The Latest Installment

When someone excitedly approaches me about a new idea for a business process or activity, it is unlikely to receive serious consideration on my part. For me, the excitement is a turn-off, because it indicates an effort to put across the idea emotionally or by the force of personality, rather than because the idea itself is persuasive.

So, what are some indicators of that excitement? For me, the following are some indicators (in no particular order) that cause me to turn away and move on to something else.

A. Excessive Emphasis

If the proposal or information comes to me in written form, it’s a real turn-off if it’s loaded with exclamation points or other repeated emphases. Worse yet is multiplication of emphases: bold face, bold colors, exclamation points , underlined and with highlighting, all in one sentence or paragraph. Over-doing the emphases doesn’t compliment my intelligence (even my ability to read), let alone the writer’s.

B. Urgency

If the proponent tells me it is urgent that I decide immediately or very quickly, and if that asserted urgency is not because of my own time contraints, then the asserted urgency comes across as simply a high-pressure technique which is designed to bypass thought. That alone is reason for me to bypass the proponent’s idea.

C. Everyone Is Doing It

Any attempt to sell the idea because others are sold on it is another way to bypass thought. It is a way of suggesting that I should join the group so that we can all be excited together. I generally believe that by the time everyone is doing it, the real profit opportunity has gone away, if it was ever there.

D. Immense Profit

If the proponent emphasizes the immense profit which the idea or venture is sure to bring, but the proponent is reluctant to talk about risk, that’s a further indication that the proponent is so excited that he or she hasn’t thought about risk, or has thought about it but doesn’t want me to do so.

Each of us is unique, and maybe your tolerance for excited promotions is much higher than mine is. Even if you can handle it better than I can, these may be helpful cautionary indicators.

Don’t misunderstand me, though; I’m not saying that it is inappropriate to be enthused or optimistic about one’s idea or venture. In fact, I don’t see how one could carry an idea forward without that. It’s just that one should not expect others to buy into it just because of the proponent’s enthusiasm or optimism.—Stan Crow

What is your filter setting that determines what attention you give to new ideas? How do you decide whether to hear a new business idea or to reject it without a hearing?

We become jaded from the bombardment of often-excessive or unverifiable claims for this or that. In self defense, we set our filter on "high", and we don’t let anything through that doesn’t come from an already-approved source.

I do that myself. It’s a rare telemarketer that can get out more than 10 words before I cut them off. Mass postal mailings go directly into recycling, unopened and unread. I never click on ads on Websites. I tune out nearly all radio and television advertising. Because newspaper advertising is quieter, it gets some attention from me—but still short shrift. All of that puts me beyond the reach of most promoters.

So what gets through to me? For the most part, information that comes to me in one of two ways: (1) Through the recommendation of a friend or colleague, or (2) through news and commentaries in the financial and business press.

Even then, my first filter setting for information that does get through to me, is my requirement for a stated economics rationale for the business idea or venture. If the proponent cannot succinctly and coherently tell me what the underlying economics rationale is, I don’t deem it to be worth my time to try to figure out what the rationale is, as a favor to the proponent. After all, any proponent who doesn’t know and understand the underlying economics of the deal is not going to succeed anyway.

One might think that is so obvious as to be unnecessary to say, but apparently it’s not obvious to many of those who have a "great new idea" for this or that business.

When I ask, "What is the principle of economics which makes this work?" the usual silence in response is all I need to know.

We don’t want to have our filters set so high that we don’t see or hear about new business ideas that really are game-changing. Still, we don’t want to waste our time. So, a pre-eminent filter setting for me is to ask, "What is the principle of economics which makes this work?"

Also, when I am the one who is the proponent of the new idea, I consider answering that question to be a first priority.

What do you think?—Stan Crow

"Oh, sure," you may say, "if I could pay my loan in full, why would I do a short sale in the first place?"

Well, let’s start at the beginning. You may have paid much more for your commercial property than it’s now worth, and you may owe on it much more than it’s worth. It may not be providing enough income to cover for much longer the payments on the debt. You might be able to sell the property, but not for enough to pay the debt. And, you can’t do a short sale unless your lender consents, which, so far, it hasn’t agreed to do, because of the loss the lender would incur.

You’ve been hoping that the economy would turn upward fast enough and soon enough to rescue you, but that’s not happening, and it might not happen, some experts say, for six, seven, or even ten years yet.

Let’s say, though, that your property is worth about half what you owe, and that it would still be a good investment for someone who could buy it for what it’s now worth.

If so, here’s what you can do: Under many circumstances, S.Crow Collateral Corp. can buy your property for the amount you now owe on it and re-sell it to an ultimate buyer for what the property is worth now. With what we pay you, you pay your existing loan in full. Yes, that means we’d take a loss on the deal, but once your existing debt is paid in full, we know how to help your lender make enough additional money to pay us back for the loss we incur when we over-pay you for your property.

Moreover, when we re-sell the property to an ultimate buyer, there’s some possibility that there may be some cash which you can take out of the deal.

The result overall: (1) You pay your debt in full, preserve your credit, and maybe walk away with some cash; (2) your lender is made whole, and more besides; (3) the ultimate buyer gets a quick deal now at an attractive price; and (4) S.Crow Collateral Corp. is made whole over time, from your lender’s extra income that results from the deal.

