Archive for June, 2010

The Brewster Wood People….Redux

“Whadda mean you keep breaking bolts!”, John half screamed into the phone.  

“I’m telling you, I’ve replaced three bolts so far and they break after the third or fourth log”, I patiently explained.  

Ah yes, its wood splitting season in Brewster, NY and its environs.  By this time people have accumulated enough wood for next winter and it’s time to cut it, split it and have it further dry throughout the summer in preparation for burning in winter.  

For a complete background on how this is done, please see our prior post: 

The Brewster Wood People 

John (the equipment guy) had lent me his splitter to split my wood.  His splitter is one of the best, its old school and very powerful, with 32 tons of splitting force.  The problem was that the flange that connects the splitting wedge to the hydraulic arm had been bent wider over the years.  This bending of the flange causes the bolt that connects the splitting wedge to the hydraulic arm to bear a disproportionate amount of the load, resulting in…..broken bolts.  

As I began to explain the situation to John, he cut me off and said, “Ok Ok fine..take the blasted thing to Rusty and let him deal with it.” 

“OK”, I deadpanned.  

So after removing the wedge from the splitter, I wrapped it in a clean rag and off I went to Rusty’s place.  A hardworking (and very honest) Czech immigrant, Rusty owns a transmission shop and his job on our little team is to keep all the equipment running.  

I arrived at the shop and showed Rusty the wedge.  After agreeing that the flange needed to be heated and bent back into position, and after a brief rant by Rusty about how John was taking advantage of him, we walked outside together.  

“How’s business by the way?” I asked

“It sucks”, came his eloquent reply. 

My neurons immediately sprang to life and I asked him, “Why, I thought people are hanging on to their cars longer and fixing them…especially with times being tough.” 

“Yea they are…but no one has any money”, he responded. 

“You see that green truck, I put a transmission in it 3 months ago and the guy can’t pick it up because he can’t pay for it.  Same with that one over there, and look, even that red van, which is owned by a big company (his emphasis)…they just cant pay.” 

“You mean even the company owned vehicle is still here because they cant pay?”, I confirmed.  

“Yep”, said Rusty bitterly.  

“I just hope they don’t do another “cash for clunkers” ….that almost killed me ….and besides it’s a stupid program.”, he commented.  

Feeling terrible I lamely asked, “Cash for clunkers hit you that bad?” 

“That put a lot of people out of work…lot of people out of work”, he repeated quietly. 

For a background on the Cash for Clunkers program see our prior post:

If It Aint Broke Then…Destroy It!! 

I am telling this story because it’s a perfect illustration of how craven the lofty statements of “helping the little guy” and “getting the economy back on track” really are.  

Let’s break this down.  

When someone tries to plan economic activity or whenever someone decides to intervene in the economy, by definition they create winners and losers.  For if a government program is designed to tilt the playing field in one party’s favor, it will necessarily tilt the field against other parties. 

So who are the winners and losers in this case? 

Well the winner is the automobile industry, a mismanaged group of companies mostly owned by the unions and the government.   They received what amounted to a subsidy that artificially enticed consumers to buy their product.  What other business can say, “Buy my product and the government will give you thousands of dollars.”

And the losers?

The first losers are the consumers who were lulled into the program.  These were people who were not going to buy a new vehicle (else they would have already bought) and did so to “take advantage” of the program. 

In sum these consumers traded working vehicles, that they either owned outright or made significant progress in paying off, for a new vehicle for which they likely incurred large amounts of fresh debt.  

And of course repair and maintenance people like Rusty were hurt severely as these used cars were removed from the road and destroyed. 

A pity that Rusty doesn’t have a high powered lobbying firm working for him isn’t it? 

My friends, winners and losers should be decided by open and fair competition and not by bureaucrats.  In other words, success in the marketplace should be defined by what you have done rather than who you know.  

In addition to deciding who gets to flourish and who has to suffer, these programs are nearly always riddled with fraud.  For example, take the recent homebuyer tax credit (a subsidy to the housing industry that no doubt hurt many small home remodelers) where it looks as if prison inmates and IRS employees defrauded the government.  Let’s go to CNN for the story: 

More than 1,200 prison inmates, including 241 serving life sentences, defrauded the government of $9.1 million in tax credits reserved for first-time homebuyers, according to a Treasury Department report released Wednesday. 

The report also found that improper filers included 34 employees of the IRS. This is in addition to 53 IRS employees that the inspector general identified last year as improper filers.

Within a few days I was back at Rusty’s place to pick up the repaired splitting wedge.  The green truck and red van were still there, in the same place in the parking lot. 

