my years of schooling on stock investing as a long term
endeavor. However, I am hoping to
eventually overcome those pangs of conscience and make some money from the
greater fools out there. (Back To Top)
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I have recently been asked by several people about investing in commodities. Specifically, they are asking about solicitations they have received from a guy in Grants Pass, Oregon, Ken Roberts. I have received his almost monthly mailings for several years. While I have never met him personally, I do know something about him and his program. He claims to have developed his own top secret formulas to guarantee making large profits in the commodities markets. What is the truth?
From feedback received from clients, as well as hundreds of messages on the web (especially Motley Foolfs message boards), the consensus is that Mr. Roberts is a huckster. He is like most of the other get rich quick seminar people. He doesnft actually make money doing what he wants others to do. He makes his money selling books, tapes and seminars. I have worked with many of these people over the years; so I know of what I speak. His claims of guaranteed success are absolute garbage and such accuracy of predictions is literally impossible.
Commodities are tempting. Every year around the Fall, there are
daily commercials on the Rush Limbaugh Show touting guaranteed riches by
investing in heating oil. The
claim is that as the temperatures drop, the prices will skyrocket and small
investments will return several thousand percent returns. Ifm not sure what it says about the
perception of Limbaughfs listeners that there are so many commercials for get
rich quick schemes such as this and the prepaid telephone cards. Theyfre not as insulting to onefs
intelligence as the psychic phone line ads on late night TV; but theyfre
close. There have also been ads
for the past several years touting gold as the best and safest investment
because its price has been at an all time low. Again, with some hindsight, how were those predictions of
guaranteed profits from gold? The
price of gold has continued to drop, not increase. Most knowledgeable sources predict even more declines are to
come due to some expected selling by governments and other large holders. Yet, the commercials are still running
guaranteeing an increase in goldfs price.
What about the heating oil scenario? It fails on several fronts. First is the guarantee of winters so
cold that the prices will skyrocket.
Last winter was relatively mild, with much lower than normal demand for
heating oil. The biggest flaw in
the logic is that these people somehow know something that everyone else in the
investment world doesnft. Thatfs
ludicrous. The big investors who
control the commodity markets have already factored in such things as expected
demand and production levels. Many
of them use private weather prediction services for fine tuning their
investment strategies. To think
that some Joe Schmoe can buy some heating oil futures and watch them increase
in value as the temperatures drop is crazy. Futures contracts for delivery in cold winter months have
already been adjusted for that potential.
What about Queen Hillary? It has been widely reported that she was able to turn a
$1,000 investment in cattle futures into $100,000 in just a few days after just
reading the Wall Street Journal.
If Hillary can do that, why canft others? There are two main reasons.
1.
As the media love
to tell us, Hillary is the smartest human being to ever walk this planet. To expect mere mortals to match her
feats is ridiculous.
2.
The truth. Hillary didnft really turn $1,000 into $100,000. Tyson
Foods was paying her a bribe of $100,000 for special favors from the
Governor of Arkansas and laundered it by pushing $100,000 from their trading
account to Hillaryfs. In this way,
the income could be reported on the Clintonsf tax return and they wouldnft be
prosecuted for underpaying their taxes, which we all know is a much bigger
offense than accepting bribes.
A little common sense could save you
from these scamsters. Ask
yourself: gIf this is such an easy formula for
riches, why isnft this person making that kind of money?h (Back To Top)
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Wherever you find money, youfll find
vultures trying to swindle it. In
the late 1970s and early 1980s, the faddish investment was tax shelter limited
partnerships. The Tax Reform Act
of 1986 eliminated most of the tax benefits of these investments, and
subsequently their values fell through the floor. They also became relatively hard to resell. Over the past few years, a fairly
active secondary market in old burned out limited partnerships has grown considerably. Unfortunately, this development hasnft
filtered out to the masses of investors still holding these shares. Proving that knowledge is power, some
people are exploiting this ignorance.
They are sending out solicitations offering to pay about a third of what
the going market price is for these old relics of the tax shelter hey
days. Thinking that they were
completely worthless, many gullible investors have been accepting these
offers. While it may be true that
they are coming out with what seems to them to be gfound money,h they are handing over huge
profits to the vultures. All it would
take is a call to a stock broker or financial planner, who could look it up on
the secondary markets. (Back To Top)
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Last time, I discussed the penalty
that is levied on Social Security recipients under 70 who receive too much
gearned income.h I have been
encountering a lot of confusion between that rule, enforced by the Social
Security Administration, and the taxation of Social Security benefits by
IRS. Specifically, I have had
several people tell me that since they have now reached that magic age of 70,
they donft have to worry about tax on their Social Security. While they no longer have any penalty
for receiving too much earned income, they are still potentially subject to
income tax on their benefits. A
little refresher on this issue is needed.
I have always felt it the ultimate
irony that the Clintons and their fellow travelers in the JackAss Party have been portrayed by their
allies in the media as the saviors of the senior citizens in this country
against the evil intentions of those in the Elephant
Party. As always with this
bunch, the truth is 180 degrees different.
