IRS is addicted to e-filing

Electronic filing of tax returns has grown smartly in the last few years, and a good thing, too. IRS no longer has the capacity to process returns the old fashioned way, reports Tax Notes Today ($):

Speaking at an IRS software developers conference, George Jakabcin, IRS assistant deputy associate chief information officer for systems integration, said the IRS could not afford to lose the trust of taxpayers who are filing their tax returns online.

If some event led half of the current e-filers to switch back to paper, "we would be in a world of hurt," Jakabcin said. "We no longer have the capability to process the additional 43 million returns manually. We no longer have the facilities, we don't have the IT infrastructure in place to support them, we don't have the people, and some would begin to argue that we are beginning to lose the expertise."

Trouble is, e-filing has stimulated a boom in "phishing," identity thieves posing as the IRS. About a month ago my wife received an email that appeared to be from the IRS, telling her she had until May 8 to file electronically to receive her tax rebate check--I had her delete the message immediately. In 2006, IRS detected 247 phishing sites, while this year, just by May 23, they already had spotted 1,327 such sites.

Largest Hedge Funds Ranked

Institutional Investor's Alpha has come out with its new ranking of the world's largest hedge funds. Among Connecticut-based funds (how about some of you moving to Stratford?), Westport's Bridgewater Associates, with $36 billion, tops any in Greenwich.

But as the Greenwich Time observes, you should keep an eye on Steve Mandel:

Greenwich's Lone Pine Capital jumped more places than any other local firm on the list, coming in at No. 17 with $18 billion in assets. Lone Pine, which is run by Stephen Mandel, was No. 47 on last year's list, with $8.63 billion.

By contrast, Edward Lampert's Greenwich-based ESL Investments fell from the top 10 down to No. 38.

Brokers Pursue the Really Rich

Morgan Stanley, Merrill Lynch and Citigroup are pushing their brokers to work with in-house experts on such big-money issues as estate planning, philanthropy and alternative investments. It's all in the name of asset-gathering, reports the Practice Management column on the DJ Newswire:

As large firms compete for wealthy clients, they're pushing financial advisors to work with colleagues experienced in serving the superrich.

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These ad hoc partnerships dovetail with the push for advisors to work in teams and tap in-house subject matter experts or colleagues with complementary skills, as needed.

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To be sure, advisors may resist partnerships because they fear losing control of the client relationship or don't want to split fees and commissions with a colleague.

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At Merrill Lynch, a financial advisor who was doing traditional asset management with a client brought in a private wealth advisor with experience in philanthropic planning and alternative investments - two issues important to the client. The client, who had about $25 million invested with Merrill, turned over an additional $40 million within a year….

As of last year, some 215,000 U.S. households had more than $10 million to invest, according to research by Cerulli Associates. About 36,000 had more than $25 million.

Offshore Tax Dodgers Start to Sweat

Looks like a bad year for tax dodgers and their facilitators (see preceding post). In this week's Tax Report, The Wall Street Journal's Tom Herman reports that many wealthy Americans who bought illegal offshore tax shelters are "facing a difficult decision: whether to turn themselves in – and if so, how."

"People are having trouble sleeping at night," says Charles Rettig, a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, Calif. "They don't want to go to prison."

Lawyers advising tax dodgers are saying their clients are struggling to decide among several alternatives. They can confess and plead for mercy. They can quietly file amended tax returns, pay up, make other required disclosures and hope overworked government prosecutors won't follow up. Or they could choose to do nothing and pray their names won't turn up.

The IRS has turned up the heat on offshore trusts and other shelters, offering higher rewards to informants. The rewards could be a good investment: offshore tax evasion costs an estimated $100 billion in lost revenue each year.

"Operation Trust Me" Pays Off

Four years after the IRS launched Operation Trust Me, the Chesterton, IN Tribune reports, six men have been convicted by a federal jury in connection with a $60-million tax fraud.

"According to the U.S. Attorney’s Office, all six were associated with The Aegis Company, which for a decade sold sham domestic and foreign trusts for the purpose of diverting and hiding client’s taxable income, resulting in a $60 million tax loss to the U.S., in one of the largest cases of its kind."

"Taxes are like poison."

I never thought I'd read the above phrase in Inside Higher Ed, in a column written by an economics professor from Smith College. But there it is, and here is the rest of the paragraph:

Taxes are like poison. Taking a lot is fatal, but exposure to small quantities only moderately harms health. The best way for a government to tax, therefore, is for it to spread around its tax poison broadly so no entity must consume too much of it. If Massachusetts is determined to collect a certain amount of taxes from organizations (such as corporations), then it will do less harm if it forces all organizations to pay a little than if it mandates that a subset pay a lot.

