title>Tax Guru-Ker$tetter Letter Wizard Animation


Tax Guru-Ker$tetter Letter
Monday, February 15, 2010
Comparing Ponzi Schemes

Neal Boortz recently posted this side by side comparison of the two largest Ponzi schemes used to steal investor money in this country.

Another big difference between the two schemes was the fact that Madoff's victims invested their money voluntarily, while Social Security is funded at the point of a gun. Madoff's investors stopped giving him their money as soon as it was revealed to be a fraud. IRS is still forcing people to pay in to the SSA even now that's its collapse has been revealed to be imminent.

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Friday, February 05, 2010
Debunking Tax Protestors

Long time readers know that one of my long running pet peeves is having to waste time debunking ridiculous theories espoused by tax protestors.  For a long time, I felt like I was doing the IRS’s job because they refused to even acknowledge publicly that those arguments were floating around under the completely mistaken belief that to even mention them would in some way legitimize them.  The promoters of those arguments used the IRS’s silence as an endorsement of their arguments.  

Finally, after decades of ignoring the idiotic arguments used by tax protestors to convince others that they don’t need to file tax returns, IRS has been taking a more pro-active approach.  They have recently updated their guide to most of these bogus claims, entitled The Truth about Frivolous Tax Arguments.

IRS Press Release – IRS Debunks Frivolous Tax Arguments

83 Page PDF File

The table of contents below gives us a good idea of the growth in this segment of our society, as there have obviously been enough stupid people advocating these ridiculous theories to earn a spot on this list of morons.


January 1, 2010


A. The Voluntary Nature of the Federal Income Tax System

1. Contention: The filing of a tax return is voluntary

2. Contention: Payment of tax is voluntary

3. Contention: Taxpayers can reduce their federal income tax liability by filing a “zero return.”

4. Contention: The IRS must prepare federal tax returns for a person who fails to file.

5. Contention: Compliance with an administrative summons issued by the IRS is voluntary.

B. The Meaning of Income: Taxable Income and Gross Income

1. Contention: Wages, tips, and other compensation received for personal services are not income.

2. Contention: Only foreign-source income is taxable.

3. Contention: Federal Reserve Notes are not income.

C. The Meaning of Certain Terms Used in the Internal Revenue Code

1. Contention: Taxpayer is not a “citizen” of the United States, thus not subject to the federal income tax laws.

2. Contention: The “United States” consists only of the District of Columbia, federal territories, and federal enclaves.

3. Contention: Taxpayer is not a “person” as defined by the Internal Revenue Code, thus is not subject to the federal income tax laws.

4. Contention: The only “employees” subject to federal income tax are employees of the federal government.

D. Constitutional Amendment Claims

1. Contention: Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment.

2. Contention: Federal income taxes constitute a “taking” of property without due process of law, violating the Fifth Amendment.

3. Contention: Taxpayers do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment.

4. Contention: Compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment.

5. Contention: The Sixteenth Amendment to the United States Constitution was not properly ratified, thus the federal income tax laws are unconstitutional.

6. Contention: The Sixteenth Amendment does not authorize a direct nonapportioned federal income tax on United States citizens.

E. Fictional Legal Bases

1. Contention: The Internal Revenue Service is not an agency of the United States.

2. Contention: Taxpayers are not required to file a federal income tax return, because the instructions and regulations associated with the Form 1040 do not display an OMB control number as required by the Paperwork Reduction Act.38

3. Contention: African Americans can claim a special tax credit as reparations for slavery and other oppressive treatment.

4. Contention: Taxpayers are entitled to a refund of the Social Security taxes paid over their lifetime.

5. Contention: An “untaxing” package or trust provides a way of legally and permanently avoiding the obligation to file federal income tax returns and pay federal income taxes.

6. Contention: A “corporation sole” can be established and used for the purpose of avoiding federal income taxes.

7. Contention: Taxpayers who did not purchase and use fuel for an off-highway business can claim the fuels tax credit.

8. Contention: A Form 1099-OID can be used as a debt payment option or the form or a purported financial instrument may be used to obtain money from the Treasury.


A. Invalidity of the Assessment.

1. Contention: A tax assessment is invalid because the taxpayer did not get a copy of the Form 23C, the Form 23C was not personally signed by the Secretary of the Treasury, or Form 23C is not a valid record of assessment.

