February 1995
Vol 18 No 6
House Speaker Newt Gingrich and the new Republicans have promised to bring all the main provisions of their 'contract' to the floor of the House for discussion within the first 100 days of the new Congress. Among the hot topics will be middle class tax cuts and a revamped welfare system. You can expect howls of anguish from the liberal left who will hold up the specter of millions of impoverished, dependent single parents with children left to shift for themselves in a world suddenly grown markedly less kinder and gentler. What they won't mention are the hoards of well heeled bureaucrats, who've historically consumed 85% of the welfare dollar, turned out to pasture with few marketable skills. They'll be the new welfare constituents.
If you want to strike terror into the heart of a bureaucrat, mention REDUCTION IN FORCE (RIF). The phrase, 'Term limits' has the same effect upon elected officials. Few of them ever really gave much thought to the prospect that, at some time in the near future, they might be returned to the real world. They'll have to learn how to earn a living hemmed in by the chaotic web of laws and regulations that they themselves have spun around the poor wage-earning taxpayer.
Yet, that's exactly what Republicans have promised, among other things. The real question is whether or not any change will ever came to pass once all the machinations of political forces are brought to bear. Already, the deal-makers are busy bartering votes, support and cash. This accommodation threatens to water down the practical results of the 'contract' negotiations. Until we see down-to-earth benefits of the Republican 'contract' on wage earners, entrepreneurs and investors, I'm going to take a 'show me' attitude. Meanwhile, we'll have to deal with the world as it is today.
Let's take a look at some of the changes that are already on the table for 1995. Private Pension Plans are bulging with over $5 Trillion. That's just about what it would take to retire the national debt, and don't think your government hasn't noticed this. Some of the ideas proposed include taxing retirement plans on income they earn, forcing plan administrators to invest in U.S. Treasury Bonds that would be non-negotiable. The Social Security Trust Fund already resides in these unsecured promises of the government. What could be more fair than to extort the private savings of our most thrifty citizens in order to feed the voracious appetites of politicians who want to use this money to buy votes through government give aways? Here's one way to play this:
If the Republican Congress fails to confirm the sanctity of plan investments, you know that something's rotten in Denmark. Stop putting money into them. Charitable Remainder Trusts and/or insurance annuities offer tax advantaged ways to provide an income for retirement. By and large, there's less red tape when it comes to the beneficiary's being able to start taking his/her retirement pay out. Creditors have about the same degree of difficulty when they attempt to raid these irrevocable trusts as they do with pension plans. Assets can compound inside the CRT and/or annuity tax free until taken out.
As a double defense, you might use an off shore annuity, privately with little fanfare or notoriety, written by a Swiss or Isle of Man company . There's no requirement to report insurance annuities to the IRS as off shore holdings. Charitable Remainder Trusts can combine the benefits of an insurance annuity with the tax benefits of being able to get a deduction based upon the market value of donations of low basis assets, then of being able to sell them for cash without being taxed on the gain. These two devices may be the last refuge of capital in order to provide your pension.
ECONOMIC SANITY? PERHAPS. FINANCIAL PRIVACY? NO!
Regardless which party is in power, centralized control over private property by government will always pose the major threat to free citizens. But first, government has to take inventory. They do this through a variety of means. Since TRA 1986, transactions in real estate bank accounts, mutual funds, securities purchases, off shore accounts and currency transactions have been inventoried via forms 1098 and 1099. The whole structure of the listing of private assets is based upon information returns collected at every level from virtually everyone in private or government business. Despite laws to the contrary, Social Security numbers and federal I.D. numbers are the key link between assets and ownership. Resisting the giving of any identifying numbers is the first line of defense against intrusion into your private affairs. It's not easy, but it's possible.
Let's see what the law says on this subject. With a very few exceptions, Section 552a of the Privacy Act of 1974 says in so many words that no federal, state or local, government agency may deny you any right, benefit, or privilege for refusing to provide, your Social Security number unless there's a specific law or regulation adopted prior to 1975 that authorizes a demand for the number. Some of the exceptions to the law include the IRS, Social Security Administration, your employer. The law forbids their revealing your number to others.
