HIgh Stakes on a Plane

Not the same guy, but you get the picture

Recently I overheard a phone conversation that has had me puzzling ever since.

It was initiated by a man who sat next to me on a cross-country airplane flight.

He was a normal-looking fellow traveling with a normal-looking colleague.  They both were dismayed to learn that their firm's travel booker had got them window seats.  

(Try flying in the middle seat, I could have said, but I prefer not to intrude on other people's conversations.)

After they sat down, the man next to me made a cellphone call while the last passengers straggled to their seats. 

Here is the gist of his end of the conversation:

         "We have a client who wants to put $4 million into a wholly owned company, 
          maybe a restaurant franchise, with no outstanding debt.
               "Six months later, the client will receive $3.5 million back, and the whole 
          business will be over."

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That's a weird proposition.  Who would be willing to pay $500,000 to hide money for six months?   Annualized, that's 25 percent, not counting the fee charged by the phone call guy to arrange the transaction.

I've been turning this over in my head for 10 days now, and I have come up with three scenarios, none of them admirable:

1)Tax fraud.  If the "client" had sold a real estate investment property whose value had been depreciated to near zero, he would be liable for federal and state capital gains taxes, plus the ACA net investment gain tax on virtually all the proceeds, a cost of 30 percent ($1.2 million on $4 million) in some states, or possibly higher.  Such taxes can be avoided with what is known as a "1031 exchange," essentially reinvesting sale proceeds in a similar property investment.  The downside is that purchase and quick resale could trigger a tax audit.  Perhaps the "client's" plan was to sell the exchange property back to the seller, quickly and at a loss, and to invent a ruse to justify the flip.  A tax judge most likely would disallow the deductions if he or she learned that avoiding taxes had been the intent of the original $4 million purchase.  

2) Divorce fraud.  Perhaps the "client" is involved in a divorce and wants to hide assets from a soon-to-be former spouse.  In a community property state, the couple would split the $4 million, 50-50, and the "client" would net only $2 million.  If the client could invest the money in an instrument that his spouse and the spouse's lawyer could not discover, he would be left with $3.5 million, considerably more. 

3) Money laundering.  If the "client" obtained the $4 million illegally -- perhaps by selling street drugs for cash -- he would have a hard time depositing the money in a financial institution.  Banks are required now to report large cash transactions to regulators.  (In theory, he also would be required to report the income to the IRS and pay taxes on it.  Hahahaha.)  The "client" could launder the money through a cash business, maybe a restaurant, which could deposit the money as business proceeds, replacing other unreported income and harboring its own money from tax exposure.  At the end of six months, the restaurant could buy back the "client's" equity at a loss.  That repayment could be run through a regular financial institution without arousing regulatory attention.

Any of these ploys could work, I suppose, but I don't think a reputable advisor would involve himself any of them. Except for conducting sketchy-sounding business over the phone in a crowded airplane cabin, the man in the seat next to mine seemed perfectly normal.

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I did not discuss this or any other matter with the man, but I did notice his stockings.  Later I found similar pairs available online, in men's and women's versions, sold by a classy outfit called The Joy of Sox.  Here is a picture.

Cute, huh?

Making It Hard to Save

An annoying experience gives a financial writer an insight into why some of us are not saving as much money as we probably should.  Reprinted with permission from marklevinson.net

by Marc Levinson

Americans are famously unable to save money. The personal saving rate is a scant 5% of disposable income, and while two in three adults told Federal Reserve researchers last year they were “living comfortably” or “doing okay,” many of those same people apparently have no savings: 46% of respondents to the Fed survey said they did not have the cash to cover an emergency expense costing $400. Among people with household incomes below $40,000, only one in three said they could come up with $400 in cash.

Last month, I got an unexpected taste of why it’s so hard for people to save. My District of Columbia income tax return had an error. Rather than refunding my overpayment by check, the DC finance department sent me a Citibank debit card. I’d never used a prepaid card before, and the experience was educational. Moving the money from the card into my bank account, which is not at Citibank, turned out to be a major ordeal.

In theory, according to Citibank, it’s possible to set up a password on the Internet to transfer money from card to bank account. I followed those instructions, to no avail. The only way to get my money, it seemed, was to go to the bank.

But not to my bank, which wanted a fee to turn Citi’s debit card into cash. To avoid the fee, I had to take the card to a Citibank branch. I did so -- to be told that the amount on the card exceeded Citibank’s daily cash withdrawal limit. I took what Citi would give me, cautiously walked the cash down the street to my bank, and deposited it. The following day, I repeated the process. All told, between my attempt to set up an Internet password and my five visits to bank branches, it took two hours of my time to gain access to money that was already mine. Had the two branches not been close together, the transactions would have taken far longer, and I would have had to stroll through Washington carrying uncomfortably large amounts of cash.

This is the situation facing the millions of American workers, mainly in low-wage jobs, who now get their pay on a debit card rather than having it deposited into a bank account. Yes, I understand that paying wages via debit card may be useful to people who don’t have bank accounts, and I imagine debit cards are cheaper for employers or they wouldn’t use them. But as my experience showed, when you receive your pay on a debit card, you may well have a difficult time saving money in the bank. Which could leave you in a tough spot the next time you need $400.

The author has written several influential books on business and finance, including the very popular "The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger."  His next book, "An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy," will be released in early November.