2. Contention: A tax assessment is invalid because the assessment was made from a substitute for return prepared pursuant to section 6020(b), which is not a valid return.

B. Invalidity of the Statutory Notice of Deficiency

1. Contention: A statutory notice of deficiency is invalid because it was not signed by the Secretary of the Treasury or by someone with delegated authority.

2. Contention: A statutory notice of deficiency is invalid because the taxpayer did not file an income tax return.

C. Invalidity of Notice of Federal Tax Lien

1. Contention: A notice of federal tax lien is invalid because it is unsigned or not signed by the Secretary of the Treasury, or because it was filed by someone without delegated authority.

2. Contention: The form or content of a notice of federal tax lien is controlled by or subject to a state or local law, and a notice of federal tax lien that does not comply in form or content with a state or local law is invalid.

D. Invalidity of Collection Due Process Notice

1. Contention: A collection due process notice (Letter 1058, LT-11 or Letter 3172) is invalid because it is not signed by the Secretary or his delegate.

2. Contention: A collection due process notice is invalid because no certificate of assessment is attached.

E. Verification Given as Required by I.R.C. § 6330(c)(1)

1. Contention: Verification requires the production of certain documents.

F. Invalidity of Statutory Notice and Demand

1. Contention: No notice and demand, as required by I.R.C. § 6303, was ever received by taxpayer.

2. Contention: A notice and demand is invalid because it is not signed, it is not on the correct form (such as Form 17), or because no certificate of assessment is attached.

G. Tax Court Authority

1. Contention: The Tax Court does not have the authority to decide legal issues.

H. Challenges to the Authority of IRS Employees.

1. Contention: Revenue Officers are not authorized to seize property in satisfaction of unpaid taxes.

2. Contention: IRS employees lack credentials. For example, they have no pocket commission or the wrong color identification badge.

I. Use of Unauthorized Representatives.

1. Contention: Taxpayers are entitled to be represented at hearings, such as collection due process hearings, and in court, by persons without valid powers of attorney.

J. No Authorization Under I.R.C. § 7401 to Bring Action.

1. Contention: The Secretary has not authorized an action for the collection of taxes and penalties or the Attorney General has not directed an action be commenced for the collection of taxes and penalties.



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Tuesday, January 05, 2010
Urban legend still floating around...
I have addressed this hoax previously, but it is still being passed around the net, as in this email I recently received from a client in the PRC.

Subject: Senate Bill 2099

Senate bill 2099 will require us to put on our 1040 federal tax form all firearms that we have or own. Do you know anything about this?

My Reply:

That's a hoax that's been floating around the net for about a year now. The 2009 forms are in place and they don't have anything for reporting firearms.

Snopes.com has a good explanation of it.

In case you haven't seen a copy of the actual 2009 1040, here is a blank one you can look at. You'll see that there is absolutely nothing about firearms.



Thank you for the info.

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Friday, October 23, 2009

Costly fraud and error reported in home buyers' tax program

Wow!  Who would have suspected that a refundable $8,000 tax credit would be an invitation for un-deserving people to cheat?  Of course, the answer is that our imbecile rulers in DC obviously weren’t able to anticipate what anybody with half a brain could see would be an inevitable result of such a program. Common Sense has to be the scarcest commodity in all of DC.

And the response from our rulers to this?  The sub-head of this article sums it up:

Lawmakers consider extension.

Typical problem solving by our moronic leaders.  When a government program is filled with fraud and corruption, just make the program even bigger and more costly and available for more people to scam. 

Is anyone else in favor of a constitutional amendment to change the eligibility requirements for our elected officials to include an IQ above 50?  That would wipe out most of the current ruling class right off the bat.


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Thursday, October 08, 2009
New IRS Phone Scam

It appears that our friends at the real IRS have even more competition in separating people from their money from imposters.

Earlier this morning, a client called and said that there was a voice mail message on her husband’s cell phone, claiming to be from the IRS and that they needed to call back by the end of business today.  I didn’t recognize the 800 number given as being one of the regular ones that IRS uses.

Instead of calling that number back, we decided that it would be best for her to call the main IRS info line at 1–800–829–1040 and ask them to pull up her account. 

She just called us back and said that when she called the main IRS switchboard, they had no pending actions against them or anything else that would have warranted any contact from an IRS agent.  They also told her that they didn’t even have any of their cell phone numbers in their database.