Maybe you’ve been like Wilkins Micawber, the character in Charles Dickens’ novel David Copperfield, www.online-literature.com/dickens/copperfield/.  Micawber continually asserted his confidence that "something will turn up." If you read this posting again, you should realize that for you it just has.—Stan Crow

Following Monday’s post about opting out of what may be a decade of stagnant values for commercial real estate, the question is asked: Does that mean that S.Crow Collateral Corp. can do something to cause values to rise?

No, it doesn’t, and we can’t calm hurricanes or prevent earthquakes, either.

While we can’t cause market values to rise, in many circumstances we can restore you to a position of having equity in the asset—commercial real estate or a business, for example—and that is as good as an increase in the asset’s market value.

Let’s take an over-simplified but rather typical example. (Remember story problems from your school days?) Let’s suppose that you purchased a business or commercial real estate that was then worth $25 million, and you took out a loan of $20 million to do so. So, at the time of your purchase you had equity of $5 million (ignoring transaction costs).

Let’s suppose further that the business or property is now worth $12 million and can no longer service the $20 million debt. The income from the business or property could reliably service a debt of $10 million or less. If you were to sell for the $12 million value, you’d take a $13 million loss, and you might still be pursued by your lender for the unpaid $8 million—a very deep hole indeed.

Now, though, you bring S.Crow Collateral Corp. into the picture, with a signed offer by us to buy your business or property for the amount you owe (which I’m assuming is still $20 million). With your loan about to be paid in full, your lender offers to lend $7.8 million to you (65% of the $12 million present market value), and solely with that $7.8 million you purchase the business or property back from us, in a transaction that is closed simultaneously with your sale to us for $20 million.

When the deal closes, because the business or property is worth $12 million, you suddenly have equity of $4.2 million, almost replacing the $5 million equity you once had. Furthermore, now you have bought low rather than high, and you have a very reasonable prospect of enjoying further increase in value, whether or not the value ever returns to the $25 million you originally paid, and without waiting a decade.

That is how you can opt out of a decade of stagnant market values. It may reduce your property taxes immediately, as well, and that savings will go right to your bottom line.

What’s in it for your lender? Well, your lender faces the prospect of about the same loss you do, and your lender doesn’t have any better hope than you do, that the market value will rise enough to recoup its $20 million, without waiting maybe five to 10 years. Further, if your lender takes ownership of the asset, your lender will face high costs to take over something which isn’t necessarily part of the lender’s skill set. Your lender may face rehabilitation costs, upgrading expenses, hiring management, and so on.

In contrast, when you show your lender your offer from S.Crow Collateral Corp., your lender will have a way to be paid in full, immediately.

Then, when the lender makes the new loan to you and you pay that money to S.Crow Collateral Corp., most of that money will be invested right back with the lender. Among other things, that serves as further incentive for the lender to make the new loan to you.

The combination of payment of your old loan in full, the new loan to you at an amount you can afford, and the new investment back with the lender increases your lender’s income immediately.

That’s important, because that increased income for your lender is what will generate the money that makes this all work. You see, when S.Crow Collateral Corp. buys at a high price from you and sells back to you at a low price, we take a substantial loss: loss that otherwise would be on your books and your lender’s. The lender’s increased cash flow makes it possible for the lender to re-pay our investment in the lender some years down the line, at a price that will make us whole. In the meantime, S.Crow Collateral Corp. has to go elsewhere to finance that loss, but we can do that, with appropriate agreements with your lender.

In situations of tenant-in-common investments or securitized loans, some additional components must be brought into the picture, such as to prevent the TIC investors from losing their tax deferral when these transactions occur. (If S.Crow Collateral Corp. does not get involved and the TIC investors lose the property, the deferred taxable gain on their previous tax-deferred exchanges will be recognized and the tax will be owing, even if the present TIC investment is a total loss.)

So, we can’t cause market values to rise, but isn’t this about as good? In some ways better?

Finally, I suggest copying and printing this post. Save it. Show it to people whose wisdom and expertise you trust. Test it. Then enjoy the fruits.—Stan Crow

A new report by National Real Estate Investor (see excerpts, below) is causing consternation among those who are involved in the commercial real estate sector of the U.S. economy, whether as owners, investors, lenders, appraisers, brokers, title insurers, closing and escrow companies, or whatever else. That’s because the report exposes what may be a decade of stagnation in that sector of the economy.

Lenders who are expecting rising commercial real estate values to rescue them from troubled properties may have a long wait. So may investors in tenant-in-common properties nationally. So may title insurers and others. And so, especially, may 1031 accommodators of tax-deferred exchanges.

The government is not helping matters, by its tacit encouragement of "pretend and extend" treatment for troubled commercial loans. That will drag out the process which the market absolutely cannot avoid, of working its way to knowable values.

