Should I have to pay sales tax on a manufacturer's rebate? How about shipping and handling?

Q: I feel that I was cheated by the state of Florida. I agreed to pay $19,000 for a Mazda. When the dealer presented the invoice, the sales tax was calculated on $22,000 and then a "rebate" of $3,000 was deducted from the price. I protested, but the dealer insisted it was required by the state. A cash rebate was not discussed or offered. I felt it was a price adjustment or discount. The state is collecting tax on fictitious prices. I don't know if fraud is the correct term, but it sure is unfair. What do you think?

A: I see your point, but there wasn't any fraud. Florida sales tax is based on the amount received by the seller. In this case, the dealer received $19,000 from you and $3,000 from the manufacturer for a total of $22,000. "The tax is due on that amount because that's what the dealer received," said Mark Zych, director of technical assistance for the Florida Department of Revenue.

The same principle applies at the grocery store. If you use a manufacturer's coupon, you'll pay tax on the precoupon price because the retailer collects from you and the manufacturer. If you use the store's coupon, the tax is on the after-coupon price.

Q: I recently purchased an item online from a national retail chain. While I realize that I must pay sales tax on the item, I questioned the fact that I should pay sales tax on the shipping and handling as well. After all, I don't pay sales tax on stamps, or labor. What gives?

A: What's taxable and what isn't is a matter of state law. Under Florida law, the sales tax applies to shipping and handling charges. Here's a reference.

More TV: The Retirement Revolution

Retirement planning used to consist of having a lot of children to support you in your old age. If you weren't particularly good in that department, you could end up in the local poor house. Those reminders of retirement past are among the many fascinating details presented in the Retirement Revolution, which airs the next two Monday nights at 10 p.m. on WEDU and many other PBS stations. The producers at WTTW in Chicago who put the program together managed to interview dozens of retirement experts, retirees and workers who hope some day to be retired. Three people in that last category are from the Tampa Bay area and I interviewed one of them for my column today. Unfortunately, they're examples of people who aren't financially prepared for retirement. Hopefully those who watch will be inspired to do some saving for the future. Every little bit helps.

I'll be on TV talking about the economy

Monday (March 31) with Kathy Fountain for the "Your Turn" broadcast on WTVT Channel 13. It comes on at 12:30 pm as the second half of the noon news and takes questions from viewers.

Social Security still facing some big challenges

The Social Security Administration delivered another reminder today that it's running out of money to pay promised benefits. Although there's been some improvement in the long-rate forecast, the projected disaster dates remain the same as last year: benefits will exceed tax income in 2017 and the "trust fund" will run out of money in 2041. At that point there would be enough money to pay about three-fourths of promised benefits unless there's been some cut in benefits or increase in taxes.

This report from the Center for Retirement Research puts the latest information in perspective for those who are interested in digging into the subject. I think a Social Security tax increase is inevitable, but I hate to see it happen before 2017. If it's enacted earlier, Congress will just spend the money on other things, as it does now with the current Social Security surplus. That borrowing and spending is building up the IOUs in the trust fund, which we'll turn to in 2017. I think the money in the trust fund will be there because the government will borrow the money from someplace else to repay trust fund debts. However, I can't see making the debts even bigger by giving Congress more money to spend in the meantime.

It's still early to claim Pearlman fraud deduction on your taxes

Victims of the Lou Pearlman investment scam are understandably anxious to claim a tax loss. There's no question that you can claim a capital loss of the $3,000-a-year variety on your 2007 return. However, the requirements for a larger Section 165 fraud loss are much more stringent and I don't think they have been met yet. Pearlman's guilty plea helps establish that the loss was fraud, but the amount of the loss is yet to be ascertained. Trustee Soneet Kapila repeatedly has declined to estimate what kind of recovery investors might receive, saying that's premature. He has several legal actions pending, including one against HSBC  for more than $5-million. Relying on someone else for an estimate of the recovery is going out on thin ice. Some people have told me they have tried it, but the success of that strategy can't be judged until the return has been audited, which it is extremely like to be at some point down the road. (Note: The fact that you receive a refund when you file a return is not an indication of whether the return will or will not be audited.)