So, this was obviously another scam from some scumbag looking to trick people into revealing their personal identification, credit card and bank info, much like the email version that I mentioned last month


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Monday, September 28, 2009

IRS scam now world's biggest e-mail virus problem – These phony IRS emails that I mentioned a few weeks ago are still floating around the net.  I have been receiving at least one copy each day since then.  As this article explains, they contain a nasty computer Trojan virus; so be extra careful when encountering these scam emails.    



Sunday, September 27, 2009
You can't trust government financial predictions...

How many people would willingly invest everything they own with someone who has a lengthy track record of being 100% wrong on every single prediction?  Any sane investor would stay miles away from anyone with such a history.  However, that’s the case with anyone who believes a single financial fact touted by our rulers in DC.  

Job losses, early retirements hurt Social Security – This is just one more reminder that, whenever our rulers in DC predict the costs and finances of a government program, they are off by huge magnitudes. The naive way to look at this fact would be to assume that they just made honest miscalculations.  The more realistic assessment is that they lied through their teeth in order to sell the programs, knowing full well that nothing could be done to them when the truth became clear. 

That is exactly what we are facing today.  Every single one of the cost figures being used in the current fight to socialize health care is being intentionally understated so as to con gullible people into accepting it.  By the time the truth emerges that the actual costs are hundreds of times more than promised, just as with Social Security and Medicare, the politicians responsible for selling the programs will be long gone and the people too dependent on it to ever go back.

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Saturday, September 12, 2009
New Fake IRS E-mail

Snopes.com covers this latest phony email pretending to be from the IRS.  Sherry actually received one of these the other day and wondered if it was real, until I explained that IRS does not send out emails to people.  Their notices are sent via snail mail.

As I advised Sherry, anyone receiving these kinds of emails should forward them to the special IRS email address that was set up to handle this growing problem:  phishing@irs.gov

Hopefully, IRS is using these emails to hunt down and nail the scammers who are sending these out.



Friday, April 24, 2009
Voluntary taxation?


Subject: voluntary

so what dose the word voluntary mean in the irs statements? im just trying to understand whats goin on i have done much research and found no law that states we haft to pay taxes please help

Chapter 6200 at 6210 states that... "It is the goal of the Internal Revenue Service to encourage and achieve the highest possible degree of voluntary compliance with the tax laws..."
        Chapter 100 at 110 states that... "The primary mission of the Taxpayer Service is to promote voluntary compliance through education and assistance to taxpayers."
        In Part VI, under Section 6810-Taxpayer Service, it is stated at (13) 31(1)(f) that... "returns are voluntarily submitted by taxpayers."

        In Operating Techniques and Reporting Section 6810 at (13) 91(1)(a), the Manual states: "securing a valid voluntary income tax return from the taxpayer..."
        In the Section on IRS Policy Statements at P-4-84, the Manual states: "The purpose of criminal tax investigations is to enforce the tax laws and to encourage voluntary compliance."

        In the General Section, at 4022.65(3) it is said that... "When a person indicates he/she will voluntarily comply but requests that he/she be served..."

        In the Automated Collection Function Procedures at 5535.4, the Manual states that the IRS may file returns under 6020(b) if the returns are... "not filed voluntarily.")

        Furthermore, Webster's Dictionary defines the word voluntary to mean the following:

        Voluntary: brought about by one's own free choice; given or done of one's own free will; freely chosen or undertaken; arising in the mind without external constraint; spontaneous; in law, (a) action done without compulsion or persuasion.



Don't fall into the trap of believing the idiotic argument that paying taxes is completely voluntary.  This bogus claim has long been used by tax protestors, many of who are now in prison for following and encouraging others to use that very tactic.

The IRS language clearly intends for people to voluntarily file tax returns and pay their taxes.  However, that is only half of the story.  If some people do not voluntarily comply, IRS will do it for them and hit those people with severe penalties for noncompliance, including the seizure of all of their possessions and time in prison.

This is no different than how our society handles all crimes.  We are all expected not to drive faster than posted speed limits, not kill other people, not steal things that don't belong to us, etc, etc.  If we fail to volunteer not to do those things, there are police and a judicial system that will deal with us, with appropriate punishments.