What's Professor Miller talking about? Why Massachusetts Should Tax Harvard. Apparently others share my biases. In his article Miller asks, why couldn't Microsoft make the same demand for a tax exemption that Harvard and other elite schools have made? And he's right.

IFRS, Everyone?

Wealth managers soon may have yet another task: introducing their clients to IFRS (International Financial Reporting Standards). Price Waterhouse explains it all.

Muni bond tax discrimination is preserved

For decades the states have practiced income tax discrimination. They have exempted from tax the interest from in-state bonds, while taxing in full the interest from out-of-state debt obligations. The Kentucky Supreme Court held that such action violates the Commerce Clause of the U.S. Constitution, but by 7-2 the U.S. Supreme Court found that it passes muster. Liberals and conservatives joined in a multifaceted opinion, with Justices Kennedy and Alito in dissent. The tax exemption for private activity bonds was not before the Court, so the decision expressly does not apply to it.

For a more detailed analysis of the case and its consequences, see TaxProf Blog: U.S. Supreme Court Upholds Discriminatory Taxation of Municipal Bonds

Is that a trust marketing opportunity knocking?

Below JLM commented on the growing number of millionaires. Now comes a new Phoenix Wealth Survey, reported by On Wall Street, that says more and more of these high net worth folks are managing their finances on their own, apparently disillusioned with the advice they received recently. Or perhaps with the price of advice that, in hindsight, looked pretty ordinary. Reportedly 41% now have no primary financial advisor, a big jump from 34% last year.

What's more, a remarkable 42% of those with more than $3 million in assets have put off their estate planning!

Are trust bankers in a good position to capture some of that business?

A typical heir?

"Hartford, A. & P. Heir, Dies at 97" reports the New York Times. I was not familiar with this family. In retrospect, it seems that Huntington Hartford was an early ADHD sufferer, given the way he flitted from project to project.

At first, I thought to post a link to this story as a cautionary tale of the perils of sudden wealth, or of unearned wealth. But upon further reflection, I'm not sure that the result here is so bad. Mr. Hartford's inherited wealth permitted him to try out a great many endeavors, some quite offbeat, none very successful. So what? Would he have been better off with a trust officer limiting his access to the family fortune?

Boomer Wealth: Myth vs. Reality

The first, oldest members of the Baby Boom generation, born in 1946, reach age 62 this year. If you pay attention to all the marketing of rollovers and "distribution-stage" investment products, you would think that all 78 million Boomers are about to retire.

Think again. Those turning 62 will be lucky to retire at 72. Most Boomers are in their 50s, and only starting to think seriously about wealth accumulation. The youngest Boomers are in their mid-40s; retirement is barely a blip on their radar screen.

In other words, most Boomers are very much in the wealth-accumulation phase of investing, or should be. And some major media are taking steps to help them:

The New York Times has signed on Ron Lieber as a new personal-finance columnist. (The Times may have one eye on the Boomers, but the other is on Rubert Murdoch and his ambition to move The Wall Street Journal into the Times' general-news turf.) Lieber debuted with this Five Basics column.

Last Friday CNBC devoted a prime-time hour to BoomerAngst. The program gave new meaning to the term "once-over-lightly." Nevertheless, the basic point was incontrovertible: Boomers are going to need all the wealth-management help they can get.

Millionaire Households

The number of U.S. millionaire households rose again last year, to almost 10 million.

(Remember, most millionaire households contain no millionaires; rather, they contain two or more people whose investable assets add up to at least $1 million. Roughly three million Americans are estimated to be individual millionaires.)
If you have just read Jim Gust's post below, another thought may occur to you: Poor people are woefully under-represented in millionaire households!

Philanthrocapitalism?

Robert Franks explains this new term. It's what Bill Gates is doing with his money, staying involved with the philanthropy instead of delegating all the decisions to people who aren't themselves rich. Michael Edwards, who has written a book on the subject, is interviewed by Franks. Strangest thought:

The domination of philanthropy by small groups of wealthy people is potentially undemocratic. In a real democracy, you give everyone an equal chance. Poor people have been written out of the story.

Centuries-Old Family Businesses

Remember the Antinoris of Italy? Their family business has survived since 1385.

No U.S. family business can top that, but a few have managed to survive and even flourish for centuries. Business Week reports on their longevity secrets. Stewardship is one: "We work for the business; the business doesn't work for us."

Featured in the BW story is a venerable Connecticut concern: Lyman Orchards.

Goodbye to Offshore Tax Shelters?

Now that some Swiss banking secrets have surfaced, indictment season has begun, The New York Times reports.