Jeff Coleman and Tim Kelleher at Investment Fraud Recovery Network in Clearwater say they are setting up files for Pearlman victims interested in pursuing a 165 recovery, but consider it too early in the process to file a return claiming the loss. Another Tampa Bay firm in this field of work, J.K. Harris 165 Services, is taking the position that it's reasonable to take the loss in 2007. "They go on a reasonable person's standard," said Alan Gavel, who is part of an investor group in the process of buying the company. The company, by the way, is no longer affiliated with J.K. Harris & Co., but will continue to use the name.

Here is a very interesting article that outlines the difficulty of proving a 165 claim to the IRS. Note, for example, that people who made their investment directly with Lou Pearlman are in a better legal position than those who purchased through an agent.

What in the world happened to my stock?

Q: I own shares of Wachovia Corp stock that were worth $57,113 in August and are now worth just $29,811. Can you tell me what would be the cause of this?  I read about Wachovia acquiring all these banks, trying to become the largest bank in the nation. How can this be when its own stock is dropping in value?  Would I not be better off collecting the dividends now instead of reinvesting them?

A: Pretty much everybody invested in the financial sector shares your pain. You may have seen an article or two about problems in the credit markets. The problem is not just people defaulting on their mortgages, but the fact that the future doesn't look especially rosy for financial services right now. Further writeoffs of bad loans are likely and we have to figure a way out of this mess without further damage to our markets. Then, assuming we do, banks simply aren't going to be making the same kind of profits on mortgages and home equity loans that they did in the past. One analyst says Wachovia could become a takeover target. Stock prices have fallen so much that some people think financial stocks may represent a buying opportunity. However, that's only something we'll know in hindsight. You have to be brave to stick your neck out.

This problem points once again to the importance of diversification. Having a lot of eggs in one basket doesn't work out so well when something happens to basket.

Inflation, interest rates and saving pennies

Retirees and other savers are feeling squeezed with inflation heating up and interest rates falling. As the Federal Reserve Board focuses on repairing the credit markets, it runs the risk of making inflation worse. My story today looks at this issue. In addition, my colleagues have written about why food prices are going through the roof and tips on spending less. How are YOU coping as prices rise and CD yields sink? Here's what some readers had to say about lower interest rates.

And speaking of pennies, this week's column is about penny stock fraud. Don't let it happen to you!

[Credit: Stock.xchng]

Happy Easter

Best wishes for a Happy Easter to all of you who celebrate this holiday.

[Credit: Stock.xchng]

How do I report the gain on land?

Q: I bought a residential lot four years ago in anticipation of building a retirement home, but I never did. I sold the lot last year, resulting in a net gain of $10,504. How should this be reported for tax purposes?  I have reviewed the IRS website and there are so many publications and worksheets related to capital gains/losses I am now totally confused. There were no improvements made to the property.

A: You have a capital gain, which should be reported on Schedule D. If you had built a house and rented it out, your situation would be more complicated. But in this case, you probably can figure it out yourself. Filling out Schedule D is a lot easier if you use tax softare, either from a box or online. Go to www.irs.gov and click on "free file" to see if you qualify for free filing. If not, you can still do your taxes online (for a fee) with one of the filing companies, knowing it has met IRS standards.

What's the safest place for our money?

Q: My wife and I are in our seventies and we are not to diversified. Most of our retirement is in CDs, money markets and two homes.  Everything is paid for. We have , I think, enough money to get us through our retirement if someone dosen't take it away from us. What in your opinion is the safest place for our money?  I worry about the banks.

A: In my opinion, banks still are the safest place. Put your money in a well-capitalized bank or credit union (Look up bank safety ratings here.) and stay within deposit insurance limits.

Lou apparently hasn't said much yet about his assets

Bankruptcy trustee Soneet Kapila says in this new filing (see page four) that he's still trying to determine if Lou Pearlman is going to comply with the terms of his plea agreement and cooperate in the identification, location and recovery of assets. Kapila also is asking for another extension of time to file objections to the discharge of debts in the bankruptcy case. The new deadline would be July 15 if I'm calculating correctly. Fraud is a reason to object to the discharge of a debt in bankruptcy, but I'm not sure what the real significance is since the restitution order already cannot be discharged.

In other news, Judge Kendall Sharp has given the OK for Fletcher Peacock to continue as Pearlman's defense lawyer even though he is no longer a federal public defender.

Soneet Kapila's eBay auctions had better results this go-round. The big winner: an Underwood watch case for showing off three of your fancy watches. It went for $510. I don't really get why anyone would want it (a drawer is good enough for my Timex), but obviously quite a few people did. He also got $110 for a bracelet.