Not filing tax returns and paying everything you owe is considered just as much of a crime as committing murder, and IRS will nail anyone who does not voluntarily comply with those rules.  It is also a fact that accused murderers are allowed more personal rights and protections against improper accusations than are alleged tax cheaters in this country.  IRS is not constrained by any of the constitutional limitations and protections that the police have to deal with. That may not be right, but it is the way things are.

I hope this clears things up for you. The IRS website has a lot of info on this and other similarly ridiculous tax protestor arguments.  Check out Number 6 in this list of IRS's Dirty Dozen Tax Scams

6. Frivolous Arguments. Promoters have been known to make the following outlandish claims: the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Good luck.

Kerry Kerstetter 




Thursday, February 12, 2009
Fonzie Scheme?

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Wednesday, February 04, 2009

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Sunday, January 11, 2009

Fake IRS Emails – Snopes.com has an updated piece about the scam emails that are still going around pretending to be from IRS.  It would really be great to see some news from IRS that they have been able to prosecute the scumbags behind these.



Tuesday, January 06, 2009
Madoff Lessons

The best learning tool has long been OPM (Other People's Mistakes) because nobody can live long enough to make them on his/her own.  The recent exposure of Bernie Madoff’s Ponzi scheme should be a good slap across the face to any investor.

From James B. Stewart of the WSJ – The Lessons to Be Learned From the Madoff Scandal.

From Jay Leno via NewsMax

“Congress says they’re looking into the Bernie Madoff scandal. So the guy who made $50 billion disappear, is being investigated by the people who made $750 billion disappear.”

“His family says he suffers from multiple personality disorder. Apparently, every one of them is greedy.”



Monday, January 05, 2009

Why We Keep Falling for Financial Scams - Interesting look at Ponzi and other types of scams that people fall for. 

It should be noted, in the comparisons between Madoff’s Ponzi scheme and the Federal government’s Social Security Ponzi scheme, that “free market” scammers have to be more creative in order to lure in saps voluntarily.  The Feds don’t have to convince anyone that Social Security is a good investment because they have the power to have the IRS stick guns in our faces and force us to pay into their financially insane scheme. 



Friday, December 19, 2008
No Ponzi Scheme is bigger than Social Security...

(Click on image for full size)

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Saturday, September 27, 2008
Debunking Bogus Rumors

Snopes.com had some interesting and timely topics in their most recent weekly newsletter.

FDIC protection – Many people are spreading false info on how this works.

We Deserve It Dividend – Nutty proposal I have already received in several spam emails.



Friday, September 05, 2008
The fox guarding the henhouse?

RANGEL ADMITS TO VILLA INCOME - Interesting story about how the top DemonRat in charge of the Federal Tax Code has accidentally failed to report over $75,000 of rental income on his tax returns and Congressional disclosure forms.

When can we expect the IRS to indict him for tax fraud? Let's not hold our breath waiting for that to happen.

I guess this is another example of the old "it takes a thief to know one" in relation to his constant rantings about the infamous "Tax Gap" and how everybody is a tax cheater so that we need to have tougher tax enforcement. He does know how easy it is to pocket tax free rental income.

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Sunday, July 27, 2008

Girls Gone Wild Guru Francis Sues Ex-Accountant - What many call the “Willie Nelson Defense” against tax evasion charges, blaming the CPAs.



Wednesday, July 23, 2008

Pity The Celebrity Taxpayer Making the big bucks puts them dead center in the IRS cross-hairs.  The additional publicity IRS receives when busting celebs is a big bonus for their policy of intimidating us normal folks.

Forbes slide-show of some of the recent celebrity tax fights in the news.  Since most IRS audits are technically confidential at the earliest stages, there are obviously many more that we never hear about.



Monday, May 05, 2008
More Scam IRS Emails
While IRS does offer to deposit refunds directly into taxpayers' bank accounts, they have never had any facility to post refunds to credit card accounts. Anyone claiming that IRS will apply some money to your credit card is a crook who intends to levy a charge against your credit card account.

Likewise, IRS never sends out refund notices via email. NEVER.

I mention these warnings again because I just received the following email from a client.

Subject: Fw: Notice From Department of the Treasury

I just received another one of these e-mails from the IRS.
When I received the last one I guess I deleted it and could not forward it to you, so here it is.