Note that Schools, car rental agencies, State drivers' license bureaus, banks, credit agencies, lenders, hospitals, doctors and other private firms have no legal right to your number. Of course, private companies can refuse to do business with you if you fail to provide a federal SSN. But you also have rights if they illegally discriminate against you for that reason. In entering into negotiation, you might point this out to them. Public Law 93-579 requires that any federal, state or local government agency requesting your SSN first provide the following information to you:
Whether disclosure of your number is mandatory or optional.
The statutory or other authority it has to require your number.
The manner in which your SSN will be used.
The consequences, including penalties, if you don't provide it.
As a business person, you can apply for a Taxpayer Identification Number (TIN) under which you can operate a business. LLCs, Partnerships, Corporations, and certain Trusts normally obtain their own TINS in order to open bank accounts for the purposes of paying income and payroll taxes. Your personal connection with a business entity may be kept private so long as you're not registered in the public records as an officer, director, trustee etc.
Even where giving your SSN is mandated, the Feds don't seem to be interested in enforcing the law. For example, even though TRA-86 requires applicants for a U.S. passport to disclose their SSN, a 1989 study shows that 40% of applications for passports, don't contain this number despite a $500 fine that can be imposed. Here's another interesting little fact. Although IRC Section 6109(e) requires that a dependent child must have a TIN in order to claim a deduction, Section 6676(d) says in part: (1) In General – if any-person required to include the TIN of any dependent on his return fails to include such number on such return, such person shall, unless it is shown that such failure is due to reasonable cause and not willful neglect, pay a penalty of $5 for each failure. They rarely collect even this small sum, but even if they do, getting a $2000 exemption at the cost of $5 isn't a bad trade off while protecting your heirs' privacy.
As long as you're paying for Social Security, it's a good idea to audit your account every 3 years to assure that your earnings are being properly credited. They base your eventual pension upon the highest-paid 35 years. If they make a mistake, they only have to go back 3 years to correct it. When I did my regular 3-year audit of my own account a few years ago, I discovered they'd completely lost it in the computer, wiping out 43 years of earnings. Had I not checked, I would have been in for a surprise upon retirement. Call 800-772-1213 and request Form SSA 7004 ‘Request for Earnings and Benefit Statement' which you can send in to verify your own personal account.
HOW DO YOU KEEP PROPERTY TRANSACTIONS PRIVATE?
The infamous TRA-86 brought with it a requirement that real estate closings be documented by means of a Form 1099, submitted at the closing. Later still, most of the exceptions to this law were removed so that it now encompasses almost every imaginable aspect of real estate. Nonetheless, there are transactions which would seem to escape reporting requirements, thus keeping private real estate out of government computerized asset inventories. What might these be?
U.S. Treasury Regulation Section 1.6045-3T(1) lists exceptions to the reporting requirements of real estate transactions, and number one among them is Corporations. It says 'No return of information is required with respect to a transferor that is a corporation…'. By holding real estate corporately, there are the obvious privacy advantages, plus, the owner of the corporate shares is personally insulated from the liability associated with EPA, Tenant suits, government regulators. Furthermore, regular C-corporations are exempt from the passive loss rules and thus enjoy unlimited real estate tax write-offs against active income. These advantages must be weighed against the potential costs of double taxation on gain and dividends, but holding title corporately merits serious consideration.
Another little loophole in IRA-86 is that it says nothing about reporting, personal property transactions. When real estate is held in trust, with interests of the beneficiary declared as personal property, transfers of beneficial shares don't require reporting. In practice, a property might be bought in the conventional manner and titled to the Trustee of a Trust for which you might be the named beneficiary. Alternatively, the seller might place real estate into Trust, naming your designee as the Trustee. Next, you buy his shares in the Trust and become the beneficiary with 100% of the power of direction over the Trust.
When you sell, you convey the beneficial interest to the buyer in an unreportable personal property transaction. He terminates the trust and has your former Trustee deed the property to him. Conversion of personal property to real estate doesn't appear to be covered in the tax regulation either. Your financial privacy thus remains intact. Here again, there are other intangible benefits to doing business as the beneficiary of a Trust,. Your control over the ownership of the property is invisible to all intents and purposes. You can build in considerable asset protection if the beneficial interest resides in an out of state corporation. This could reduce your personal state income taxes if you incorporated in a state which imposed no state tax at corporate level. Any litigation affecting the beneficial interest would have to be pursued in the state where the beneficiary was domiciled, not where you, a mere shareholder, lived.
