Retirement Funds Vanish as Bankruptcies Hit Tax-Deferred Scheme : Bloomberg's Erik Larson

The story is about an intermediary and some section 1031 exchanges gone very bad. Money not there. Now I'm neither a CPA nor a tax practitioner. From a very general investment and personal finance perspective, what are the lessons?

Businesses built around the tax code's loopholes can turn out to be very poor places to put your money. There must be a "valid business purpose" somewhere in there. I'm not just talking about such a business purpose for IRS purposes, but for investment purposes, such as "has this thing made money?" and "has it ever paid back the investors' principal?". When a very big tax loophole gets lobbied into existence, legitimate businesses will be built which also accommodate it, and then sometimes more exploitative types come in, for the big, quick bucks which might be hustled. No specific characterizations of such intended here, but generally, it should always be a concern if it is your money that is involved. When the tax consequences of a transaction, or a use of a specific intermediary look to you, as a lay person, to be the key drivers, rather than the making of a profit or gain, then, caveat emptor.

Another lesson, for business owners such as the person mentioned in the story, is to surround yourself with reputable people, to run something like the transaction described in the story by both your lawyer and accountant, and listen to them.

Seek real diversification, not just apparent diversification, when you can. If one thing goes very badly, will you be washed up?

Finally, if in a situation somewhat like the one in the story, if there is not a way to get the favorable tax outcome you would prefer, a way which passes the "smell" test, look for a fall-back approach, perhaps a less aggressive approach, with a still pretty good outcome. Beware people giving you a hard sell on some sure-fire tax-avoidance scheme, which just happens to compensate them handsomely. Ask how they are compensated! Demand specific written disclosure! The proposed actions might look like tax evasion, not tax avoidance, to the authorities. There's a world of difference. Even when the "intermediary" doesn't lose or steal your money.

Bloomberg.com: Exclusive

Please, Read Financial Publications and Websites Critically!

That includes this blog, of course.

This morning, in one publication I follow (the excellent Financial Times in this instance,) I saw the blurb on the front page: "How Long will markets be able to defy gravity?" in reference to Martin Wolf's column. Now, I ask you: Is it within the realm of possibility that an outright agenda is reflected there, or what? Mr. Wolf has recently written columns advocating greater progresivity of income taxes in the US (boo on that idea), more international cooperation to tax people in such a way as to preclude them fleeing to tax havens (boo on that also), and reconstruction of the welfare state in the USA (boo, pbbbbht, hiss on that) so, upon looking at a few columns, we see something more of the mindset of the author. Apparently another statist European, who views personal income as the rightful property of the great and wise state, if it only has the resolve to tax it away and do many great and fine things with it, like buy votes.

The problem is that taxation changes taxpayer behavior. They try to cope, lawfully, let's hope! If you tax dividends at a higher rate than capital gains, corporations will pay out less of their profits in dividends. If you raise the taxes on higher incomes, then people will go into the perilous woods of tax shelter forest, and the tax shelter wolves may get them. in other words people will invest to minimize taxes instead of growing their money. Bad situation. To borrow someone's wise illustration, (sorry, I don't have the citation), if Uncle Sam were to tax 100 percent of the money I make every Friday, I would not go in to work on Fridays. Would you? If he only taxes away fifteen percent of what I make on Mondays and Tuesdays, I will go in to the office on those days! If Wednesdays' earnings are taxed at twenty five percent, I will sigh, but hey, I need the money. On Thursdays the tax is thirty percent. I grumble. I probably still go in. I need the money. I would suggest that in Euroland they are taxing Fridays heavily so people are working the other days, and the economies have lower growth.

A cynical comment I once heard, and I do not have the attribution: The problem with popular democracy is that at some point the mob (rabble sounds so undemocratic) may discover that they can vote themselves the contents of the public treasury. Couple that with an attitude that what is yours can be taxed away from you and placed in the public treasury first, and Karl Marx himself would stand up and cheer.

MarketWatch: "IRS cracks down on donor advised funds", article by Thomas Kostigan

IRS cracks down on donor advised funds - MarketWatch

When you invest in a non-straightforward way, to primarily "get the best of the tax code", you may get an outcome you did not seek. Watch yourself. There are plenty of tax-efficient ways to invest. Good advisors can earn their keep for you, or you can educate yourself to become a good do-it-youselfer.

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Got Money? Serious Money? Watch Out for Tax-Shelter Purveyors

There are various perfectly fine ways to invest sizable holdings in a good, tax-efficient manner. This was not one.

Guilty Plea Made in Trial Over Shelters From KPMG - New York Times

So you pay some taxes. You count your blessings.