Sounds like bad news for certain billionaires and their offshore private bankers. Also for the New Haven Trust Company, which turns out to be located more than a stone's throw from the New Haven Green in Lichtenstein, specializing in "tax planning."

The Wall Street Journal comments:

The case provides a rare window into the world of private banking -- the personalized financial services offered to wealthy customers -- where Switzerland's UBS has long dominated. The case could lead to other U.S. clients: The indictment says the two financiers -- former UBS private banker Bradley Birkenfeld and Liechtenstein financial adviser Mario Staggl -- courted rich Americans and helped some of them avoid paying taxes.

The indictments are the latest sign that elaborate tax-evasion schemes available only to the super-rich are teetering toward a collapse.

“Legacy Assets”

Is "legacy" becoming a bad word?

Citigroup CEO Vikram Pandit made me aware of the threat at his first presentation to the Wall Street crowd. Citi, Pandit said, will get rid of $400 billion of "legacy assets."

Citi must have borrowed the term from the IT guys. Software engineers like projects that start with a clean slate. Too often, though, they must wrestle with "legacy assets" – dysfunctional IT stuff that the client considers too expensive to jettison.

For CEO Pandit, "legacy Assets" serves as convenient shorthand for saying, "We didn't acquire these CDOs and SIVs and other junk during my watch." So Citigroup investors should blame the previous CEO, Charlie Prince. Better yet, Sandy Weill.

Will "legacy" acquire enough negatives to endanger the fashion of referring to estate planning as "legacy planning"?

"Legacy planning" is meant to suggest an enhanced form of estate planning – one concerned with passing along "values" as well as money and property. But as the IT guys and Pandit remind us, all that gets passed along isn't necessarily welcome.

There's also the question of whether "values" can be taught to the children of the extremely well off. See yesterday's post on the Wealth Report and the comments thereon.

Repealing the rule against perpetuities works!

After the enactment of the generation-skipping transfer tax, some wealthy families became much more interested in creating perpetual private trusts to avoid future transfer taxes. The obstacle to such a strategy is the inscrutable rule against perpetuties.

No problemo, said roughly half of the states, who proceeded to either repeal the rule for in-state trusts or extend it for such a long period as to be "perpetual enough." Some states also adopted a "wait and see" rule, that is, the rule against perpetuities could not be invoked to invalidate a trust because of the mere possibility of breaking the rule, an actual violation would be required.

Why would the states toss out the venerable rule against perpetuities? Because it would get them a leg up in attracting new trust business. Could that strategy really work?

Yes, it did.

Here's the documentation: SSRN-Perpetuities, Taxes, and Asset Protection: An Empirical Assessment of the Jurisdictional Competition for Trust Funds by Robert Sitkoff, Max Schanzenbach. The law professors discovered that abolishing states enjoyed a 20% increase in trust new business ($6 billion per year) and their average trust size increased by $200,000. They estimate that $100 billion worth of trust funds have been relocated to take advantage of the abolition of the rule against perpetuities.

"The Hedges of Greenwich, Connecticut"

Ben Stein's column in the NY Times today offers a nifty idea for a new HBO series. But Stein's real concern is the speculation in energy futures. Oil and gas prices seem to keep going up, even when you would think demand should start to slacken off. Stein believes prices keep rising because the hedge-fund managers of Greenwich are speculating in energy like crazy. And now, brokers and private bankers are steering their clients into oil futures as well.

A sign that another speculative bubble is about to burst?

Irrational exuberance over energy has already claimed a victim: twin ETF's conceived by Yale's Robert Shiller. MacroShares Oil Up and Macroshares Oil Down were intended to allow investors to bet on oil's ups and downs although the funds did not actually buy or sell oil contracts. The ETFs, launched when oil was about $60 a barrel, might have worked if oil had not soared much above $100. But it did, and the WSJ reports that the funds will be liquidated. See also Forbes' Accidental Gusher.

What about it, wealth managers? Are you still putting clients into energy futures, or are you telling them it's time to bail out?

Rich enough to pay taxes?

As noted earlier, I believe that the tax benefits accorded to higher education have gotten entirely out of hand. If I have to pay taxes on my inconsequential investment income, why shouldn't university endowments do the same? Please note that I don't oppose the charitable deduction for gifts to universities, I just resent the exemption for their investment income, which at times has been extraordinary.

Apparently, they have taken notice in Massachusetts, where TaxProf Blog reports that some legislators want to consider a 2.5% excise tax on college endowments greater than $1 billion. I'm not clear on why an excise tax would be better or more fair than an income tax. Nine universities would be affected, with Harvard owing a projected $840 million.

Is that too much to ask?