A promise from the federal government
isnft worth squat. Just ask
American Indians how valuable a treaty is. There has never been a tax deduction allowed for the Social
Security and Medicare taxes that are withheld from paychecks or paid in as Self
Employment tax. This creates a
kind of double taxation. You are
paying income tax on money that you didnft actually receive. To counter this injustice, the Feds put
into the original law that to balance out the up front double taxation, all
benefits received would be completely tax free. However, in recent years, as the Feds looked for additional
ways in which to steal money for their operations, they started taxing some of
the Social Security benefits received by the evil rich folks in this country, a
very popular target. At first, it
was 50% taxable. The very first
tax bill signed by the Clintons was a retroactive (which used to be illegal)
increase in the taxable amount to 85%.
I have seen this cost many people several thousand dollars. There is a push underway by the JackAsses in Congress to subject 100% of
Social Security benefits to taxation.
Itfs one of their first agenda items when they take back control of
Congress after the 2000 election.
Of course, if itfs the evil rich, why
should we care? There are
literally scores of provisions in the tax code that penalize the evil
rich. Supporters of these additional
taxes call them gmeans testingh because those people supposedly have
alternative means with which to make up the difference. I prefer to refer to it as gmean testingh because they are being mean to the producers of this country; or those
who St. Louis Congressman Dick Gephardt refers to as the gwinners of lifefs lottery.h In each of the mean testing provisions, the thresholds are
different. So where are they for
Social Security recipients? In
another example of the infamous marriage penalty, the threshold is $25,000 of
total income for single persons and $34,000 for married couples filing joint
returns. This figure includes the
tax returnfs adjusted gross income (AGI) plus tax free interest (e.g. from
municipal bonds) and half of the Social Security benefits themselves. As one of many penalties for using the
Married Filing Separate status, the threshold for those people is zero.
So, Congress has defined a single
person earning $25,000 or more a year as an evil rich lottery winner. What can be done about this
injustice? You can cross your fingers
and hope that these punitive laws are changed, as the Elephant Party had promised to do if it ever
controlled Congress. Of course,
they also promised to support term limits and fewer government programs. Itfs too bad political elephants
suffer so much from amnesia. As
always, the solution, if you donft want to pay in those extra several thousands
of dollars each year, is to take steps of your own. The easiest method is to prevent your 1040 income from
reaching those magic thresholds by shifting some of it to another tax
return. Specifically, a C
corporation tax return, which has its own 15% tax bracket for the first $50,000
of taxable income. An S
corporation wouldnft do any good because its income just flows right back to
your 1040, pushing you into higher tax brackets and triggering the mean testing
penalties. (Back
To Top)
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Itfs amazing to hear stories of
idiots spending thousands of dollars on toys and other new Star Wars stuff,
expecting them to be worth millions in the future. Things made to be collectible, such as those prized
treasures from the Franklin Mint, donft
become valuable. Neither is
anything that is still being produced.
Rarity and limited supply cause high values. (Back To Top)
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Itfs classic Washington logic (the biggest oxymoron
around). Take a program that is completely
out of control in terms of cost and bureaucracy, and make it even bigger and
more powerful. In a blatant
attempt to buy votes from senior citizens, the JackAss Party is planning to have
Medicare, which is already on the brink of bankruptcy, pay for
prescriptions. Supporters of this
plan estimate this added benefit will cost an additional $45 billion a
year. Considering that all
previous Medicare estimates have been a tiny fraction of the actual numbers,
itfs obvious where this is headed.
While at first blush, this may appear to be a good deal in the face of expensive medications, I prefer to look at the overall big picture. While the medicines may be free to the seniors, it is just like Federally paid road work. Most people consider it a freebie. However, that money does come from somewhere; from those of us who work for a living. Taxes will have to go up to pay for this. The ceiling on the income subject to the 12.4% Social Security tax (currently $72,600) will be removed.
Fans of big government are very patient and have been extremely successful in achieving their objectives by working in increments. Queen Hillaryfs attempt to take control of the entire medical care industry in 1994 failed because she tried to do it all in one big bite. These kinds of changes are much more easily assimilated in gbaby steps.h Once people become accustomed to a government program such as this, the chances of it ever being eliminated, or even reduced, are nonexistent. Anyone opposing free government paid medicines will be portrayed by the media as wanting to murder poor defenseless old people. The media love all big government programs and will do everything in their power to support the growth of Medicare. (Back To Top)
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Some time ago, I wrote about the growth in poverty planning in the financial advisor arena. This entails helping people dispose of or move assets in order to qualify for government paid programs, such as Medicare. This became such a hot issue that a law was actually passed making it illegal for anyone to give this kind of advice. Luckily, in an increasingly rare support of the Constitution, this law was tossed out as being an infringement of our freedom of speech.
As the saying goes, if you want to know what is important, follow the money. Although our countryfs overall rate of inflation has been fairly low over the past few years (averaging around 3%), the two areas that have consistently had double digit inflation rates have been education and medical costs. Similar to the poverty planning for senior citizens, a fast growing specialty in the financial planning community is helping people qualify for financial assistance for their childrenfs college costs. The basics of these planning steps, which I will cover in more detail in a future issue, involve how assets are owned (by parent or child) as well as what kinds of assets. Some types of assets, when listed on financial applications, cause a student to be ineligible for financial assistance; while others (e.g. business assets, residences and annuities) are not counted as strongly against the student. If you now have or will be having a college student in the family, and you want to qualify for some very generous financial assistance with those costs, you should consult with a financial advisor who is aware of the strategies that could help you qualify. (Back To Top)
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Kerstetter Letter 11802 Deer Road Harrison, AR
72601
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