Book Review:  Wall Street Secrets for
   Tax-Efficient Investing:
   From Tax Pain to Investment Gain

Originally published in Derivatives Report, vol. 3, no. 9, copyright 2002.  Warren, Gorham & Lamont, Division of RIA, 395 Hudson Street, New York, NY 10015.  1-800-431-9025

The current prevailing view in Washington appears to be that “abusive tax avoidance transactions” are becoming more of an issue and that they are a detriment to our tax system.  These tax shelters, says Treasury, are transactions designed to take advantage of the incredibly complex Code to obtain benefits that Congress never intended¹.  But there is another perspective, a flip side to the coin, if you will.  And that can be found in a recent Bloomberg Press publication called Wall Street Secrets for Tax-Efficient Investing: From Tax Pain to Investment Gain by Robert N. Gordon with Jan M. Rosen².  According to Gordon:

In general, the tax code discourages investing through what might be called ‘one-way laws’.  If the investor makes money, the government, which took no risk and put up no capital, demands a share.  If the investor loses money, that is his problem or mostly so; the tax laws offer little to cushion the blow.

Many of these “one-way laws” or situations are noted in the book’s overview, called “The Tax Code Discourages Investing More Than Encourages It.”  One such situation involves capital gains vs. capital losses.  Specifically, long-term capital gains (those realized on securities sold after being held more than one year) are taxable at 20%.  However, if a taxpayer after all trades are netted has a net capital loss, that taxpayer may take only $3,000 of it a year against ordinary income.

Another situation involves the double taxation of dividends – first as profits at the corporate level and then at the shareholder level when part of the profits are paid out as dividends.  This double taxation not only discourages investing but also puts American companies at a competitive disadvantage vis-à-vis their foreign competitors.  An example is provided:

Example: A U.S. corporation makes $1 and pays a 35% corporate tax.  The other 65 cents is paid to the company’s owner (the stockholder) as a dividend.  The owner is in the 38.6% bracket (2002-2003) and thus pays tax of 25 cents on that 65 cents.  Result: the U.S. government, which is in the enviable position of getting a reward despite taking no risk, got 60 cents of the $1 the company earned, while the owner got 40 cents.  After state taxes, the share could be as little as 34 cents.  (And if the owner dies in the next few years, his estate could have to pay taxes on the 34 cents that is left of each $1 of earnings.)  Surely, the tax laws have discouraged investing.

Prefacing the above information are the oft-quoted words of Judge Learned Hand:

Over and over again courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible.  Everyone does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands.

With these thoughts in mind, Robert Gordon, a Wall Street veteran, then shares the strategies of an insider to demonstrate how you can use the tax laws to your advantage.  Clearly and concisely written, his book explains federal and state tax considerations that investors need to know to make the most tax-efficient choices and to protect their portfolios.  The emphasis is on practical application, aimed at guiding the reader to specific, accessible tax-saving goals without having to wrestle down the entire tax Code.  Wall Street Secrets for Tax-Efficient Investing: From Tax Pain to Investment Gain is a book well worth reading.

View more information on Wall Street Secrets for Tax-Efficient Investing.

1. PO-2026, Statement of Mark A. Weinberger Assistant Secretary of the Treasury (Tax Policy) before the U.S. Senate Committee on Finance (3/21/2002): 2002 WTD 56-37.  For current IRS thinking and Treasury proposals in this area, see Humphreys, Hariton and Glenn, “Tax Shelters: IRS Voluntary Disclosure Program and Privileges; New Treasury Proposals,” page 16 of this issue of Derivatives Report.

2. Robert N. Gordon is the president and owner of Twenty-First Securities Corporation and a member of the “Derivatives Report” Editorial Advisory Board.  His company provides investment advice and financial management for corporate, institutional, and individual clients.  Jan M. Rosen, a long-time editor and former tax columnist in the financial news department of The New York Times, has been responsible for that newspaper’s annual tax section for many years.  Wall Street Secrets for Tax-Efficient Investing is available at bookstores.

This article and other articles herein are provided for information purposes only.  They are not intended to be an offer to engage in any securities transactions or to provide specific financial, legal or tax advice. Articles may have been rendered partly inaccurate by events that have occurred since publication.  Investors should consult their advisers before acting on any topics discussed herein.



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