For those who want to opt out of a decade of stagnation and move into profit quickly, the key is a private-sector financial process which accomplishes the following:

1. It pays in full commercial real estate loans that no longer make sense in light of today’s lower values;

2. It opens a commercial real estate lending facility for new loans in conservative relation to today’s lower values;

3. It increases, rather than decreases, the income of commercial real estate lenders;

4. It decreases, rather than increases, the risks of commercial real estate lending; and

5. It provides owners with instant equity in their commercial properties, instead of no equity and being "under water" on their loans.

Is this possible? Yes, it is, with the correct blend of certain non-real estate financial activities with commercial real estate lending—activities which have most people in the industry have thought to be unconnected with each other.

We’re here to connect them.—Stan Crow

nreionline.com/finance/news/pimco_commercial_real_estate_prices_0616/:

Avoiding Being Ravaged by Taxes, for Those Who Are Successful Now

Almost every day we deal with some people who are enjoying the rewards of many years of hard work. Those who don’t know them may think it was always easy for these people, but, in most cases, what they now have did not come easily—or with any certainty that it would ever come. Now, their greatest financial concern is preservation of what they have achieved—most especially, protection from being ravaged yet again by taxes.

Avoiding Being Ravaged by Commercial Debt, for Those Who Struggle Now

Some days it’s a roller coaster around here, because at one and the same time, while we are working with persons whose concern is avoiding having success be taxed away, we’re also working with others who feel that they are standing on the edge of a precipice because of the collapse of their investments or business in today’s economy—often after a long career of success in those investments or that business. For these, their greatest financial concern is, similarly, to preserve at least some of what they have achieved, but now the fear is of being financially destroyed by debt rather than by taxes.

In our use of collateralized installment sales and their variants in both of these situations, I have observed that these are not two different types of people. Life may be treating them differently right now, but most people who are successful now haven’t always been, and most who are struggling now haven’t always been.

For those who are struggling now because of commercial debt, my goal is to play a part in helping them to return to the success they once knew—to turn their "necessity to glorious gain", in the words of William Wordsworth, from "The Happy Warrior":

—Stan Crow

If the Property Is Fine, But You Want Out

Many of those who purchased tenant-in-common (TIC) interests in investment properties to complete a tax-deferred exchange under Section 1031 are feeling ticked off with an investment which they no longer want. That’s especially true, if they want to get out but don’t want to have to exchange into yet another property or yet another TIC interest—but they continue to want to defer their accumulated taxable (but as-yet-untaxed) gain.

An attractive rescue plan can be a collateralized installment sale, so that your tax is deferred under Section 453, the installment-reporting section of the Internal Revenue Code, rather than under Section 1031 for exchanges. Under Section 453, there is no re-investment requirement at all, as a condition of continuing your tax deferral. With a collateralized installment sale, you sell to a dealer who re-sells to the ultimate buyer, usually for cash. The dealer places the pre-tax cash proceeds into a "collateral account" which is safely set aside and invested in accord with your criteria, in financial instruments, stocks, bonds, whatever. You receive a return based on the investment of the pre-tax amount in that collateral account, rather than only the net after tax. Check with your tax adviser, but we think this is a clean way out of TIC investments.

Furthermore, it typically doesn’t require ageement by the other TIC investors for you to do this.

If the Property Is Burdened by Too Much Debt, in Relation to the Property’s Value Now

If the property has declined in value and now is loaded up with too much debt, a process which is based upon a collateralized installment sale can make it possible for the existing debt to be paid in full and be replaced by a new loan in a lower amount that the property really can handle.

This process typically requires the agreement of all of the TIC investors, but they are likely to be tickled to agree.

The loss which the lender avoids is passed to the books of the collateralized installment sale dealer, who recoups the loss with payment from the lender some years later, in part from the extra investment earnings the lender enjoys because the troubled loan was paid in full, and in part from other investments that are made possible by the transaction between the lender and the collateralized installment sale dealer.

The loan-resolution process involves some rather sophisticated financial and investment activities for which an explanation is beyond the scope of this commentary—you might roll your eyes at me—but that explanation is available to all of the TIC investors and their advisers, managers and representatives.—Stan Crow

A certain dairy farmer has 100 dairy cows. He instructs his manager to be certain that all 100 are milked every day. When the dairy farmer returns from a three-day trip he discovers that the cows have not been milked. He asks the manager why, and the manager responds, "I decided that it makes no sense to go to the work of milking any particular cow, because each cow is only a very minor part of the total. You can get along okay without the milk from one cow. As each cow came through the milking shed, I thought, ‘I don’t need to milk that one.’ Then I thought the same about the next one, and the next, and therefore, very sensibly, I did not milk any cows."

The dairy farmer replied, "I can get along okay with you, too. You’re fired!"

The Fallacy of Division

What was wrong with the manager’s logic? As logicians know, the manager committed the logical "fallacy of division," that is, he asserted that what is true of the whole is therefore true of a part of the whole. (Also, the manager’s logic was convenient; he really didn’t want to milk any cows, so his illogic fit perfectly with his own laziness.)

The fallacy of division prominently figures in discourse about politics and public policy, but politicians and purported public-policy experts seem to be unable to recognize it in themselves or to recognize, label and rebut the fallacy when it occurs in others.

