Where is Lou Pearlman?

As one lawsuit after another has been filed against Lou Pearlman, his Trans Continental Airlines and other companies, the man himself has been silent. Now Orlando TV station WESH reports that he is traveling in Europe. Trans Continental spokeswoman Elizabeth Neff confirmed only that he is traveling. She would not answer my question about when he would be back.

Here is an interesting photo of Pearlman in happier times.That may be his Orlando-area home in the background. His two-story home on Lake Butler in Windermere was featured in a recent issue of "Executive Living" magazine. The 16,000-square-foot home has 10 bedrooms and 13 1/2 baths, according to the magazine. Pearlman said he was planning to build a 30,000-square foot addition that would include two commercial bowling lanes and a grand ballroom where his artists could perform.

Reader reports problems with TaxCut software

Q. I am trying to use TaxCut software to do my taxes and it will not allow me to claim the state sales tax deduction. I have done all updates, including the latest this morning.  I have also spent hours speaking with 4 different Taxcut software tech support people, and finally found one who admits the software writers overlooked this. What they will do about it remains to be seen. Maddening!

A. H&R Block claims that the software has been updated. Part of the problem might be that a return claiming that deduction cannot be filed before Feb. 3.

However, I think this is a good warning that anyone who itemizes deductions should pay close attention to the sales tax item when using ANY software package (not just TaxCut). Also double check if you are taking the tuition deducton or the deduction for teachers' out-of-pocket expenses. All those items were added to the tax law at the last minute and some software packages may not be equipped to handle them properly.

Is the Trans Continental investigation over?

Q. I talked with my sales agent this morning, and he stated that the state investigation of Trans Continental was over and he heard the results were positive. I asked him if the money was really insured. He stated yes it is. He told me when to send my letter requesting the closing of my account and returning my funds. He also said that within the next couple of weeks everything will be made public. I hope I can believe him.

A. The state investigation is far from over. Your sales agent is either misinformed or deliberately misleading you. The only thing he might be right about is that we will know more in the next couple of weeks. Stay tuned.

Where can I find online tax calculators?

Q. Your column of Jan. 28 was very good! You mentioned online calculators to determine the "alternative minimum tax." Can you define this a little more and where are these calculators?

A. Thanks! The IRS Web site has lots of info, including a set of online calculators. To use the "AMT Assistant," you first have to complete a draft of your tax return. The AMT is an alternative way of figuring your tax, disallowing certain items. Most people are not subject to the AMT, but if you want to be sure, go online and use the assistant.

Contests for the creative

Ready for a break from all the gloomy news? How about this--you, or a kid you know, could win a prize for creativity.

First, the National Foundation for Credit Counseling and its local affiliates are sponsoring a poster contest for kids in grades 1 through 12. The theme is "Plant the Seed of Saving to Grow Your Future." Top prize is a $500 savings bond and an expenses-paid trip for two to Washington D.C. You can find the rules here.

H&R Block is offering $5,000 for the best You Tube video on how you're planning to spend your "Super Sweet" tax refund. You can find the rules here.

Have fun!

Bank foreclosing on Trans Continental headquarters

Things are going from bad to worse for Orlando entrepreneur Lou Pearlman and his Trans Continental companies. Bank of America sued Friday to foreclose on a $25.6-million loan it made to a Pearlman company for revitalization of Church Street Station, where several Trans Continental companies are headquartered. The bank wants a receiver appointed to take over the property. Here is the court filing.  A developer says he wants to buy the property.

The City of Orlando also contributed $1.5-million to the project, which was supposed to create more jobs. However, Orlando media reports say Trans Continental is firing employees. The city says its interests are protected. Countrywide Home Loans also has filed foreclosure suits on mortgages for two condos Pearlman owns.

You can read more in today's Orlando Sentinel, and in reports from WESH-TV: first story, second story.

How should Trans Continental investors handle their taxes?

Q. My sister and I got a Trans Continental account through our mother, since passed away. My newest concern is regarding upcoming income tax. What do we declare since no 4th quarter statements have been issued, and we have no notices from  T.C. regarding their intentions????