Until next time, 

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com

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A Little History

Another busy week at Granite…This week I thought we would view a snapshot of history together.  Enjoy and let me know your thoughts!

Of the heroes of the American Revolution perhaps none was more flamboyant, bold and personifies manhood more than Captain John Paul Jones. He was one of nature’s self-made men. He was born to a poor family in Scotland and was raised in poverty. Jones became a captain by his own merits at the age of twenty-one. He was slight and wiry in body, about 5’5″ tall with a sharp, wedge shaped nose, high cheekbones and a strong cleft chin. . He was always neatly dressed and had an eye for the ladies. He had, however, a violent temper which manifested itself throughout his career. Known as the Father of the American Navy he struck terror into his enemies. Indeed, Benjamin Disraeli, an early biographer, wrote that the nurses of Scotland hushed their crying charges by the whisper of his name. The following explains a little about the life of this talented, charming but often prickly man.

When Congress formed a ‘Continental Navy’ Jones offered his services and he was commissioned as first lieutenant on 7th December 1775. As a lieutenant on the Alfred and later a captain of the Providence, Jones gained useful experience of naval warfare. His reputation rose rapidly and he advised Congress on the drawing up of Navy regulations. In November 1777 he sailed in the ‘Ranger’ for France where he struck up a rapport with the American Commissioner in Paris, Benjamin Franklin and, at Quiberon, forced the French to salute the American Flag – the first time it had been hoisted in a foreign harbour.

Jones’ most famous battle came in 1779, when Captain Jones took command of the USS Bonhomme Richard, a merchant ship rebuilt and given to America by the French shipping magnate, Jacques-Donatien Le Ray. On September 23, 1779, The Bonhomme Richard battled the English ship HMS Serapis off the coast of Flamborough Head, in east Yorkshire. The Serapis was a well-constructed, well-furnished man-of-war, thoroughly equipped, while the Bonhomme Richard had every disadvantage in these respects; being an old retrofitted merchant vessel.

The combat which ensued, between the Serapis and the Bonhomme Richard, is one of the most remarkable in the annals of naval warfare, for the circumstances under which it was fought, the persistence of the contest, and the well-matched valor of the commanders. The engagement was by moonlight, on a tranquil sea, within sight of the shore, which was crowded with spectators, who thronged the promontory of Flamborough Head and the piers of Scarborough. The engagement began at half-past seven in the evening, with a series of attempts by the Bonhomme Richard to come to close to the English ship. As the guns of the Serapis fired at the Richard, two of the old eighteen-pound guns mounted in her gun-room burst, killing many of the men below decks. The Richard then passed to windward of the Serapis, receiving still more fire, which did much damage to the rotten hull of the old ship. Jones next attempted to get into position to fire upon the entire length of the Serapis. This resulted in a momentary collision. Immediately seeing an opportunity, Jones ordered his men to board the Serapis. The English sailors repulsed this effort and the ships separated. As the ships maneuvered once more they again came into close contact. This time Jones ordered his men to tie the two ships together; with Jones himself helping in the task.

The ships were tied so close that the guns of one touched the sides of the other. Each release of cannon fire from the Serapis blew large holes in the hull of the Richard. With his ship sinking underneath him and the Serapis’ cannon continuing to blow ever larger holes in his ship, the English Captain Pearson called out to Jones, “Has your ship struck?” (Do you surrender?) The hot tempered Jones instantly shot back, “I have not yet begun to fight.”

What followed was hand to hand combat of the most vicious kind. Jones’ men cleared the deck of the Serapis, with muskets and hand-grenades. One of these grenades reached the lower gun-deck of the Serapis, and there setting fire to a quantity of exposed cartridges, produced a bloody destruction of life. The damage to the Richard at this point so great that she was beginning to sink below the water line. The English prisoners of war were set to work manning the pumps thereby keeping the Richard afloat. Human courage and resolution have seldom been more severely tried than in the exigencies of this terrible night on board the Richard. Jones continued to fire what cannon he had at the Serapis while men from both ships battled on the decks. Both vessels were on fire, when, at half-past ten at night, the Serapis surrendered.

The entire losses of the Richard were estimated at one hundred and fifty, nearly one-half of all the men she carried. The English Captain Pearson reported at least one hundred and seventeen casualties. The Bonhomme Richard was so riddled by the enemy’s fire, and disemboweled by the gun-room explosion, that she could not be saved from sinking. When the wind freshened, the day after the victory, she became no longer tenable; her living freight was taken from her, and Jones, in the forenoon of the 25th, “with inexpressible grief,” saw her final plunge into the depths of the ocean. Jones sailed the Serapis to Amsterdam where he enjoyed the smiles of the fairer sex and rested with his men.