Examples

Whatever one may think about the merits otherwise of off-shore drilling for oil, for example, it is an example of the logical fallacy of division, when politicians and policy wonks argue that off-shore drilling in, say, the Gulf of Mexico is unimportant because it is said to meet only a small percentage of America’s oil consumption. (Drilling in the Gulf represents a much more substantial percentage of American’s oil production, but never mind that.) Stated that way, then every part of America’s oil production is minor, so an advocate against oil drilling anywhere can argue that whichever well or oil field is at issue at the moment is not really essential.

In the same way, opponents of nuclear power plants can and do argue against the next one. Opponents of a weapons system for the armed forces can and do argue against the next one.

In the same way, proponents of an additional tax or regulatory requirement can and do argue for the next one, because it’s said to be only a minor additional burden. In that way of reasoning, there need never be an end to adding taxes and regulatory burdens on business.

It’s Not Just the Other Side

A thoughtful reader may note that the examples I’ve used so far fit with my beliefs, such as that the presumption should be against adding burdens on doing business. The same logical fallacy of division can be used, however, by people who generally agree with me on the merits. Example: People who are generally on my side on issues may argue that it’s okay to authorize government to intrude on privacy in yet another way, because the additional way is only a minor addition.

Look at the Whole

What am I saying here? I’m saying that the issue regarding a proposed policy cannot logically be decided on the basis of whether that policy position is minor in comparison with the whole. Instead, it should be decided by looking at the whole, including the proposed policy position, to determine whether the whole makes sense. Otherwise, we begin to justify dumb things just because they make an already-dumb situation only a little bit dumber.

If you watch for the fallacy of division, you’ll run across examples nearly every day. Let’s label those examples for what they are, and let’s not let the speakers get away with logical nonsense.

Or, to say it another way, let’s milk it for all it’s worth.—Stan Crow

My story is a contrast to that told in the Robert Anderson play, "I Never Sang for My Father", which was staged in New York in 1968, starring Hal Holbrook as the son who felt guilty for not having loved his father. (Gene Hackman played that role in the 1970 movie version, with Melvyn Douglas as his father. The play was staged again in New York this year.)

I did sing for my father—quite literally—but my point here, as Father’s Day approaches, is to express my gratitude to him, for one of the greatest gifts he gave to me: his persistent optimism in the reality and potential of opportunity.

His optimism in the reality and potential of opportunity is all the more remarkable, because he lived through the Great Depression, World War II and the Korean War. During his career as an entrepreneur in small business, he was poor, he was prosperous, he was poor again, and he prospered again. He said to me, "Do your best", and, "You can be what you want to me." Indeed, he said, "You can be President, if you want to be."

Yes, part of that was his confidence in ability, which as a biased father he thought he saw in me. The greater part of that, however, was his confidence that there is an order of things, in which doing one’s best ordinarily—although not always—brings its own reward. Why? Because opportunity is real, and it is full of real potential for the one who sees it and pursues it.

There are those who might say that it was easier then, when taxes were lower and regulatory hurdles were lower. There is truth in that, but my point is that my father, and many like him, believed in the reality and potential of opportunity in spite of some of the greatest challenges that the world had ever faced.

So, here’s to Dad! I sing his praises again, in gratitude for a priceless gift which he made real in me: optimism in the reality and potential of opportunity.—Stan Crow

I said a couple of days ago that I would comment further about what is called a "Deferred Sales Trust^TM" (or "DST", for short), see www.myept.com marketed by an outfit called "Estate Planning Team" (EPT).

I don’t see it as my role to try to criticize (or publicize) the competition, but when people want to know how a DST differs from a collateralized installment sale, it’s appropriate to answer honestly about what those differences are.

Here’s one which should be emblazoned on a cautionary banner for every person who is considering selling an asset in a DST transaction: the DST promoters invite what I believe is a conflict of interest for the professionals who are advising the seller.

At www.myept.com/Attorneys the promoters say this, to attorneys:

"In addition to increasing your legal fees, by joining EPT you may be eligible to earn reoccurring solicitor's fees on each closed DST case. When a DST closes, the proceeds generated from the sale of the asset must be professionally managed by the DST Trustee. If your state bar allows you may earn a percentage of the investment manager's fee in the form of a solicitor's fee. These fees are paid to you every year that the assets are managed within the DST. Each state bar has its own view on solicitor fees. Contact your state bar to ensure that there are no state rules or ethical opinions that prohibit attorneys from receiving solicitor fees."

If you are a prospective seller, think very carefully about it, if your attorney advises you to use a DST transaction. You may just want to ask your attorney whether he or she will be compensated by EPT for recommending to you that you use a DST transaction.

Do you want your attorney to recommend a course of action because your attorney believes that is the best course of action for you, or do you want your attorney to have a personal monetary interest in recommending one course of action (a DST sale) as opposed to an alternative?

Whether or not a particular state’s bar association deems such a payment to your attorney to be an ethical violation, it doesn’t take a uniquely astute ethical sensitivity to see that the quoted statement above is an overt invitation to an attorney to have a personal monetary reason to advise you one way rather than another. In fact, the quoted statement above seems to me to indicate a willingness (by someone, anyway) to push the ethical envelope.