THE TIDE OF PRIVACY INVASION IS IN FULL FLOOD
For every move toward privacy, there's a counter move to invade it. Every time you give your drivers license, credit card or identification number, birth date, address to anyone, it probably goes into a computer. Ditto for catalog orders, credit, mortgage and job applications, background security checks, medical treatment, school enrollment, passport applications, purchase of vehicles, remittance of guarantees and warranties, fire arms permits, long distance calling cards, etc. There are large agencies making huge sums, of money compiling and selling information about all of us. Some of these are:
CDB Infotek of Santa Ana. California (800-427-3747) provides nationwide searches to locate people and businesses, criminal and civil court records; ownership searches vehicle, RV and boats, DMV records, real property, bankruptcies, liens and judgments, fictitious names, voter registrations, corporate and partnership filings, UCC filings, divorce and probate records. Cost: $199 plus monthly fees.
Equifax Credit Information, of Atlanta, GA (800) 685-1111, Trans Union Corporation, of Springfield, PA, (800) 851-2674 and TRW Information Systems, of Chatsworth, CA (800) 854-7201 or (800) 682-7654 collectively hold the credit files of almost everyone in America.
In October, the 103rd Congress passed the 'Digital Telephony BilI'. It requires telephone companies to design their equipment to make it easy for government to tap telephones and FAX lines. On-line systems such as Internet, Compuserve, America On-Line, Prodigy, ATM networks, and electronic messaging services such as E-Mail are exempt. All calls from cellular and mobile phones easily can be monitored. Private industry has fought back with PGP (Pretty Good Privacy) to encrypt E -Mail messages. You can send $15 to The Financial Privacy Report for their March 1994 issue for more details on how PGP programs work. Encrypted E-Mail may be only one of two remaining private ways to communicate with a Swiss banker. The other is a private telephone debit card. You buy this card with cash from Western Union Offices. AT&T Phone Center stores and 7-11 Stores. It prepays for from $5 to $500 in phone calls. To use it, you dial a special 800 number from which all your calls are dialed, obliterating any links to you as the caller, and effectively blocking phone traces.
By and large, privacy isn't invaded so much as it's trampled by those who are assembling marketing data or mailing lists. Nonetheless, like innocence, once it's gone, you can't get it back. Does that mean that the situation is hopeless? Loss of privacy is akin to an injury which can be healed slowly over time with effort. The first rule is to cease and desist adding to the computerized file of information on yourself. Way back in the 70s I decided to remove myself out of the system. As it happened, I'd just closed down a business and was in the process of relocating, so it was an opportune time. My kids were out of the school system, so no trace remained there. I spent my bank accounts down to zero and closed them. Next, I opened new accounts in several different banks using Trust and corporate names/numbers. I stopped using business cards.
I started using a new mail box in a different post office. My new home was owned by a trust. I stopped giving out a physical address, using a private mail room facility for all business mail connected to me personally. It's address was also the address of my business license. Telephones were connected and deposits paid in Trustee name to keep my name out of the phone book.
Wiping out the old record was only half the battle. I made it a point not to add to the information already in the system. I stopped giving anyone my Social Security Number. Except for absolute essentials, I stopped carrying anything in my bill fold with my Social Security number on it. I avoided using ATM machines and personal credit cards. I stopped giving out credit information to anyone, even though this created some dismay from time to time. As a consequence, I also stopped using bank loans. Real properties that I owned were placed into Trust by circuitous and direct deeding, exchanging and directly from sellers upon acquisition. Mortgages and notes were also assigned into various trusts as they were acquired or carried back.
This may all seem a bit melodramatic, but it's really a matter of a personal decision to become a private person and to adjust habits and patterns accordingly. Despite all the busy work all the above activities generated, I've never been sorry for one moment for the serene life this has accorded me over the past two decades. No doubt, the lack of access to bank credit has saved thousands because it forced me to become resourceful in obtaining financing for real estate transactions from other than conventional mortgage loans and institutional lenders. Privacy is a complete way of life requiring one to maintain a certain level of vigilance against intrusions under any guise and from any source. But the private financial life can pay large dividends when trouble strikes. Ask those with EPA problems.
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