The NEW Trader's Tax Solution: Money-Saving Strategies for the Serious Investor / Edition 2

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This comprehensive guide is completely updated with information and strategies for tackling the new 2001 Tax Law. CPA and expert tax consultant Ted Tesser provides current solutions for the tax problems facing most U.S. traders, investors, and income earners today-excessive tax payments to federal and local governments, insufficient preparation for retirement, and, ultimately, the fate of bequests.

Here are invaluable business, estate, retirement planning, and tax-saving strategies that virtually anyone can implement within the new tax laws. Included is specific information to help traders reduce their tax liability, with individual case studies, real-world examples, and model tax returns. In this book, Tesser shows everyone concerned:

  • How to disinherit the federal government
  • How Trader Status is upheld, even under audit
  • How to augment underfunded retirement plans
  • How to master the basics of estate tax planning
  • How to use the annual gift tax exemption
  • How to integrate the "triple crown"-Tesser's latest strategy for tax avoidance and wealth accumulation-into your trading plan

. . . and much more.

Keep the profits you work so hard to earn, whether from trading, investing, or simply working-and take control of your financial destiny. With The NEW Trader's Tax Solution, the choice between building wealth and just getting by is yours.

With the "triple crown," you will learn how to unleash the full power of Trader Status by combining it with a Trading Entity. You will also learn how to establish a Welfare Benefit Trust to accomplish all these goals and more. This program enables you to take advantage of little-known facets of the tax law that have been on the books for almost three-quarters of a century. You will learn how to:

  • Contribute and deduct substantial amounts of money over any period of time
  • Grow the principal in a fully tax-deferred, 100ecure environment
  • Access the money at a future date, not limited by age, income, or retirement plan status
  • Avoid the restrictions of ordinary retirement plans by using the same techniques that have been used by America's largest corporations since 1928

This is not something that someone sat around in some back room and hypothetically thought about. Rather, this is a strategy that is currently being used by those savvy enough to understand and enact it. The New Trader's Tax Solution makes this program accessible to virtually anyone by laying it out clearly and showing you exactly how to do it!

Get the government to pick up the tab on this year's trading profits, foot the bill for any trading losses, and increase your wealth by 50%, instantly. After putting Trader Status on the map, Tesser now takes it to another dimension, complete with real-world case studies, illustrations, templates, and filled-out, ready-to-be-filed tax forms.

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Product Details

  • ISBN-13: 9780471209997
  • Publisher: Wiley, John & Sons, Incorporated
  • Publication date: 2/11/2002
  • Series: A Marketplace Book Series , #3
  • Edition description: Revised & Updat
  • Edition number: 2
  • Pages: 534
  • Product dimensions: 6.36 (w) x 9.30 (h) x 1.69 (d)

Read an Excerpt

Chapter 1

The Basics of Accumulating Wealth and Keeping It


In this book, I provide a framework that provides you with a better opportunity to master the technicalities of income tax, retirement plans, and estate tax planning for anyone who owns or has ever owned an investment.

I'll mention some tax code sections; however, retention of the specific sections is unimportant. I leave them there only as a reference point. I'm going to lay the groundwork for you and provide you with a set of concepts on how to understand these things in planning your own financial destiny.

An understanding of these concepts and the establishment and implementation of these techniques and strategies are crucial in your determination of how much wealth you would like to have in your lifetime and how much you would like your family to have in the future. The choice is yours as to whether you and your family are getting wealthier over the years or just getting by.


In my 20-plus years in this field, one thing with which I've always struggled is how to minimize the effect of taxes for my clients. For the most part, the better they did, the worse my clients' tax positions became. This was because of the ruinous effect of capital gains taxes, income taxes, estate taxes, gift tax, and all the other state and local taxes. In order for them to maintain the same return in any given tax environment, it always seemed that my clients were forced to take many more risks with their capital to offset the impact of taxation.

Most people eventually give back 91percent of their wealth to the government over their lifetime. (This concept will be explained in detail in subsequent chapters.) This and some of the other things I discuss in these next few sections will be hard to believe. They're going to sound far-fetched and too good to be true. Let me assure you that everything I recommend is clearly defined in the tax code.


There are several types of strategies that you can implement to avoid taxes and to increase wealth.

  1. The first type is strategies that are considered to be in the red--strategies that will clearly flag audits and, in fact, may subject the preparer and the filer to tax-motivated transaction (TMT) penalties. None of my strategies will even approach this area.
  2. The next type is strategies that fall into the grey area of the law--very aggressive strategies that may at some point be challenged because of subjective interpretations of the law. Again, none of my strategies fall into the grey area of the law unless I specifically qualify them by stating so. It is then up to you to decide your level of risk.
  3. The third type is strategies that are clearly black-and-white interpretations of the law, and these are the types of strategies I love to deal with. It is not worth the risk of subjecting my clients or myself, for that matter, to the possibility of penalties, interest, and additional tax. I would much rather sleep well at night than implement a strategy that at some point may be challenged and disallowed by the Internal Revenue Service (IRS) or any other government body.

