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CONGRESSIONAL STIMULITUS

February 1, 2009
One might think of the economy as a horse drawn wagon loaded with goods and services. Three of the four horses pulling the wagon are consumers. The other horse is government spending. The wheels allowing the wagon to move are the four spokes of the financial system providing credit, namely: (1) consumer and mortgage borrowing (2) business borrowing (3) state and local borrowing and (4) U.S. Treasury borrowing. The axel grease allowing the wheels to turn is confidence for every financial transaction is a series of promises we trust will be kept. When a criminal like Bernard Madoff breaks a promise, we discount his behavior as abnormal. But, when sincerely made promises are broken by the system at large our confidence is badly shaken.
Today the three consumer horses have stopped galloping out of depression, fear and uncertainty. Three of the four credit wheels have broken off from their axels; and, even if we could get them back on, there is no axel grease to start them turning.

In his inauguration address, President Obama stated, “The question we ask today is not whether our government is too big or too small, but whether it works…” Clearly, he means to steer the economic recovery by flexible pragmatism as opposed to a fixed ideology.

A MULTI-PRONGED ASSAULT

President Obama intends to assault the worsening economic catastrophe in a number of different ways, namely:
1. Economic Stimulus: Stimulus measures are intended to create jobs and boost confidence that consumers will awaken from the spending slumber like Sleeping Beauty. The House last week passed a huge stimulus bill intended to jump start the economy. The Senate this week will take up a similar measure. There are, however many views about what this bill should and should not include that will eventually be resolved by compromise. Some issues are:
a. Economic Recovery versus systemic change: The House bill goes beyond direct job producing provisions like road proj... Read More »

ANOTHER CHARGE OF THE LIGHT BRIGADE?

March 21, 2009

Media baron Rupert Murdoch was quoted recently: “We are in the midst of a phase of history in which nations will be redefined and their futures fundamentally altered.”
A far less notorious Russian First Deputy of Staff, Vladislav Surkov, was also recently quoted: “The crisis won’t be overcome if we fight it with troops of sluggish number-crunchers. We need new creative solutions, not a scientific basis for doing nothing, lying n the stove and waiting for the restoration of the American economy.”
The Charge of the Light Brigade, immortalized in Tennyson’s poem, exemplifies how stupidity, miscommunication, incompetent leadership combined with unimaginable bravery to bring about a military disaster for the British against the Russians in the Crimean War. Many are alarmed that President Obama’s Stimulus plan together with his energy, education and health care proposals will inevitably cause an economic calamity for this country. No one can adequately predict the future but I do believe that the administration is not blindly charging against insurmountable odds and does have a sane plan that is intelligently based on present circumstances and has a good chance of success. In this issue I will focus on some broader policy issues and give you a framework for understanding what is being attempted.

WHAT ARE THEY TRYING TO ACCOMPLISH?
It is helpful for me to think of the administration’s plan as three interconnected plans, namely:
1. Stabilize the economy and prevent a deflationary cycle: In my last issue “Congressional Stimulitis” I discussed the several components of President Obama’s stimulus plan which includes $800 billion in government spending, continued and expanded bank rescue efforts printing money to ease credit flows and a program to stem home foreclosures. One criticism of the package is that it is unfocussed diluting its effect by spreading funds over too many projects. I for one would have preferred more e... Read More »

CLIMATE CHANGE FOR OFFSHORE BANK ACCOUNTS

COME IN FROM THE COLD

The IRS has announced a revised voluntary disclosure policy for those with un-reported foreign bank accounts who want to come in from the cold.