New financial report shows $2.9-million collected

Bankruptcy trustee Soneet Kapila has filed new financial reports, including this one on the main Lou Pearlman bankruptcy. It shows $2.9-million collected to date. The single largest chunk ($1.6-million) came from the sale of the residences at Atlantis. There are separate reports for each of the other bankruptcy cases inolving much smaller dollar numbers, but the total collected would now be more than $3-million. So far $367,028 has been spent in the main case, but Kapila and his lawyers have not yet asked for payment of any professional fees. 

Rene Chamberlain objecting again to document handover

Turns out former Pearlman lawyer Rene Chamberlain isn't handing over documents without further fighting. Her lawyer filed this motion asking the judge to reconsider the order to hand over documents. He says the order wasn't properly served.

Should we tap our home equity?

Q: We are both newly retired and living on one Social Security check and investments. Would it be ridiculous to borrow on our already mortgaged home? In doing this, we would be getting a tax break and invest the amount not needed. We would use that amount borrowed to supplement our monthly income in place of the drawing down our investments. Common sense tells me that this is not a good idea. Do you think it's crazy?

A: I recommend listening to your common sense. Using home equity as a piggy bank to finance living expenses is something best saved for when you are in your 70s or older and have no other options. Borrowing against your home equity to make investments is a high-risk strategy I don't recommend, especially not to retirees. You don't say how old you are, but I assume that one of you is too young to collect Social Security. If you are concerned about the adequacy of your investments to last you through retirement, you've probably retired too soon. Working a few extra years or continuing to work part-time in retirement can make a huge difference in the adequacy of your retirement income.

Here's when your rebate check is coming

The IRS just announced the schedule for delivering rebate checks. You go to the head of the line if you signed up for direct deposit when you filled out your tax return. Your rebate check will be deposited in the bank account you specified on your return and you should have your money in the first half of May. Mailed checks will go longer, but everyone who filed a return by April 15 should have a rebate by July 11.

People who file returns after April 15, will still get their rebates; it will just take a bit longer.

The IRS also posted this rebate calculator to help you figure out what you've got coming to you.

Banks freezing home equity credit lines

You know that home equity credit line you thought would substitute for an emergency fund if you ever had an emergency? Think again. Banks are "freezing" credit lines left and right, as I report in my story today. A freeze means you can't charge any more than you already have. Credit lines generally are frozen with no prior notice, to prevent you from running up debt at the 11th hour. That means if your credit line hasn't been frozen yet and you know for sure you'll need the money, you'd better borrow it now. That could be especially important if you've got a home improvement project in process. Of course it's always best to avoid borrowing if it's not necessary.

Banks are giving the general decline in real estate values as the reason for the freezes. If your home value goes down, you have less equity and they have less security for any money you borrow.

 

Fletcher Peacock wants to continue as Lou's attorney

Fletcher Peacock filed this motion asking to be appointed one of Lou Pearlman's criminal defense attorneys along with the federal public defender's office. Peacock has left his office as federal public defender and is now in private practice. He says "a productive attorney-client relationship has been established" and prosecutors have no objection to the appointment.

What kind of retirement plan is best for me?

Q: My employer only offers 403(b) and 457 plans to save for retirement. Do these plans have stocks that I can choose from and allocate by percentages like I was able to do in my 401(k)? I am considering rolling my investment over to a traditional IRA because the other two do not seem as appealing to me right now. Where can I find simplified information comparing all three options so that I can make the best financial decision?

A: If you want to buy individual stocks, I recommend rolling your 401(k) money to an IRA with a discount brokerage firm. To find out whether buying individual stocks is even an option with your 403(b) or 457 plan, you need to contact your plan providers.  If by "stocks," you really mean "stock mutual funds," all these plans provide that type of option. Your plan provider can tell you which particular fund options you have and what kind of fees are involved. Comparison info tends to be written for the employer trying to decide which type of plan to offer. But here's some info if you want to read up: One,  Two, Three, Four.

Soneet Kapila gives up on trying to sell Windermere estate

Bank of America will be allowed to foreclose on Lou Pearlman's Windermere mansion. Bankruptcy trustee Soneet Kapila wasn't able to sell the property, his lawyer, Denise Dell-Powell, said Thursday. Pearlman owes the bank about $5.8-million, including the mortgage, accrued interest, back taxes, etc. The best bid at Saturday's auction was $3.75-million, which was rejected as too low. Attempts to negotiate a sale with another buyer fell through.