The strategies that I discuss in this book are strategies that fall into the black-and-white category unless otherwise clearly stated. They are well defined, and they abide with the very letter of the law.

Furthermore, these are not hypothetical strategies that were thought up by someone in some back room and never tried and tested. These are strategies that I have used on my own tax returns, in my estate plan, and in those of my clients for many years. They are strategies that you can take home with you today and implement in developing your own tax reduction, retirement plan enhancement, and estate tax elimination plan.

A Forbes article dealt with devious tax shelters. In "Tax Shelter Hustlers," Janet Novack and Laura Saunders discussed how the large accounting firms are peddling highly aggressive tax strategies to their clients for a percentage of the tax savings. They stated<

Recently, Forbes obtained copies of two different letters whose first paragraphs contained what you see at left. ["Dear _______, As discussed, set forth below are the details of our proposal to recommend and implement our tax strategy to eliminate Federal and state Income taxes associated with (the company's) income for up to five (5) years ("the Strategy").]

Each was sent by the accounting firm Deloitte & Touche this fall to a medium-size corporation.

We agreed not to identify the recipients, but we can say that neither is a Deloitte audit client. We can also say that each letter demands a bounty for zeroing out the company's taxes< a contingency fee of 30% of the tax savings, plus out-of-pocket expenses. Deloitte promises to defend its "strategy" in an IRS audit--but not in court--and to refund a piece of the fee if back taxes come due.

Pay attention. These letters are prime evidence of a thriving industry . . . that has received scant public notice< the hustling of corporate tax shelters. These shelters are being peddled, sometimes in cold-call pitches, to thousands of companies.

Will the shelters hold up in court? Maybe yes, maybe no, but many schemes capitalize on the fact that neither the tax code nor the IRS can keep up with the exotica of modern corporate finance. Hesitant at first to participate, respectable accounting firms, law offices, and public corporations have lately succumbed to competitive pressures and joined the loophole frenzy.

This new industry is quite apart from the so-called corporate-welfare tax breaks knowingly granted by legislators, such as for exports or R&D.

The new corporate tax shelters have nothing to do with public policy and everything to do with arcane quirks in the tax code. Congress often knows nothing about these breaks and isn't happy when it does hear of them. These unintended tax breaks are saving corporate buyers up to $10 billion in tax a year, estimates Stanford law professor Joseph Bankman. That's still a small part of the $190 billion in corporate tax collections, but business is booming and there's nothing to slow it down< "I'd be astounded if it doesn't grow dramatically next year," says Bankman.

Deloitte & Touche and the other Big Five accounting firms have grabbed the lead in this hugely profitable new business. But they aren't alone< Investment banks and tax-product boutiques are also peddling shelters. Law firms such as King & Spaulding and Skadden, Arps are raking in huge fees writing opinions to justify them.

Haven't corporations always hired advisers to help minimize their taxes? Yes, but not like this. "This is a totally new phenomenon," says John Chapoton, a former Treasury official now with Vinson & Elkins. Why is it happening now? In part it's related to the growth of derivatives. The same minds that figured out how to split a security into a multitude of different cash flows and contingent returns are now engineering products in which the tax benefits are split off from the underlying economics of a deal. It's no coincidence that many of the new crop of shelters use swaps, collars, straddles, and newfangled preferred stock as building blocks.

It has taken a while for inhibitions to be shed and the most outlandish gimmicks to propagate.

In addition, tax advisers are no longer just devising specific strategies to deal with a client's tax needs as they arise, as in the past. Today's shelter hustlers parse the numerous weaknesses in the tax code and devise schemes . . . that can be pitched as "products" to corporate prospects. Then they sell them methodically and aggressively, using a powerful distribution network not unlike the armies of pitchmen who sold cattle and railcar tax shelters to individuals in the 1970s and 1980s.

For tax professionals, the temptation to grab a piece of this profitable business is also intense. Recently the IRS got an anonymous letter blowing the lid off a particularly smelly scheme, and it was signed simply "A Pressured Practitioner." Former IRS Commissioner Lawrence Gibbs likens today's corporate shelters to the abusive individual shelters of 20 years ago< "It's virtually the same thing, with a bit more sophisticated product. Once something like this gears up, it's hard to stop, and the government is far behind the curve." To combat some of these schemes, the IRS can invoke a Supreme Court case from 1935, Gregory v. Helvering. It says that if a transaction superficially follows all rules but is devoid of economic substance and produces tax savings Congress didn't intend, it can be considered a sham and disallowed. Unfortunately for the tax cops, this sham doctrine is extremely fuzzy, whereas the rules that define the various components of a transaction are often well defined. This difference is ripe for exploitation, because the IRS is not equipped to find most shelters and even those which are discovered are unlikely to incur penalties.