Okay, so suppose the person who recommends a DST transaction to you is a certified public accountant. Do the ethical concern and potential conflict of interest exist there, too?

Well, see this, at www.myept.com/CPA%27s---Tax-Professionals:

"As a member of the Estate Planning Team you may also be eligible to earn re-occurring solicitor fees [footnote about checking on the rules of the professional’s jurisdiction] on each closed DST case if your resident state allows. When a DST closes, the proceeds generated from the sale of the asset must be expertly invested by the DST Professional Trustee. These fees are paid to you every year that the assets are managed within the DST by the selected investment advisor.

"In the event your resident state prohibits fee sharing, you may request that EPT direct you to a securities broker/dealer and registered investment advisor that will sponsor you to obtain a Series 65 registration/Investment advisor representative registration which would enable you to be paid on-going compensation generated from monies invested from DST fee based money management."

For whom is your CPA working, if your CPA is paid by the DST promoter through the earnings on the investment of your sale proceeds?

In those jurisdictions which allow these side payments, at the very least the professional should disclose to you that the professional is being paid by the promoters whose transaction the professional urges you to undertake. Even if the professional discloses that to you, how certain can you be, that his or her advice is based solely on what is best for you?

Oh, yes, lest there be any doubt: in a collateralized installment sale transaction, S.Crow Collateral Corp. does not pay money on the side to your attorney or CPA. We can arrange the transaction so that the after-tax cost to you of other transaction costs is reduced, but you pay your attorney and CPA. We don’t.—Stan Crow

It's a little embarrassing at parties, when people excitedly clamor to learn about the various ways to defer taxes, or about how we resolve troubled commercial loans.—SC

Because they are so widely marketed, I’m often asked about what are called "Deferred Sales Trusts^TM", see www.myept.com, marketed by an outfit called "Estate Planning Team". Those who ask me about deferred sales trusts, or "DSTs", for short, usually want to know how they differ from collateralized installment sales, and whether DSTs achieve the tax deferral that is advertised as their primary benefit.

I see a red flag, when I read on the Estate Planning Team’s home page that DSTs are "an IRS tax code compliant strategy to defer capital gains tax on the sale of highly appreciated property", and when I read, at www.exeter1031.com/news_PLR_deferred_sales_trust.aspx, that on March 10, 2009, the Internal Revenue Service "issued a highly anticipated Private Letter Ruling today that addresses the tax deferral strategy called Deferred Sales Trusts™."

Well, I’ve read that Private Letter Ruling, and it doesn’t mention DSTs even once. It deals solely with these questions: (1) Whether a trust in which the trustee was unrelated by blood to the installment seller but was in business with the installment seller was a "related" party for purposes of installment reporting under the tax code; and (2) whether, when and how unrecaptured gain because of depreciation deductions must be recognized.

The ruling declared as a caveat that it expressed no opinion on anything other than the specific questions asked, it may be used only by the taxpayer who requested it, and it may not be used or cited as precedent.

Among the glaringly unanswered questions is this: Is it relevant how the trust came into being, and who created it? The ruling is silent about that, because the facts in the taxpayer’s request for the ruling didn’t say. And what about the economic substance doctrine, now codified by Congress?

The biggest red flag, though, is simply in the representation that DSTs are "an IRS Code compliant strategy". It seems to me that such a representation makes the sponsors virtually the guarantors of the promised tax outcome. Given the unique circumstances of each taxpayer and the risks of varying outcomes of tax audits, that’s not a representation I would care to make, especially in a carte blanche fashion such as that.

So, right at the start, a substantial difference between a collateralized installment sale and a DST is that a collateralized installment sale is a sale to a dealer who buys to re-sell, not to a promoter of a trust company which represents what your tax outcome will be. We believe that a collateralized installment sale can bring both non-tax and tax advantages to our sellers, but we urge our sellers to obtain their own tax and legal advice for their particular circumstances. Every collateralized installment sale transaction is unique, and it’s not some one-size-fits-all, mass-produced, mass-marketed strategy.

The operative word here is caution.

I’ll have more to say about this soon.—Stan Crow

Dealburt’s Retirement

S.Crow Collateral Corp. announces the retirement of Dealburt, our long-time editor of The Latest Installment. Dealburt has been the alter ego of Stan Crow, who now takes over the editorial responsibilities for The Latest Installment, first hand. For possible alter-ego analogies (or contrasts or similarities?), one may think of "Bunbury" in Oscar Wilde’s play, "The Importance of Being Earnest," or "Harvey" in the play of that name by Mary Chase. (James Stewart later starred in a film version of "Harvey", and both Art Carney and he starred in television versions.) We thank Dealburt for his great service and wish him a long and enjoyable retirement.

Regulatory-Risk Aversion and a Slower-Growth Economy

I believe that economists and commentators have largely missed a very significant factor that will have much to do with whether the U.S. economy returns to strong growth, or merely muddles along (or worse). That factor is this: Will we continue down the path of becoming a "regulatory-risk" economy, in which businesses large and small are increasingly unwilling to make any move until they receive a permission slip from some government official or agency?

From personal observation, I can say this: The reason why business people are substantially immobilized from trying new activities or methods without governmental permission is that without that blessing they believe they can’t be certain whether doing the new thing would get them into trouble.