----- Original Message -----
Sent: Monday, May 05, 2008 2:33 PM
Subject: Notice From Department of the Treasury

After the last annual calculations of your fiscal activity
we have determined
that you are eligible to receive
a tax refund under section 501(c) (3) of the
Internal Revenue Code. Tax refund value is $189.60.
Please submit
the tax refund request and allow us 6-9 days
in order to IWP the data received.
If u don't receive your refund within 9 business
days from the original IRS mailing date shown,
you can start a refund trace online.

If you distribute funds to other organization, your records must show wether
they are exempt under section 497 (c) (15). In cases where the recipient org.
is not exempt under section 497 (c) (15), you must have evidence the funds will
be used for section 497 (c) (15) purposes.

If you distribute fund to individuals, you should keep case histories showing
the recipient's name and address; the purpose of the award; the maner of
section; and the realtionship of the recipient to any of your officers, directors,
trustees, members, or major contributors.

To access the form for your tax refund, please click here

This notification has been sent by the Internal Revenue Service,
a bureau of the Department of the Treasury.

Sincerely Yours,
John Stewart
John Stewart
Director, Exempt. Organization
Rulings and Agreements Letter
Internal Revenue Service

I wrote back:

Thanks for sending me a copy of that scam email. It's the same concept, but slightly different from the one I recently discussed on my blog.

Let me know if you receive any more and definitely do not respond to any of them.


I was curious to see what the actual scam web page looked like, so I went to it. The URL tells you it is obviously an outright scam; but the crooks have designed it to look quite a bit like an official IRS page.

For those who may not want to risk visiting this site, I snagged a picture of it:

(Click on image for full size)


Sunday, May 04, 2008
Calif. Man Accused of Targeting Christians in $25M Nationwide Ponzi Scheme - The classic Ponzi style of scam never goes out of style. And of course, there never seems to be a shortage of fools who fall for what should be obvious con games to anyone looking at them objectively.


Saturday, May 03, 2008

Miracle Cars Fraud – Snopes.com looks at an interesting scam that had over 7,000 people paying $1,000 each for non-existent vehicles.  In hindsight, most scams look so obvious; but the fact that these people were suckered in by their own religious leaders who were too naive to recognize con artists, gives this a different twist.



Wednesday, April 23, 2008
Phony IRS Emails

I received the following from a client about a week after another client faxed me a copy of  similar email she had received:

Subject: Is this a scam?-->> Tax refund - Online form


I got the below notice – supposedly from the IRS.  There is a link to push – but I see the words –redirect- and I think this is some kind of scam to get my ss# or who knows what.  

Do you think that this is legit or scam?

------ Forwarded Message
From: Internal Revenue Service <taxrefund@service.irs.gov>
Reply-To: <taxrefund@service.irs.gov>
Date: Tue, 15 Apr 2008 13:09:37 -0700
Subject: Tax refund - Online form

After the last annual calculations of your fiscal activity we have determined that
 you are eligible to receive a tax refund of $620.50.
Please submit the tax refund request and allow us 3-6 days in order to
 process it.

A refund can be delayed for a variety of reasons.
For example submitting invalid records or applying after the deadline.

 To access the form for your tax refund, please click here

Note: For security reasons, we will record your ip-address, the date and time.
Deliberate wrong inputs are criminally pursued and indicated.

 Internal Revenue Service

Copyright 2008, Internal Revenue Service U.S.A. All rights reserved.


My Reply:

That URL appears to be in Japan.

That is one of the scams that IRS has been warning people about.

Snopes.com covered this specific scam on their site.   






Friday, April 04, 2008

Scammers file taxes for York man – This man was actually quite lucky that the theft of his identity was discovered  Who knows how many similar scams go undetected?



Sunday, February 24, 2008
Identity theft victims can be very young...

Man Accused of Stealing 7-Year-Old's ID

Photo courtesy of FreakingNews.

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Sunday, January 20, 2008
Beware of Tax Scams

Anti-Tax Groups Convince Americans Not to Pay Taxes  – And as proven all too often, there is no shortage of people gullible enough to fall for these idiotic scams, such as Wesley Snipes. 

IRS Names Four New Frivolous Claims to Avoid - Four new scams added to the IRS's list of popular tax protestor arguments that will get anyone stupid enough to mention any of them an automatic $5,000 penalty. 