Says one lawyer< "The IRS misses nine out of ten shelters. On the tenth, the company settles and pays back taxes and the government agrees to no penalties. That's a small roll of the dice for the company."

Good news for you, the reader?

None of the strategies I discuss in forthcoming chapters have even come close to being in that article. None of the strategies presented in the pages that follow even border on the aggressiveness that the "Big Four Firms" are actively promoting. These firms are known for their conservatism!

That should give you some degree of confidence in what I will present to you in this book. You should have even more confidence in the fact that I have gone to audit at least once, and in most cases many times, on each and every strategy I discuss--I have won!


There are only two types of income tax strategies< (1) those that involve income, and (2) those that involve deductions.

The first type we will look at are those strategies that involve doing something with your income. You can really only do four things with your income<

  1. Transform it--for example, into a lower tax bracket.
  2. Avoid it--for example turn taxable income into nontaxable.
  3. Decrease it.
  4. Defer it--into another year or tax period.

On the other hand, you can really only do four things with your expenses<

  1. Create them--through the creation of paper losses (expenses you would normally have and now turn into deductions).
  2. Accelerate them--into the current year.
  3. Transform them--into more favorable deductions (i.e., Schedule C deductions rather than itemized; we will talk more about this concept).
  4. Increase them--make expenses that were nondeductible into deductible expenses.

Most people feel that taxes are mandatory, but they are not. My strategy consists of using these eight components to ELIMINATE or to significantly reduce your federal and state income tax, tax on your retirement plan, and the burdensome estate tax.

By now you're probably saying to yourself, "That's insane." Well, I'm going to make an even crazier statement<

The federal income tax, the retirement tax, and the estate tax are voluntary taxes. You can pay them if you want to, but if you wish to avoid them, you do not have to pay.

I am not talking about tax protestors--those who say the income tax is illegal, that the tax system was never ratified in the law. Take my word for it, income tax is legal, and might makes right. If the government wants to tax you, they will. Fighting them is going to result in some unsavory consequences for you.

Rather than fighting them, I liken my strategies to tax judo. In other words, I use the government's own tax laws to help me to limit or eliminate tax.


In the sixteenth century, people believed the earth was the center of the universe. They thought that all the planets revolved around the earth. To think otherwise would have been heresy. In the late 1500s an Italian scientist named Galileo invented the telescope and with it discovered that the earth was simply one of several planets revolving around the sun.

Up until 1491, everybody knew the earth was surely flat. If you sailed far enough to the world's outer reaches, you would reach the end and fall off into space--until an Italian sailor named Christopher Columbus sailed from Europe to the West Indies and proved that the earth was in fact round.

Up until the middle of the twentieth century, science was convinced that energy and matter were two distinct quantities. Along came a scientist named Albert Einstein who proved, along with his theory of relativity, that energy and matter were, in fact, the same.

* * *

What I have just illustrated is a concept called the paradigm shift. A paradigm is a set of rules or precepts through which the universe is viewed. It is a framework through which people make sense of everything around them. A paradigm shift, on the other hand, is what occurs when something comes along to alter that set of rules or framework, and hence an epiphany, or major change in consciousness, is attained.

As Dorothy Parker once said, "There are two sure things in life--death and taxes." I say, "There is only one sure thing, and that is death--everything else is negotiable."

And "everything" includes the payment of taxes. The remainder of this book presents many strategies that can help you to achieve this paradigm shift.