[Fisher Auctions photo]

Lawyers ordered to hand over Pearlman documents

Judge Arthur Briskman today approved the latest attempt by Soneet Kapila to force former Lou Pearlman lawyers Robert Leventhal, GrayRobinson and Leventhal & Slaughter to turn over documents. He said attorney-client privilege had been waived and the "balancing test" came out in favor of the trustee. Former Pearlman lawyer Rene Chamberlain also will have to turn over more documents since the judge approved this plan for Kapila's lawyers to review her emails. Here are the court's notes on today's hearing.

How do the taxes work on my H savings bonds?

Q: Our H savings bonds reach final maturity in July. There is a taxable interest amount shown on the face of each bond. How is this reported to the IRS? Must the bonds be redeemed at one time?

A: The deferred interest shown on your bonds is taxable when the bonds are redeemed or they reach maturity, whichever comes first. Delaying redemption would mean you would not be earning any interest on the money but you would still owe the taxes. You report the deferred interest on your 2008 tax return.

Lou's stuff sells on eBay for Dave Hedrick

It looks like Dave Hedrick had a pretty good haul with his recent listing of Lou Pearlman-related items on eBay. The highest-priced item was the MTV Moonman Spaceman music video award presented to the Backstreet Boys, which went for $9,200. The Mikhail Gorbachev award came in second, although Dave must have been disappointed. He told me that someone once offered him a quarter million dollars for it. I wanted Lou's PhD diploma from Century University, but $80 was more than I was willing to pay. I don't know how all these copies of Longshot, the movie, could go unsold, but apparently eBay buyers are more discriminating than I thought. Did anybody on the blog buy anything?

What tax breaks would be right for me?

Q: I would love to have a little bit more insight on what tax credits and breaks are right for me. I am single with no children. My annual salary is $30,000. I am clueless when it comes to tax time and this year I want to change that. Which tax credits would be right for me?

A: Tax breaks come in two primary categories: credits, which are subtracted from tax owed, and deductions, which are subtracted from taxable income. A person in your situation might make an IRA contribution and qualify to deduct it or take a class to improve job skills and qualify for the Lifetime Learning Credit. The credits and deductions in the tax code are Congress' way of rewarding you for spending your money in certain ways. I applaud your desire to educate yourself to make sure that you aren't missing out. I recommend getting a tax book such as J.K. Lasser's Your Income Tax 2008. It is dry reading, but you'll learn a lot.

But now for the sad reality: Most people can't actually take any of those credits and deductions. For example, I won't get any tax credits on my return this year; now that my children are grown and I'm not paying their college tuition, I don't qualify to claim any credits. I do take deductions, but most people don't unless they are homeowners with mortgage interest and real estate taxes to deduct. Some deductions, such as IRA contributions and student loan interest, are available to anyone. But you have to itemize to claim most deductions, such as charitable contributions, and you won't do that unless all your deductions are more than the standard deduction ($5,350 this year for a single person).

In case you were looking for Steve Rodd...

he has a new address, filed with the bankruptcy court.

Congress says sorry, no rebates for elderly whose kids claim them as dependents

Q:  I understand that people making at least $3,000 (in wages or Social Security benefits) need to file to get the rebate and that you cannot file if you're claimed as a dependent on other people's taxes. I claim my parents as dependents on my return. For a child who doesn't file, the taxpayer filing the 1040 receives $300.  Does that mean that the taxpayer who is filing the 1040 receives that money on the elderly person's behalf, same as for a child? I would like to claim my parents as I usually do, except that now I'm afraid they won't get the $600 they're due as a couple on Social Security if I were to claim them.

A: Your fears are correct. As far as the rebate payment is concerned, your parents are in the same category as children 17 and older who are claimed on their parents' return. The parents don't get the rebate and neither do the children since they are claimed on their parents' return. The $300 per child rebate applies only to qualifying children 16 and younger. Either you get the personal exemption for your parents or they get the rebate, but not both.   

Should my phone number be on my checks?

Q: We’ve had our phone number printed on our personal checks for many years because the stores where we shopped asked for it. Recently I ordered new checks, which arrived today with no phone number printed on them. Also the names were not printed the way I expected. I wanted each of our names printed on a separate line but instead the names are written “William T. or Betty A. Jones.” Should our phone number be shown on the checks? Does the way the names are shown on the checks make any difference?