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Tuesday, January 08, 2008

Snipes Trial on Track – His Race Card tactic to delay his tax fraud trial continues to fail.


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Saturday, December 29, 2007

Wesley Snipes trial stays in Ocala, Fla. – It looks like his ridiculous Race Card strategy didn’t do the trick.


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Tuesday, November 20, 2007
Beware taking tax advice from insurance salesmen...

In response to a phone call from a long term client, whose wife’s uncle was being pressured to cash in stocks and replace with annuities, I sent the following:

In regard to your phone call about your wife’s uncle, there are a number of things to consider.  While there are tax free trades possible for some kinds of annuities and insurance policies, he should have a financial pro see if his situation will qualify.

I can't handle this; so he will need to work with a competent financial advisor.  Some thoughts that did come to mind:

It's a very serious red flag when a financial advisor puts a rush priority on doing something and doesn't allow you adequate time to conduct due diligence

There are tons of scammers selling inappropriate annuities to older folks. Google this and you will get a ton of hits.  Annuities generally have huge commissions for the agents; so there is a conflict of interest inherent in any sales pitch.  The push to sell existing investments also smells of account churning to generate commissions.

His reply to me:


Thanks for your input, especially on my wife’s Uncle.


Her brother and I are going to Uncle's house today...the insurance guy is supposed to meeting him.


I plan on getting the insurance guy's business card ( if he's legal, his license number will be on it) then telling him that I am reporting him to the Dept. of Insurance on a complaint for "Elder Abuse".  Hopefully, he will leave Uncle alone because his license will be in the balance.


Thanks for your help,

More from the client:

Subject: Re: Uncle and the Insurance Salesman

Hey Kerry,


Wife’s brother and I had a meeting with the insurance guy and Uncle today.  The insurance guy is convinced that Uncle can liquidate his stock account under a 1035 exchange and roll the funds into the annuity from the insurance company, without any tax liability......I don't think so.....here's the situation...


Uncle's stock account is nothing more than a stock account that is traded by his broker, there is some turn-over for some stocks but for the most part, it's full of AT&T stock, that Uncle received/bought when he retired from AT&T some 30 years ago.  The stock account is not in a "401-K" or an "IRA", it is not in anything that resembles a deferred retirement account. It is: A managed stock account that happens to be included in Uncle's Living Trust. In this case, I don't think this qualifies as a "custodial account", but I could be wrong, because the broker does "manage" the account by making trades that benefit Uncle, whenever these trades result in a capital gain, Uncle pays the tax, if any, on those specific trades as they happen.


The broker says that there is still a "block of stock" that has not been traded and still has the original "cost basis". He further says that, when this stock is liquidated, Uncle will have to pay capital gains tax on approx: 54K of "increased value"....


   The insurance guy says, Not so...because the stock account is a "custodial account",  then there won't be any capital gains, "we'll handle it as a 1035 exchange and there will be no tax liability". He further states that,"All we have to do is liquidate the stock and transfer the money directly to the insurance company and Uncle won't have to pay capital gains tax because the money never was in his hands." (this can't be right)


   I don't think it is a "Custodial account" just because he calls it a custodial account....right?  


  If Uncle sold a few shares of the original inventory, then he would have to pay some capital gains tax on the difference between the original cost basis and the sales price, right?   Once it is sold, it is sold, period. It doesn't matter if the check is cut to me or the insurance company, it is sold, there is a gain, because the previous account wasn't a "tax qualified" account, right?


Frankly, both my brother in law and I believe this insurance guy is blowing smoke, but since he and the broker have their own interests to protect we decided to ask a qualified CPA about the situation.  If the CPA comes back and says that it sounds like Uncle will have to pay capital gains taxes on the liquidated stocks appreciated value, then we'll tell the insurance guy that our tax professional told us that tax will be due, so Uncle is not doing the deal. Done, Goodbye.


So tell me Mr. Tax Guru.....do you know of any circumstance where a "managed stock account, not a custodial account, listed in a living trust can be transfered into a life insurance annuity using a 1035 exchange, such that, no capital gains tax will be paid on the liquidated stock" ?


Awaiting your answer,


P.S. I'm not mentioning that the annuity will only let him remove a limited amount of money per year, and that the annuity only pays 3.5% interest while the brokerage has been making Uncle 6% per year, and anytime Uncle needs money the brokerage will not limit how much he removes.