A. My recommendation is to wait to file your tax return until the situation is clearer. Returns are not due until April 17 and anyone can get an automatic extension until Oct. 15. Your best bet is to organize all your other tax papers now, put everything in a big envelope or file folder and revisit the whole situation the beginning of April.

If you don't want to wait because you are due a big refund from the IRS and you really need the money, you could file a return now, then file an amended return as necessary later. However, there are penalties for understating your tax due by more than 10 percent, so you need to be careful. Waiting is the best approach.

New investor lawsuits filed related to Trans Continental

Robert and Charlotte Oliver, who sold the Trans Continental Airlines savings program through their company Golden Security, are accused of fraud, negligence, elder abuse and sale of unregistered securities in a suit filed today in Pinellas County Circuit Court. Deborah Berger filed the suit on behalf of her 84-year-old mother, Selma Cohen, who invested $233,000 in Trans Continental after Charlotte Oliver represented it as a safe, FDIC-insured investment. Now she can't get the money out as Trans Continental is not honoring withdrawal requests.

Berger says that among other things, the Olivers misrepresented the investment, failed to conduct meaningful due diligence and failed to disclose that they were not licensed to sell securities. Here is the complaint for those who would like the details. Clearwater lawyer Bruce Barnes is representing Berger.

Update 1/26/07 Another lawsuit has been filed against the Olivers, Golden Security, Lou Pearlman and various Trans Continental companies by John Cirignano, seeking recovery of his $502,176 investment. The lawsuit, filed by Clearwater lawyers Patrick Davis and Robert Persante, contains allegations of fraud, theft and exploitation of the elderly. One interesting side note: The suit says that sales agents controlled the rate of interest being offered and the lower the rate offered investors, the bigger the commission paid to the agent. The Olivers offered investors 3.08 percent at the same time that other agents in Pinellas County were offering 6.08 percent. Here is the complaint .

Here's a statement from the Olivers' lawyer, Jack Kiefner: "The Olivers are optimistic that Trans Continental and Lou Pearlman will abide by their obligation to repay the Trans Continental investors in the employee savings account program. If and when that occurs, it will make these kinds of lawsuits moot."

Lou Pearlman's been grounded

The Orange County Sheriff's Office has seized Lou Pearlman's Gulfstream jet on behalf of a North Dakota bank (First International Bank & Trust), which says he owes $19.6 million and got a court order to seize the plane.

Here's the story reported by the Orlando Sentinel. Here's the court document

I thought this would be of interest to investors in Pearlman's Trans Continental Airlines Employee Investment Savings Account. Check my blog entries for Jan. 9, 18 and 22 and Dec. 21 for more information.

Please help me understand I bonds!

Q. I bought I bonds in September 2003 and I don't understand how they work. How much am I earning? Is this a good investment or should I try to do better with a CD or money market account?

A. You shouldn't buy any investment you don't understand, but since you already own the savings bonds, you should take some time to learn about them before deciding to cash them in. The No. 1 thing to know is that the interest rate you earn changes every six months. The I bond rate has two parts. One part is determined by when you bought the bond and remains fixed for the life of the bond. In your case that part is 1.1%. The other part of the interest rate is based on the inflation rate, which will change every May and November.  According to the savings bond Web site, your bonds currently are earning a composite (the two parts considered together) interest rate of 4.22%. That makes them a decent, but not stellar investment. An additional benefit is that taxes on the earnings are deferred until you redeem the bonds. A drawback is that if you cash them in before five years, you will be charged a three-month interest penalty.

There is no one perfect investment for the future. If you think inflation is going to accelerate, I bonds look good. If you think interest rates are going to decline, long-term CDs look good. If you think interest rates are going to rise, money market funds look good.

Is it safe to use an out-of-state bank?

Q. We usually get CDs from local banks. If an out-of-state bank gives a higher interest rate, are there any drawbacks to using them? My husband thinks it might cause problems if you die before the CD reaches maturity.  What are your thoughts on this?

A. It's perfectly fine to use an out-of-state bank as long as it is FDIC-insured. (Stay away from banks in foreign countries that you see advertised on the Internet.) You can check with the FDIC to find out if a bank is insured. Call and ask about the bank's procedures for handling an account when an account holder dies if this is a matter that is of concern to you.