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Table of Contents

Introduction: We Are All Traders! 1
1 The Basics of Accumulating Wealth and Keeping It 3
The Foundation - Things You Need to Know 3
The Basics of Tax Planning 3
Red, Gray, or Black-and-White? Choose Your Tax Strategy 4
There Is No Mystery to Saving Taxes 7
The Paradigm Shift to Tax Freedom 8
2 The Trader's Tax Solution 9
There's Too Much Tax ... Here's What You Can Do about It 9
"Thanks a Million, Uncle Sam." (Or Should I Say $89,500.49 after Taxes!) 11
Does Anyone Feel Morally Obligated to Pay the Maximum Income Tax? 12
How to Direct the Government in Your Best Interests 13
Investors Are Hit Particularly Hard 16
The Government's Free Lunch - Your Tax Return! 17
Starving the Government - Trader Status 17
Investor, Trader, or Broker-Dealer/Market Maker - What's the Difference? 18
You May Be a Trader and Not Know It! 20
Case in Point - Was Louis Yaeger a Trader? 22
What This All Means 25
Schedule C - Born to Be Filed 26
Other Benefits of Claiming Trader Status 28
It's Your Business - Why Not Deduct It? 29
3 Recent Trader Cases 47
The Case of Fredrick R. Mayer 47
The Case of Rudolph Steffler 53
The Case of Stephen A. Paoli 54
Trader Status - Other Cases 56
4 The 1997 Trader's Tax Act - The Most Significant Changes for the Trader and the Investor since 1986 58
The Top 10 List of Things to Know 58
Section 475 for Traders of Their Own Accounts 64
Summary and Conclusion 68
5 The Triple Crown 69
The Most Effective Tax-Saving Strategy I Have Ever Known 69
Step 1 - The Business 69
Step 2 - The Entity 75
Step 3 - The Voluntary Employee Benefit Association 97
The Triple Crown 111
6 Providing for a Wealthy Retirement 112
The Big Boom of 50-Year-Olds! 112
Life's Tough and Then You Retire - How to Make It Easy 114
Denial Is Not a River in Egypt 115
See No Evil, Hear No Evil ... Opening Your Eyes 115
And the Walls Come Tumbling Down - the Pillars of Retirement Planning 118
The Tax Factor 119
Paying My Fair Share Does Not Mean the Maximum Tax I Can Pay 120
What Lies Ahead - and How Will It Affect Your Retirement? 121
The Crumbling Pillars 121
Conclusion: The 10 Deadly Sins of Retirement Planning 127
7 They Don't Make Hearses with Luggage Racks 129
The Last Laugh 129
Estate-Tax Planning 101: The Basics 131
The Unified Gift and Estate Tax 131
Multiple Choices - A Career in Government or a Career in Government? 136
A Typical Estate 136
Your Retirement Plan Gets Hit Worse 137
Conclusion 142
8 Income and Expenses: A Review 144
Income Defined 144
Earned and Passive Income versus Investment Income 148
Unlimited Gains/Limited Losses 149
Unlimited Income/Limited Expenses: The Pig and His Pal 150
What Is an Expense? The "Four Criteria Deduction Test" 150
Total Return Investment Plan (TRIP) 151
Calculation of True Yield 152
The Risk/Reward Ratio Revisited 156
Risk/Reward Ratio Meets the "Tax Factor" 158
9 New World Retirement Planning 162
Individual Retirement Accounts 162
Simplified Employee Pension Plans 164
Qualified Retirement Plans (KEOGHs) 165
10 New World Estate Planning 170
Using the Annual Gift-Tax Exemption 171
Using Estate-Tax Planning Strategies 173
Other Considerations in Addressing Estate-Tax Planning 174
Sixteen Crucial Definitions 179
11 The Double Play: To Give Is But to Receive! 183
Background 183
To Further Compound the Situation 189
A CRT and Your Heirs 190
A Crummey Trust Is Not So Crummy! 191
To Gift Is But to Receive 192
Prepay Your Estate Tax for Pennies on the Dollar 193
The Double Play - Summary 196
12 The Layup: It's Just a Matter of Trust 197
How and Why to Set Up a Trust 197
The Layup - Summary 201
13 The Home Run: A Way to Double Your Exemptions 202
The Basics 202
The Home Run - Summary 203
14 Modern-Day Miracles - Chalk Up a Few for the Good Guys 204
Trader Status Audit Victories I Have Had 204
What We Can Learn from All of This 218
15 Knowing Your Limits: How Far Can You Go? 220
Question of Legality 220
"Only the Little People Pay Taxes" 221
How the IRS Builds a Criminal Case 222
The Taxpayer Bill of Rights 224
Specific Mitigating Circumstances 226
Your New Rights as a Taxpayer 229
Significance to the Investor and the Trader 230
Michael Milken 233
How to Play for Keeps with the IRS 233
What Criteria Are Most Important in the Selection of Tax Returns for Audit? 234
Types of Audit-Selection Processes 236
Ten Ways to Reduce Your Chances of Being Audited 237
Playing in the Major Leagues with the IRS 242
Audit DO's and DON'Ts 243
Other Winning Audit Techniques 246
16 101 Tax-Reduction Strategies 250
Conclusion 280
App. A Investment/Trading Vehicles and How to Report - Tax Consequences 281
App. B Deductions Related to Investment and Trading Activities 291
App. C The VEBA - Code Sections 291
App. D The VEBA - Court Cases 300
App. E Other VEBA Rulings 312
App. F 166 Frequently Asked Questions and Answers 318
App. G Trader Tax Return Examples and the 475 Election 350
App. H Logs and Journals 468
App. I It's All a Matter of Time (The Reality of the Wash Sale Rule) 511
Notes 514
Disclaimer 517
About the Author 519
Index 521
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