Government by Agencies and Officials

Underlying this uncertainty is the perception that the federal government is becoming, more and more, a government by agencies and officials rather than a government of laws.

It’s not that there’s a shortage of statutes on the books—far from it. It’s that the usual practice now is for government agencies and officials to be granted—either by statutory text or by accretion—so much discretion in making decisions that what really counts, as far as business people are concerned, is often not what the law actually says, but what some official may later decide the meaning, scope and particular applications of the law are, whether or not foreseen by the legislators.

To this uncertainty about what the official or agency may decide that the law means, one can add uncertainty about how long it would take to find out and the cost of lawyering up even to ask the question. Then one can understand why there is a growing regulatory-risk aversion on the part of business people today.

I Was a Regulator Once

I once served on a regulatory body, many years ago. As a free-enterprise guy, I was caught by surprise, when I began to think that I could accomplish great things with the imposition of additional regulations. When I was the one who wrote the regulations, I found it easy to mandate that other people do things the way I thought best. When I realized, somewhat late, what was happening to me, I resigned that position, having learned an invaluable lesson.

The propensity to regulate (the government’s side of things) is the direct cause of regulatory-risk aversion (the private-enterprise side of things).

It’s a Big Deal

Our economy is struggling now against many headwinds, but regulatory-risk aversion is one which, as far as I can tell, most economists have not taken into account. They should. It’s a big deal.—Stan Crow

Important announcement: With the hurdles now overcome, we are pleased to announce our criteria for resolving troubled commercial loans, as follows:

1. Loan status: The loan is a troubled commercial loan, that is, the property is worth less than the amount owed, and the payments on the loan are not current or may soon not be current;

2. Lender: The loan is owned by a bank (1) which has a "troubled asset ratio" preferably not above 50% (see http://banktracker.investigativereportingworkshop.org), (2) which is not under any cease-and-desist or consent order by its regulator, and (3) which now holds the particular troubled loan in its loan portfolio without having sold or securitized it;

3. Minimum amount: The unpaid balance on the troubled loan or group of loans is $1 million or more;

4. Timing: At least 30 days remain before foreclosure;

5. Bankruptcy: No bankruptcy proceeding is pending regarding the borrower;

6. Relationship between lender and borrower: The borrower is a valued borrower whom the lender would like to retain as a customer, and the relationship between them is amicable;

7. Access: The borrower has access to the bank at the senior executive officer level; and

8. Debt service: The borrower will be able to meet the debt-service obligation for a new loan, newly underwritten by the bank in relation to the new, lower value of the property.

Please note carefully: Subject to contingencies on both sides (including a particular financial transaction between S.Crow Collateral Corp. and the bank), and subject to satisfaction of the above criteria, and subject to mutual agreement upon terms and conditions that are approved by the borrower and by S.Crow Collateral Corp., the latter will agree to purchase the property from the borrower at the amount the borrower now owes on the property, so that the borrower can pay the bank in full. S.Crow Collateral Corp. will then immediately sell the property back to the borrower at a lower price which is made possible by a new loan from the bank to the borrower and which the borrower can service. The arrangement for the new loan is solely between the borrower and the bank.

S.Crow Collateral Corp.’s financial transaction with the bank increases the bank’s Tier 1 capital and enables the bank to replace the existing troubled loan with U.S. Treasuries or U.S. agency securities. That takes the pain out of the deal for the bank, so that it can be willing to lend new money to the borrower and be comfortable with doing so.

S.Crow Collateral Corp. does not represent the borrower in obtaining a new loan or settling the existing one, because S.Crow Collateral Corp. is not an adviser or agent for anyone. Instead, S.Crow Collateral Corp. acts solely on its own behalf, as a principal, and therefore does not charge either the borrower or the bank any fee for any service. We make our money as a counterparty in the transactions in which we participate.

If you are the lender or the borrower in regard to a loan which satisfies the criteria stated above, you are welcome to contact us.—Stanley D. Crow, President, S.Crow Collateral Corp.

The situation:  Now that I’m ever-so-slightly older and thinking more about my retirement, I’m becoming quite concerned about my investments. If I were to sustain a big investment loss now, I wouldn’t have time to recoup, and I wouldn’t have employment earnings to help me to do so. The state of the economy seems very agitated right now. What can you tell me to ease my concerns?

Editor's Comment:  I can give you a solid footing on which to minimize your risk of investment loss. What’s more, I can do so without even giving you any advice about the investments themselves.

Here it is: Invest with dollars that haven’t been taxed yet, to increase substantially your margin against investment loss.

Let’s assume that you have the opportunity to sell a capital asset for $1 million, that your tax basis is zero, and that the combined state and federal capital gains tax rate is 30%. Let’s compare selling for cash at the end of 2010 vs. selling with a collateralized installment sale at the end of 2010. Let’s assume that either way the sale proceeds are invested (directly by you, in the case of a cash sale, and via a collateral account if it’s a collateralized installment sale) in January, 2011, in something that immediately loses $200,000. Let’s assume, further, that either way the new investment is sold right after the loss occurs. You then receive what’s left, either directly or because the collateral account is closed and the installment contract is paid. (Ignore transaction costs either way.)