First investor lawsuit against Trans Continental

Palm Harbor investor Horst Kayser may be the first investor to go to court over Trans Continental Airlines employee investment savings account. He is suing Orlando boy band promoter Lou Pearlman and two Pinellas County sales agents for fraud and misrepresentation. He says Pearlman and Trans Continental stole his money and Churchill Financial of Clearwater and agents William Kress and Steve Rodd exploited the elderly by putting them in the program.

The suit was filed in Pinellas County Circuit Court last week. Here is the story from the Times. If you are interested in the court filing, you can read it here (Warning: It's a VERY large file to download.) Clearwater lawyers Patrick Davis and Robert Persante teamed up on the case.

Kayser’s story is similar to those of many investors: He responded to a Churchill ad for a high-yielding bank certificate of deposit and was talked into investing in Trans Continental. He made his largest investment, $50,000, last September, when the program was already under investigation and investors were having trouble getting their money back. The lawsuit says Churchill agents knew about the problems but didn’t tell him.

The lawsuit also says Kayser was misled that the funds were FDIC-insured and says that Pearlman intermingled investor money with Trans Continental money.

Churchill Financial, which was one of the largest sellers of the Trans Continental savings program, denied the allegations.

Check out Yahoo's new personal finance Web site

Yahoo Finance debuts a new personal finance Web site offering 66 calculators, resource centers on personal finance topics and content from providers such as CNNMoney.com, Consumer Reports, Kiplinger, The Motley Fool, Smart Money and The Wall Street Journal.

 

More banks suing Lou Pearlman

Orlando entertainment businessman Lou Pearlman has a boatload of trouble paying his debts. Two more banks are suing him, bringing the total to four just in the last few weeks. Things must be pretty grim over at Trans Continental headquarters at Church Street Station. I've heard from many investors who say they have called repeatedly or even shown up in person, but have had no luck even speaking to someone who handles accounts for Pearlman's savings program.  I have nothing new on the state's investigation of the savings program.

The latest bank to sue Pearlman and his companies is First National Bank and Trust Co. of Williston, N.D. They say Pearlman owes them $14.2-million, with interest accruing at the rate of $4,914 a day. Here's the latest lawsuit , which was filed in federal court in Minnesota.

In addition, First International Bank & Trust of Waterford City, N.D. is suing Pearlman and Trans Continental for $19.6-million in Orange County Circuit Court.

For other bank lawsuits and links to earlier Pearlman stories, see my blog entry for Jan. 9.  For a discussion of red flags that signal potential problems with an investment, see my blog entry for Dec. 21.

Is my husband's pension safe?

Q. I am concerned about my husband's pension. He worked for a large company for 30 years, retired and is receiving a monthly pension. Is there any way the company can cancel or change his pension? Is the company able to renegotiate the terms of his pension, the way they did with his healthcare coverage?

A. Legally, a company cannot change or renegotiate pension benefits that already have been earned. (It can change the way future benefits are accrued.)  If a company goes bankrupt and dumps its pension plan, the plan is taken over by the Pension Benefit Guaranty Corp. to protect the participants. The PBGC has limits on what it will pay, which are most likely to affect high earners and early retirees. As you have discovered, health care benefits are not legally protected.

Should we file jointly?

Q. My husband and I are both 29 and have been married about 1.5 years. He has been in medical school for 3 years and is not allowed to work, so he makes no income and takes out loans.  Last year I filed by myself, which I'm not sure was the right thing to do. This year friends have told me that I could claim him as a dependent since he makes no income. Can I claim him as a dependent?  Also, should we file jointly, or seperately?  Lastly, I work full time but go to school part time. Can I try for the Hope Scholarship or something similar?

A.  Your friends are correct that you are missing out. You should file jointly, which gives you a total of two exemptions. It's not really a matter of one of you claiming the other as a dependent. In fact, you should go back and file an amended return (1040X) for last year, filing jointly.

You definitely should be able to claim education tax breaks such as the Lifetime Learning Credit or the tuition deduction for you and your husband. IRS Publication 970 has details. The version I found on the IRS Web site was for preparation of 2005 returns, so it will help you with your amended return. A new version should be up on the Web site before too long. Note that when he starts payments on his student loans, he also will get interest deductions. If you find all of this too confusing, I recommend that you take your return to a professional tax preparer so you don't miss out.