After the war, in 1792 Jones was appointed U.S. Consul to Algiers, but he died in his Paris apartment on July 18, before the commission arrived. His body lay in an alcohol filled coffin in an unmarked grave in a cemetery for foreign Protestants for over a century. The turn of last century was a time of great American naval expansion, encouraged by the President Teddy Roosevelt, an intensive search was made to find his body. In 1905 it was rediscovered. Amid great ceremony it was brought back to the United States aboard the USS Brooklyn accompanied by three other cruisers. Seven battleships met them off the American coast and as a single column they sailed into Chesapeake Bay. There the first four battleships peeled off firing 15 gun salutes while the Brooklyn sailed on to Annapolis. In 1913 his body was finally laid to rest in a magnificent marble sarcophagus, modeled on the tomb of Napoleon, in the chapel crypt of Annapolis Naval Academy; a far cry from his humble beginnings in Scotland.

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The Lone Ranger

In matters of style, swim with the current; in matters of principle, stand like a rock – Thomas Jefferson 

We have a warped perception of conformity in our culture.  Reflecting on what is acceptable vs. not acceptable yields an interesting paradigm.  Dressing weird, speaking incoherently and behaving like an angry toddler will get you cries of praise for being original, artistic and forward thinking, but to have differing intellectual points of view, to stand for basic principles or to call a failed policy by its name and ….gasp…you blaspheme.     

Intellectual diversity has become a very dirty word.  

Nowhere is this more true than in the realm of economics.  Witness our very own Federal Reserve, where decisions are taken that affect the daily life and financial future of nearly all Americans.  

You would expect discussions over monetary policy to be quite animated as the consequences of misguided decisions in this area are grave.  You would also expect there to be some variations in the voting patterns as a result.   

Most Federal Open Market Committee (FOMC) votes have been unanimous.  

It is a little strange that there is complete agreement among a group of intellectuals when discussing such weighty issues as interest rate policy.  In business, the best decisions are made via the presentation and discussion of diverging points of view and rarely are these varying points of view perfectly reconciled when it come times for a vote.  The recent FOMC voting patterns suggest a lax decision making atmosphere at best and a lack of any independent thought at worst.  

Recently; however, there seems to be the genesis of some independent (and thought provoking) thinking coming out of the Fed.  

Kansas City Federal Reserve President Thomas Hoenig has lately shown that he is not an android programmed to automatically rubber stamp the ZIRP (Zero Interest Rate Policy).  

In a handful of recent votes on major policies, Hoenig has been the lone dissenting vote.  His rejection of some key elements of dogma have done much to puncture some of the illogic of the “groupthink” dominated FOMC meetings.  

In a recent interview with the Huffington Post, Hoenig has articulated some of his positions as follows (our emphasis added):

  • Lambasted the tilted playing field that benefits Wall Street banks over Main Street banks;
  • Called the idea that the U.S. needs megabanks to compete globally a “fantasy”;
  • Said Congress should mandate simple, easily understood and enforceable rules
  • Prodded the Senate to get tougher on permanently ending Too Big To Fail
  • Criticized the Federal Reserve’s ongoing policy to keep the main interest rate near zero because it “guarantee[s] a spread to Wall Street”, enabling unearned profits and “encourag[ing] speculation.” 

To illuminate a little further regarding the last point about the zero interest rate policy or ZIRP, let’s just state what this means in plain English.  

Look, this blog is read by many a General Manager, Financial Officer or others that are responsible for delivering business results.  Who amongst us has the luxury of having a ZERO Cost of Sales?  

That’s right a bank’s Cost of Sales is the cost of obtaining money.   Allowing banks to borrow at ZERO and lend out at whatever they can get, results in a guaranteed gross margin.  Not to beat a dead horse, but this is like a bookstore that receives free books and sells them at market rates.  

“So Bechara, where does the free money come from and what are the banks doing with all the money they are making”, yells the peanut gallery.  

Boy this is where it really gets sordid.  

Well the free money comes from the Fed and of course the Fed’s money is either borrowed or printed.  Borrowing money means the US Taxpayer is on the hook to pay it back and printing the money means the US Taxpayer will eventually suffer a decrease in purchasing power.  So in short, the Fed’s money comes from the US Taxpayer one way or another.  

As far as what the banks are doing with all the money they make, well they pay it to themselves in bonuses.  Let’s go to the New York Times:

Bank executives are grappling with a question that exasperates, even infuriates, many recession-weary Americans: Just how big should their paydays be? Despite calls for restraint from Washington and a chafed public, resurgent banks are preparing to pay out bonuses that rival those of the boom years. The haul, in cash and stock, will run into many billions of dollars.