The middle class has been squeezed dry, it may be time to go to where the money really is for revenue.

The Art Market Revisited

Sotheby's may have been smart to slim down its spring sale of impressionist and modern art. (See Jim Gust's earlier post.)

Bloomberg reports:

Sotheby's 52-lot auction totaled $235.3 million, inside its estimated range of $203.9 million to $280.1 million. The 58 works Christie's offered on Tuesday raised $277.3 million.

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Sotheby's average price per lot was $5.7 million, up from $3.5 million in November, even after U.S. stocks suffered their biggest drop in almost a month yesterday. Sotheby's said Americans bought more than two-thirds of the lots, a reversal of the Christie's sale, when U.S. buyers took home only a third.

The star of the Sotheby's sale, a work by Ferdinand Leger, went for $39.2 million. In second place was the painting below,"Girls on a Bridge," by Edvard Munch. It's a bit cheerier than his famous "Scream."


Graham Kirkham, aka Baron Kirkham of Old Cantley, bought "Girls"in 1996 for $7.7 million. Last evening at Sotheby's it fetched a record $30.8 million. Even after reducing that figure by a few million to allow for the buyer's premium, Baron Kirkham appears to have enjoyed an annualized return on his art investment of about 11%.

Not bad. And that's not counting the psychic income the Baron received along the way. Nobody ever invited guests to a country house to admire the municipals.

Will contests and multiple families

Notes from a Texas probate attorney. (I wonder how the polygamists handle this?)

The art market as economic indicator

As the economy weakens, one might expect that a luxury segment such as fine art would drop as well. And perhaps it has, Robert Franks reports in The Art Market's Stealth Correction. We haven't seen headlines trumpeting a fall in prices, according to Franks, because the big auction houses are managing the supply, cutting the spring auction offerings by 25%. Prices at the highest end of the market haven't suffered, but they have in the middle. Says Franks:

Gauging art prices based on the record-shattering prices for an Andy Warhol is a bit like gauging the stock market based on the share price of Google.

UPDATE: Compare Show Me the Monet in Barron's.

Time to Step It Up?

Wall Street’s problems create exceptional new business
opportunities for bank trust departments and trust companies.

You now have something Ford Motor Company is spending tens of millions trying to get—consideration. If you have been following Ford, you know that many people don’t even consider buying a Ford product because of past problems. Ford CEO Alan Mulally knows that before he can sell more cars, he has to get people to put Ford back on the list of cars they “consider” buying.

While headlines have trumpeted the huge financial losses of Wall Street brokerage and private equity firms, their customers have lost also. In turn, those firms are losing the confidence and trust of their clients—and that means opportunity for you.

Who are these clients? Many were successful business owners, executives and wealthy retirees who wanted to earn a good return on their money, but with moderate risk. They were convinced by good salesmen with slick presentations that their firms were the only place to get “state-of-the art” management of their investments.

Fed by a continual stream of media reports on the successes that these companies and hedge funds were reporting, it seemed as if they indeed were taking over the investment marketplace, so there was a natural desire to want to join them. Sadly, in some markets bank trust departments and trust companies were being given little if any consideration when it was time to pick investment managers.

How times have changed! Media outlets are now running stories about people who have lost lots of money in “safe” investments, and many people feel they have been outsmarted or duped. Who can blame them? Just think of the poor folks who were sold the “safe alternative” to CDs—auction-rate securities.

Here is where the opportunity for trust departments comes in. Many wealthy investors are now looking for trustworthy investment help from companies with no hidden agenda. Many prefer to get it from a local, well-established source, one where they can meet the people face-to-face. Sounds just like a trust department.

How do you take advantage of this change of tide? People are not just going to show up at your door to give you business. You need to step up your marketing and sales efforts and reach out to them. Also, marketing through centers of influences—attorneys and CPAs—can be effective because these professionals are helping their clients deal with investment losses and may be in a position to recommend your services.

Recent events have put trust departments back in the game, have reshuffled the “investment help” consideration list, so it’s a great time to rev up your marketing efforts and start securing new business relationships. Merrill Anderson is ready to help you do just that.

This Private Bank is "Members Only"

Fieldpoint Private Bank and Trust just opened in Greenwich, CT. Founded by a group of wealthy investors, including three former Merrill Lynch CEO's, Fieldpoint's announced aim is to recreate the good old days when organizations such as U.S. Trust were young and flourishing.

With one apparent difference: No uncouth rich Russian will be able to walk in and establish a relationship. Fieldpoint is described as "members only." In addition to rudimentary manners and clean fingernails, Fieldpoint members will be required to possess at least $10 million in investable assets.

For more about Fieldpoint's founders, see this Investment News story from last December.