Who can claim the mortgage interest deduction?

Q. My mom and I bought a house together. Can she claim the house on her taxes alone, even though I pay most of the bills?

A. If both your names are on the mortgage, then either or both of you can claim the interest deduction. The person who paid the interest is supposed to get the deduction, but the thing the IRS will be most concerned about is that you aren't double dipping with both claiming the same expense. If you  both paid, the deduction should be split proportionally according to how much you each paid.

A Form 1098 should come in the mail showing interest paid, and most likely showing one person's Social Security number. If that person takes the deduction, you don't need to do anything special. If you are going to split the deduction or the other person is going to take it, you should each attach a page to your return, showing both peoples' names, addresses and Social Security numbers and showing the split of the interest.

I'm assuming that you both live in this house. If this is a rental situation, with one of you paying the other rent, there are different considerations.

Was the AT&T-Bell South merger completed?

Q. Has the merger been completed? I notice that Bell South no longer trades. I own 3,300 shares of Bell South in certificate form and have heard nothing from either company concerning the stock.

A. It was completed Dec. 29. You can read about it here. You are entitled to 1.325 shares of AT&T for each of your Bell South shares. You should have received materials on the merger last summer when shareholders were asked to vote on the deal. You'll need to contact the stock transfer agent about surrendering your shares. The hassle of processing of transactions like this one is one of the reasons I recommend holding shares in a brokerage account instead of in certificate form. 

Don't savings bonds pass tax-free to heirs?

Q. In your column in the Money section on Sunday, you stated that if one held E or EE bonds that had matured until death, it was "sticking your  beneficiaries with the tax bill".   Don't E or EE bonds passed on  to beneficiaries get stepped-up basis and the accrued interest is therefore not taxed to benefciaries?'

A. No. Savings bonds do not get a stepped-up tax basis at death. Tax-deferred investments such as IRAs, annuities and savings bonds do not get a stepped-up basis at death. The beneficiary owes income taxes the same way the original owner would have owed them.

Million Dollar Gift Limit?

Q. Is the lifetime gift tax exemption $1-million each for a husband and wife ($2-million total) or could we each give $1-million to each of our four children ($8-million total?

A: It’s $2-million total, which does not include the $12,000 that you each are allowed to give to an unlimited number of people each year. And if you have that much money, you need to be talking to an experienced estate planning lawyer.

More problems for Lou Pearlman and Trans Continental

Integra Bank says Lou Pearlman and Trans Continental Airlines owe it more than $18-million and are either broke or unwilling to pay their debts. Trans Continental says it's trying to work things out, but so far the company has not cooperated, according to the lawsuit. Here is my story from today's paper. For those who want to go to the source, here's the actual federal court filing: Download document

Update (1/12/07):  Another bank is suing Orlando entertainment entrepreneur Lou Pearlman. American Bank of St. Paul sued Pearlman and several of his companies in federal court in Minnesota this week, saying he defaulted on more than $27-million in debt. The bank said it lent Pearlman the money to buy the British television show "Top of the Pops" and to refinance other debt. The bank says Pearlman pledged shares of Trans Continental Airlines as collateral. Here's a Minneapolis story about the suit and here's the actual court filing: Download document.pdf

Earlier stories on Trans Continental can be found here:

Original Times story, initial followup, state suit against company.

It's easier to check up your broker

The NASD just unveiled a its free Arbitration Awards Online Database, which makes it easier to search for cases against your broker or brokerage. You can view a copy of the actual award.

The NASD also offers the ability to search for licensing and other information on individual brokers.And you can go to the SEC to search for financial advisers.

Here's how investments perform over the REALLY long run

Ibbotson Associates has just come out with updated numbers for average annual returns on major asset classes from 1926 through 2006. (That's 81 years if you're counting.)

Large company stocks (S&P 500): 10.4%

Small company stocks (bottom 20% by market cap) 12.7%

Bonds (long-term government) 5.4%       Cash (30-day T-bill) 3.7%

These numbers are not adjusted for inflation, which averaged 3.0% a year over the period.