CLIMATE CHANGE FOR OFFSHORE BANK ACCOUNTS
Offshore or foreign bank accounts have always been perfectly legal and U.S. citizens or residents can own them for legitimate reasons such as higher investment yields, creditor protection or to facilitate business dealings abroad. The owner of a foreign bank account will have no problem with the U.S. government so long as the account is reported to the Treasury on TD 90-22.1 (Foreign Bank Account Report or FBAR) by June 30 of each year and the interest income from the account reported to IRS in a timely filed Form 1040.
Many U.S. persons, however, hiding behind bank secrecy laws of countries like Switzerland and Liechtenstein, have failed to report the account and income earned on the account. Bank secrecy laws for years frustrated IRS efforts to capture this unreported income estimated to cost the Treasury $100 billion.
For many reasons, including the need to monitor and interrupt the flow of funds to terrorists, the IRS is now aggressively pursuing offshore non-filers. Penalties for getting caught red handed may include:
1. A fine of at least $10,000 for neglectful non-filing of the FBAR.
2. A fine, equal to the greater of $100,000 or ½ the value of the account at the time of the non-filing. For accounts of $1 million or more the $100,000 increases to $500,000, for willful non-filing of the FBAR.
3. A fraud penalty on the income not reported equal to 75% of the underpayment in tax.
4. A criminal penalty including lengthy jail sentences of up to 10 years for both failing to file the FBAR and failing to report the income.
Evidencing a more aggressive stance the U.S. Department of Justice recently asked a U.S. District Court to order Swiss Bank UBS to turn over the names of some 52,000 customers. UBS had avoided a criminal trial for its... Read More »

MADOFF AND OTHER PONZI SCHEMES PRSENT TRICKY TAX ISSUES

This issue summarizes in general terms some of the tax issues involved in attempting to claim a tax loss due to a Ponzi scheme fraud. The article is written mostly in lay terms and should not be viewed as exhausting all of the tricky tax issues concerning theft losses.
DEDUCTING THEFT LOSS IS PROBLEMATIC
Obtaining a tax deduction for a Ponzi scheme loss requires answering many questions of fact and law, including:
1. Whether the loss is an investment loss or a theft loss
2. The proper year for claiming the loss.
3. The amount of the loss
4. Whether the loss is deductible fully or only to the extent it exceeds 10% (as for personal casualty losses) of adjusted gross income for the loss year.
5. The character of the loss, that is, capital loss or ordinary loss.
6. Whether the loss is from a trade or business or non-business activity.
7. Whether a net operating loss created by the allowed loss deduction may be carried back to earlier tax years.
8. To which earlier tax years may a resulting net operating loss be carried?
9. Whether taxes paid on phantom or fictitious income from the Ponzi scheme may be recouped by filing amended returns.
10. Whether one may recoup taxes on fictitious income paid in years closed by the 3 year tax refund statute of limitations.
The answers to these questions often take years to resolve and too frequently result in litigation with IRS. Until the issues are resolved there is often the need for and expense of filing protective refund claims to preserve alternative or fallback positions.
In 2009, IRS published a Revenue Ruling explaining its positions regarding many of the above questions. Some examples of potential potholes for investors are:
1. Normally one may deduct a theft loss in the later of the year of discovery or year in which there is no longer a reasonable prospect of recovery. For most Madoff investors that would postpone the loss deduction to 2009 or later even though many investors are in dire financial strait... Read More »

MORE ON MORTGAGE DEBT CANCELLATION TAX ISSUES

Effects of the sub-prime mortgage debacle are no doubt being felt by all. Especially desperate are those who purchased dream castles during 2005, 2006 and 2007 and are now among the largest group upside down to their mortgage debt and facing foreclosure or abandonment. This issue updates and expands on my previous discussion of mortgage forgiveness of a personal residence appearing in the May 8, 2008 issue. The relief granted by Congress to distressed homeowners who are released from part or all of mortgage debt obligations presents complex and tricky tax law issues that are best handled with the assistance of a lawyer experienced in tax matters.
The Mortgage Forgiveness Debt Relief Act of 2007 (Act) provides tax relief to defaulting homeowners who might otherwise owe income tax on qualifying mortgage obligations forgiven in 2007 through 2009. The Emergency Economic Stabilization act of 2008 extended that relief through 2012.
A lender that is paid less than the full principal owed on a mortgage often decides not to personally pursue the borrower for the deficiency i.e., the amount by which the amount of the mortgage debt obligation exceeds the value of the foreclosed property. In that case the lender is required to file Form 1099-C informing IRS and the borrower of the cancelled portion of the debt. The amount of cancelled debt is taxed at the higher ordinary income tax rates (not as a capital gain) unless certain narrow exceptions or escape hatches are available.

WHY CANCELLATION OF DEBT IS TAXED
Many logically ask: “Why am I taxed on a debt I cannot afford to pay when I’ve received no funds and have lost my home?” The answer is not comforting: the income tax applies to all income from whatever source derived. Income means an economic benefit received or constructively received, whether in cash or property or in some other form not constituting a gift. When you receive loan proceeds there is no immediate economic benefit because you have an equa... Read More »