Industry executives acknowledge that the numbers being tossed around — six-, seven- and even eight-figure sums for some chief executives and top producers — will probably stun the many Americans still hurting from the financial collapse and ensuing Great Recession.

 

Now the President and Congress are discussing a special bank tax to recover some of the money given to the banks that they used to pay bonuses. 

My friends this is why a planned economy is simply an insane idea.  We are piling distortion on top of distortion in our efforts to make people act a certain way.  We give money to banks and then are upset at how they use it so we now we institute a special tax to get the money back but this tax does not apply to GM, AIG, ……etc etc. and the insanity goes on.  

We should rediscover our roots and go back to a simpler system based on responsibility and accountability and independence.  For example, businesses can set their own pay and bonuses, but they will never see a dime of taxpayer money.  

Apparently the Fed finds these ideas to be quaint, outdated and not suited to our modern world.  Well, at least there is one man at the Fed who has the intellect and courage to take a lonely stand for our founding principles.    

Hi Ho Silver.  

Have a great week, 

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com

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More Forms Please

Please enjoy this week’s guest post from our friend Karla Dennis from Cohesive Tax!

I love the way government talks. Here is a quote from IRS Commissioner Doug Shulman: “Better information reporting helps the tax system work better by ensuring that everyone pays what they owe. The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses.” He makes it sound so friendly and helpful. What “IT” is happens to be the latest nightmare for taxpayers…the new 1099-K.

The 1099 is a catch-all series of IRS documents used to report non-wage income from a variety of sources like contract work, dividends, earned interest and pension distributions. The new 1099-K aims to shine a confiscatory light on a currently hard-to-track payment stream: credit cards. Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients, and the IRS, an annual form documenting the year’s transactions.

The result: A blizzard of new tax forms that the Internal Revenue Service will begin rolling out next year.

The massive expansion of requirements for businesses to file 1099 tax forms that was hidden in the 2,409-page health reform bill took many by surprise when it came to light last month. But it’s just one piece of a years-long legislative stealth campaign to create ways for the federal government to track down unreported income.

The rule weeds out the most casual retailers: The 1099-K is only required when a merchant has at least 200 payment transactions a year totaling more than $20,000. But it applies to all payment processors, including Paypal, Amazon.com, and others that service very small businesses.

The goal of the new regulations is to catch income that is going unreported to the IRS. The federal government loses an estimated $300 billion each year from the “tax gap” between what individuals and businesses owe and what they actually pay. In short, the IRS is claiming the government is “losing” $300 billion annually that is “owed” to them. So the best way to claim more of your money is to track everything so carefully that the IRS will find every last penny. Of course, we are the ones doing the work for them by having to file mountains of new forms.

Here is how it works:  For companies that currently report all their credit card and Paypal sales to the IRS, the 1099-K requirement will have little impact. All the paperwork will be done by the bank or payment processing service, and business owners will simply receive a form at the end of the year listing their total receipts.

The 1099 changes attached to the health care reform bill massively expand the requirements for filing the “1099-Misc” form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods.

Starting in 2012 that changes. All business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you’re making the payment to — even if it’s a giant retailer like Staples or Best Buy — at the time of the transaction, or else facing IRS penalties.

In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizeable business transaction.

The result: Think of your business travel with hotels and rental cars. Now expand that to everything.  Phone service: 1099. Computer service: 1099. Whoever does your postage meter: 1099. You do a little advertising, Yellow Pages: 1099. Your landlord: 1099. You might as well just keep a stack of them in your pocket and hand them out as you go. 

This is what the President calls “revenue enhancers” an easy way to bring in more cash without raising supposedly tax rates. In reality it is another tax hike in the form of squeezing more from your existing lifestyle.

Still, the form the new law took was surprising — especially the requirement that businesses file 1099s when they purchase goods, which hardly anyone saw coming.  Most average 10 filings a year of 1099 forms, each of which takes about half an hour to prepare. That’s in line with the GAO report, which found that a typical small business spent between three and five hours per year filing 1099s. 

The new law extending 1099s just to services purchased from corporations would push that number to at least 200 filings per year for a typical small business — adding an estimated $6,000 to the cost of preparing the average tax return. And that’s without even accounting for the requirement that 1099s be filed for purchases of goods.

So you dutifully file much more so the IRS can take much more.  As the saying goes “No good deed goes unpunished.”

Still…I keep saying,

To Your Success…

Karla Dennis – America’s Tax Diva

Cohesive

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