A few other notes: Last year bonds returned just 1.2%, their lowest return since 1999. Small company stocks returned 16.2%, the 8th year in a row they've beaten large-cap stocks, which were up 15.8%.

(Photo credit: Getty Images)

Should I keep my old credit card active?

Q. I'm 24 and got my first college student card from Visa in 2001. It expires in March, and I guess they will then close my account. I have not used the account for a year or two now as I've gotten other cards (my second one in 2003). Should I try to get this card renewed even though I don't ever use it or would it be better to close it for my credit score?

A. It would be better for your credit score to keep the card. Even though you haven't used it, your card might be renewed without any effort on your part. But my recommendation would be to use the card a couple of times a year to keep it active. That is positive for your your credit score in two ways: First, the older card increases the length of your credit history. Second, it improves your credit utilization ratio, the amount of your debt compared to the amount of your available credit.

(Photo credit: Getty Images)

Should I give away this property or leave it in my will?

Q. I am 79 yrs old and own a piece of property in Maine valued at about $50,000, where a grandson and his family live (and love it). I pay taxes and insurance costs, which are no problem. Should I leave the place to him in the will or transfer it now?

A. If you're certain you want your grandson to have the property and you have no plans to use it yourself, I'd be inclined to transfer it now and let him take over the taxes and insurance costs. Of course you could continue to pay those items as a gift to him if you chose. One reason to transfer a property by will is that it will get a stepped-up tax basis to the current market value at your death. However, this is not an issue if your grandson plans to live there, since after two years of ownership, he'd be able to sell the property without any tax liability. You will need to file a gift tax form, but will not owe any gift taxes until your lifetime gifts exceed $1-million. Leaving the property to him by will also would be a bit more complicated since it would involve probate proceedings in Maine as well as the state you claim as your residence. You could use a trust, but under the circumstances, I don't think it would be worth the trouble.

The only reason I can think of not to give away the property is that the gift will affect your eligibility for Medicaid should you need to qualify for coverage in the five years after the transfer.

(Photo credit: Getty Images)

New sales tax table now available

Anxious to figure out your sales tax deduction for your 2006 tax return? Check out the new version of Publication 600 on the IRS Web site.

The bad news: The deduction continues to shrink for average Floridians. For a family of four with an adjusted gross income betwen $50,000 and $60,000, the deduction in the table went from $918 for 2004 to $742 for 2005 and now to $734 for 2006. For the same size family with an income of $200,000 or more, the deduction has increased from $1,888 in 2004 to $2,069 in 2005 and $2,154 in 2006.

All those numbers are based on the statewide sales tax of 6%. If you live in a county with an additional sales tax, you calculate your deduction using a worksheet in Publication 600.

In addition to the amount from the table, you can add sales taxes paid for purchase or lease of a motor vehicle, purchase of an aircraft, boat or mobile home and building materials for a home purchase or "major renovation." On that last point, you can count sales taxes paid by a contractor if the contract states that the contractor is authorized to act in your name and must follow your directions on construction decisions. Whew! That's pretty specific.

Instead of using the tax from the table, you can use actual sales taxes paid, provided that you saved all your receipts.

Do I have to cash in my savings bonds when they mature?

Q. Do savings bonds have to be cashed in and/or interest reported in the year the bonds mature? Can the bonds be transferred or gifted after maturity?

A. No, yes and no. Nobody compels you to cash your bonds in the year of final maturity (30 years for most bonds), but they stop earning interest, so by holding them, you are making an interest-free loan to the government. IRS rules say that you are supposed to report the interest on your return when the bonds reach final maturity. Check the savings bond Web site for info on when bonds stop earning interest.

Once bonds have reached final maturity, they cannot be transferred. It wouldn't do any good anyway. If you transfer ownership of a savings bond to someone else, you are obligated to pay taxes on the interest earned up to that point.

Read the Wall Street Journal for free Jan. 2

Happy new year!

If you like to read the Wall Street Journal, but you're too frugal to buy your own subscription, here's your chance. The newspaper is free Tuesday, Jan. 2. Go online to read to your heart's content until the clock strikes midnight.

By the way, the print version of the newspaper's new look makes its debut today.