My reply:

I first have to repeat that I am still too overloaded with existing client work to be able to take on any new work; so your uncle really should have his own tax pro to consult with. 

However, this situation is too juicy to resist commenting on.  It sounds exactly like the classic case of a commission hungry insurance salesman preying on trusting elderly folks.  Out of curiosity, how did this sales person come into contact with your uncle?  I don't see why he would even be considering such a drastic change in his investment portfolio at this time in his life.  It sounds like the salesman bought a list of likely victims (aka gullible seasoned citizens) and did some cold calling.  Am I right?

In terms of Section 1035 exchanges, you are correct and that salesman is blowing smoke up your rear ends.  As a quick web search will confirm, this is a mechanism by which one annuity plan can be swapped for another annuity plan tax free or one insurance policy can be swapped tax free for another insurance policy.  It does not allow for different kinds of investments to be swapped for other different kinds of investments. 

He is also misinterpreting the term "custodial account."  As you very well know, many investors keep their stock and bond investments inside an account with their stockbrokers for easier transfers.  In regard to how this type of ownership is treated for tax purposes, it is no different than owning the shares directly in your own name.  The stockbroker is considered to be your agent acting on your behalf.  Anything that happens in that account is treated exactly the same for tax purposes as it would be if the assets were owned directly in your own name. 

Likewise, assets held inside living trusts are considered to be the exact same as assets owned directly by an individual.  They are completely transparent for tax purposes while the trust's owner is alive.

Claiming that this kind of custodial account allows special Section 1035 tax free treatment is either the ranting of an idiot or a con artist.  I'm guessing the latter.

After your mention yesterday of your plans to possibly file a complaint against this guy for elder abuse, Sherry and I were concerned that you might be opening yourself up to a lawsuit.  However, after this additional info, it appears that you do have a responsibility to see that this scammer can't do his evil work on other folks.

Again, it would be wise to have someone independent of all of your uncle's investments review his holdings to see if he even needs to make any changes.  It sounds as if he would be much better off sticking with what he has rather than moving to a very restrictive and lower yielding annuity vehicle that just happens to pay a huge sales commission.

Good luck.  I hope this helps.


From the wife:



Thank you so much for taking the time to address this question for us. We needed your outside, independent explanation of whether the 1035 fits this situation because Uncle's financial advisor is the stock broker (a V.P. at Smith Barney) who was telling him he would have unavoidable tax consequences if he sold his shares & bought the annuity even if the money was transferred directly to the insurance co.

Since the broker is on one side & the ins salesman on the other side of this tug-of-war, we needed your outside expertise to confirm that the broker is right.

I'm truly grateful for your willingness to help us understand this situation better.


Hugs to you & Sherry.


TaxCoach Software: Finally! Plain-English Tax Planing That Builds Your Business!



Sunday, November 11, 2007
Playing the Race Card in tax scam case

I’ve commented a number of times on how stupid Wesley Snipes was to fall for the Tax Protestor scam that income taxes are voluntary.  As these latest legal documents provided by The Smoking Gun show, he and his legal defense team obviously realize they have no chance of succeeding on the merits of their ridiculous argument; so they have spent a huge amount of time, money and energy conducting an opinion survey to try to prove that the area in which his trial is scheduled to be held is too racist to be fair to Mr. Snipes.

It’s too bad Snipes didn’t spend as much energy earlier on researching the validity of this tax evasion scheme before he jumped full bore into it.  He could have avoided this entire mess and possible future stay in the Club Fed gray bar hotel. 




Wednesday, September 26, 2007

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Saturday, September 01, 2007
Email Tax Scams

Snopes.com has these notices about recent fake IRS emails floating around trying to obtain personal info from unsuspecting folks, aka phishing.  I haven’t received any of these myself because I am a strict user of MailWasher to purge my email accounts of spam and scams before bring anything into my main Eudora email; but I have received some emails from readers who did receive some of these fake IRS emails. 

E-mail from the IRS offers $80 to those who complete "member satisfaction surveys.

E-mailed IRS notice claims the recipient is eligible for a tax refund.

IRS has also put out another news release on these kinds of scams.


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Monday, August 06, 2007
Facts of life...

The best way to explain how Social Security works is to describe a typical Ponzi Scheme.

(Click on image for full size)

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Monday, April 23, 2007
Socialist Security

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