Why do you get $60,000 more with a collateralized installment sale? If you begin with a cash sale for $1,000,000, that amount is immediately taxed, at a cost to you of $300,000, and when you lose $200,000 on the next investment you never get back any of the tax on the $1,000,000. With a collateralized installment sale, however, the government bears 30% of the loss for you, because the $200,000 you lost was never taxed as income to you in the first place. With a collateralized installment sale, you never receive $1,000,000 to be taxed; you receive $800,000, and the tax on that is $240,000 instead of $300,000, and the government absorbs the other $60,000.

It gets even better, though, if instead of immediately terminating the collateral account after the $200,000 loss you delay payment of the tax on the $1,000,000 collateralized installment sale for 30 years, as follows:

You improve your position by $670,000 just by choosing a collateralized installment sale: a very substantial buffer for possible investment losses! (Some contingencies are not addressed here, of course.)—Stan Crow

The situation: As a congressman, and especially because of my committee assignments, I see just about everything that people try, in an effort to avoid or minimize tax. Sometimes because of promoters who sell transaction packages, and sometimes because of under-informed tax advisers, this or that tax-avoidance strategy will be foisted on well-meaning taxpayers as the cure-all in every situation. Over and over, from what I hear, promoters tell people, "Sign these forms and follow these instructions, and you can defer/avoid/minimize tax." The promoters give the impression that the tax outcome is just a matter of using the "right" forms, which, no coincidence, the promoters can sell.

The promoters typically attach a trade name to their forms. They publicize that tradename as though reality and intention don’t matter, and as though tax outcomes were only a matter of labels. They advertise that trade name until eventually the IRS works its laborious way to them and exposes the subterfuge for what it is.

Then, when that happens, it’s not unusual for the promoters to adopt a new trade name, change this or that little feature of the forms, and then start all over with a re-named strategy that, once again, purports to be the formulaic solution for every taxpayer. Again, they will run ahead of the IRS for a while.

It’s entirely appropriate for taxpayers to minimize their tax cost within the bounds of the law. Believe it or not, I’m actually in favor of letting everyone minimize their taxes, as long as they play by the rules. When they mess up, though, it’s unpleasant for them and unpleasant for me, when I have to hear them complain that they were misled. Can you do anything to help to caution people to stay away from promoters’ formulaic tax schemes?—Congressman

Editor's Comment:  Much trouble has resulted for many taxpayers who have been told, "Just sign this," to reduce their taxes. Often the resulting trouble for the taxpayers occurs when the IRS audits them, but probably the greater problem is the mess that is made of how the taxpayers conduct their daily business and receive their income.

Much of the problem is caused by promoters who seem to believe that one size fits all, when, really, that’s hardly ever accurate. Just as every person is unique, every person’s business situation is unique, and every business transaction should be uniquely fitted to that person and that business situation. Only in that way can the best outcome for both business and tax purposes be envisioned, let alone achieved.

If I can achieve nothing more than help people to learn to stay away from tax-strategy promoters and to turn, instead, to constructing real business transactions with real opposite parties with real business benefit for the particular situation quite apart from the tax effect, then I will have the great sense of satisfaction that comes with a job well done—and the taxpayers will have the best prospect of achieving the greatest tax efficiency, as well.

Remember this good advice: one size fits one.—Stan Crow

The situation: I have two questions which relate to creativity. The first pertains to my business. Because of changes in the industry in which I do business, I need to re-evaluate the business model for my company. So far, every time I try to do that I come up with the same things I’ve always done, and they’re not working all that well. How can I break out of that mold and do some really fresh thinking?

My second question pertains to your business. You regularly discuss taxes, and quite often you have creative ideas for minimizing taxes. This strikes me as an anomaly; taxes seem to me to be at the far end of the spectrum from creativity. How can taxes, which are so very rules based, have anything in common with creativity? (Of course, I want to minimize my tax burden, just as about everyone else does, so I can cope with anomalies if necessary!)—Business Owner

Editor's Comment: You are right to begin with your business model, because a business model can either cause or prevent success—or it can cause success at one time and then prevent that same success when conditions change. As you have discovered, your business model can get moldy.

Anyway, out of many possibilities, I’ll suggest a few that may help you begin to think in a fresh way.

1. Use your right brain, or borrow one.

Creativity comes more from the right side of your brain than from the left side. The left side is more linear. It thinks from point A to point B to point C. The right side, on the other hand, may omit A, B or C, or may re-arrange them. The right side tends toward bold ideas and bold action, such as sliding down the banister instead of walking down the stairs. The left side, being linear, tends to build on known information and to follow it to a logical conclusion. The right side, being somewhat improvisational, may start with a conclusion and ask the left side, "Why not?"

At least in my own experience, creativity has almost always begun with a "why not" sort of question, and the left side of my brain is then given the task of building a structure accordingly, sometimes working from the answer backward to the underlying point of beginning, the point at which I am looking for a solution.

If you tend to be more left-brain oriented, and the right side of your brain is dormant or weak, find someone who is your opposite. Begin a series of conversations with that person about your situation. It may even be better if that person doesn’t know beans about your business or how it works, because that person’s role is to come up with questions for you to consider, that you might have never considered because they’re so off the wall.

2. Use your left brain, or borrow one.

If, on the other hand, it’s your left brain that is the under-nourished side, engage in the same sort of conversations with someone who is your opposite: someone who can build a coherent structure for those ideas which attract you but you can’t see how to implement them.

3. Get over a dismissive attitude about your counterpart.

Strongly left-brained people tend to think right-brained people don’t know anything worthwhile in the areas that count (e.g., mathematics, logic, engineering, accounting, many areas of the law, company policies, government bureaucracies, organizational imperatives). Strongly right-brained people tend to think left-brained people don’t know anything worthwhile in the areas that count (e.g., beauty, art, expression or understanding of feelings, intuition, inter-personal relations). Get over it, because, in my experience, at least, creativity comes from extended and on-going interchange between someone who is strongly left-brained and someone who is strongly right-brained. Whichever you are, you aren’t better. You need the other.

4. Reason from principles, not from particular details.

Even left-brained people such as me can do this. Creativity can blossom when it is given a wide horizon, and that means it should start with principles before it addresses a particular problem. What is the reason why I have this business? What do I want to achieve with it? What will make me feel good about myself with this business, and what won’t? Just as philosophers seek (at least, should seek) truth, goodness and beauty, what is true about my business? What is its goodness? Where does it, or can it, achieve beauty?

Be prepared for surprises as you examine such questions. You may decide that you don’t like some aspects of your business, even if they seem to be quite successful.

5. Use categorical reasoning.

Here I turn to taxes, to illustrate my meaning. I am not using "categorical reasoning" in the pejorative sense of being closed in one’s thinking. What I mean here is that very often the problems one encounters are problems of category: a category that is wrongly chosen, or chosen simply by habit, or chosen simply because of the name you have attached to what you do. If we assign a problem to category "x" and it really would fit better in category "y", we are likely to use entirely the wrong approach and get entirely the wrong outcome.

Taxes are almost entirely questions of category. Is this revenue ordinary income, or is it capital gain? Is this activity a business, or is it a hobby? Is this business selling this property as a dealer or as an investor? Is this asset an item of supplies, or an item of inventory? Is this transaction a sale, or is it a loan, or is it a lease? The tax result will depend on the category to which the thing is assigned, and, surprisingly enough, you may have a considerable degree of flexibility in choosing the category, because you can choose how you do what you do.

This does not at all justify fakery or calling something what it isn’t. Often, however, you can choose to do something the way that it has always been done, in category "x", but you also have the freedom to do the thing in quite a different way and therefore be in category "y". If you like the outcome of category "y" better, then look for a way to structure what you do accordingly.

The categories are givens. What you do is not.—Stan Crow

The situation:  My wife and I own a large fruit-growing business, through a limited liability company we formed. We have received an offer of $60 million from someone who wants to buy the LLC. Our tax basis is $10 million, and we have no debt to speak of. I’m aware of the limit on tax deferral through installment sales, to $5 million of installment sales per taxpayer per year. Do you have something that would be applicable, to defer the tax on the entire $50 million gain?—Grower

Editor's Comment:  Actually, there are a variety of ways in which to solve your tax problem. A very interesting one is to use a perpetual collateralized installment-sale contract. Here’s how it works: Sell the LLC to a collateralized installment sale dealer on a perpetual (that is, permanent) installment contract for $20 million, with $10 million paid to you immediately. With your wife and you as sellers and with $10 million paid up front, you can defer the entire tax on your $10 million gain.

The dealer will re-sell the LLC to the ultimate buyer for $60 million in cash. The dealer will pay $10 million of that to you immediately, and owe you $10 million on the installment contract, for which the dealer will place $50 million (ignoring transaction costs here) into a "collateral account" at a bank or financial services firm you approve, with the $50 million as security for the $10 million owed to you and your wife.

The term of the installment contract will be, say, 100 years (which counts as perpetual), which means that you personally will never be paid either the $10 million owed to you or the other $40 million in the collateral account—but you will receive income on $60 million (the $50 million perpetual investment portfolio backing the installment contract, plus your investment of the $10 million you receive up front), without ever having a capital gains tax to pay. And, by standard financial analysis, the right to perpetual income on $60 million is worth $60 million. You could say that enjoying the fruit of the tree forever is as good as owning the tree itself, and better, if there’s no capital gains tax.

So, you will receive the benefit of the full $60 million, with no capital gains tax, ever.

In contrast, if you were paid the $60 million now and you paid, say, 50% of that in tax (if you’re lucky), what would you do with the other $30 million? Invest it, of course, when instead you might have had the benefit of having invested all $60 million.

So, would you rather have $30 million invested or $60 million invested?

Here’s the clincher, though: Let’s suppose you decide sometime that you want to invest in something else, and you need the $50 million. Then you sell the income stream to someone else, and thereby collect the principal—when and if you choose to do so.—Stan Crow

P.S. The collateralized installment sale dealer will be taxed on a $40 million gain, if the dealer doesn’t have balancing deductions.