A: Security experts say printing extra information on checks makes identity theft easier. They advise leaving off phone numbers, driver’s license numbers, middle names and, of course, Social Security numbers. Having an “or” between names makes it clear that either one of you can sign checks. But that’s also how it works when the two names are listed with nothing between them. An “and” between names means both have to sign. Talk to your bank if you want your checks printed differently.

Harry Milner III speaks out

Harry Milner III wrote this letter to the St. Petersburg Times about Lou Pearlman's misuse of his father's name. Thanks for filling us in, Harry!

  Obviously forgetting the email sent to him, Lou Pearlman used my dead father’s name on forged documents. I emailed Pearlman’s website in early 2004 that my father had died. I received an answer that the message was passed on to Lou.
  My family knew Lou since the 1970’s.  Lou met my brother who worked on the Goodyear blimp crew.
Lou was infatuated with blimps and a friendship formed. My father, being a salesman all his life, was interested in Lou’s idea of an airline company. Transcontinental Airlines was formed and he was named finance officer. When several failed attempts were made to lease aircraft to major airlines, the company was dissolved, or so we thought!
  As my father, Harry Milner, went in a new direction,Lou Pearlman devised his scheme. That is when he began his EISA ponzi scheme. For several years ,1989-2007, it shows he forged my father’s name on financial documents for Transcontinental Airlines. He used these documents to put off investors and to obtain fraudulent loans from banks.  He has admitted this in court.
  In the 1980’s, Harry Milner met up with Lou again after Pearlman had formed Airship International,a blimp company. Harry Milner formed a deal with Pearlman to sell his blimp advertising. He met with Budweiser while living in the St.Louis area. They were very interested, but said the advertising budget had been set for the year. The next year the deal was done, and thus became the Budweiser blimp!
The $300,000 commission was never paid to Mr.Milner on the $3 million+ deal. The commissions through the years would have made him a millionaire.This was a legitimate company as far as I know.
Obviously, he planned to frame my father for his crimes, if caught. It is obvious he either didn’t read an important email or disregarded it. It may have cost him several years of his life in prison.
  The arrogance and ignorance of a pathological liar is what got him caught.
  I guess Good wil triumph over Evil in the end. We’ll just have to wait for the sentencing to see if that’s true.

Harry Milner III, Edgewater, Florida

How do you report an IRA withdrawal?

Q: When filing a tax return where the only income is from an IRA withdrawal, do you use the standard tax form? If so, do you take the standard deduction and personal exemption and if it results in a negative figure are no taxes owed? Or is there a special form for IRAs?

A: You can use Form 1040 or 1040A to report an IRA withdrawal and calculate whether you owe income taxes. Yes, you take your personal exemption and either the standard deduction or itemized deduction and the bottom line will determine how much, if anything, you owe. You need to fill out a special IRA form (Form 8606) only if certain situations apply, explained here on page 22-23 (the section about IRA distributions). The form is mainly for people who have made nondeductible IRA contributions in the past, who are converting to a Roth IRA or who are taking distributions from a Roth IRA. Be sure to report your Social Security income (some of which may be taxable) to make sure you qualify for the rebate. If you need help, go here to find an AARP tax volunteer site.

Annuities can be tax time bombs

The tax deferral annuities offer is one of their big selling points. But people who buy them often don't understand that these investments carry negative tax consequences too. Today's column is about a couple (Keith and Dolores Cutler, shown here) who learned about one of those consequences the hard way. Here are some things you need to know about annuities and taxes:

Annuities and taxes

- Taxes are deferred as long as the money stays in the annuity.

- When an annuity is purchased outside a retirement plan (with after-tax dollars), withdrawals are partly taxable/ partly tax-free return of principal.

- Withdrawals are taxed as ordinary income, not capital gains, even when they are invested in stocks.

- Taxes may continue to be deferred in a direct annuity-to-annuity transfer between companies, known as a 1035 exchange.

- An heir who inherits your annuity is taxed the same as you would be. There is no step-up in basis at your death.

[Times photo]

No deal on Lou's house

Lou Pearlman's Windermere mansion went on the auction block today, but the best bid wasn't good enough. The high bid was $3.75-million (plus a 6% buyer's premium). Auctioneer Lamar Fisher said another, substantially higher,  offer is pending. He said bankruptcy trustee Soneet Kapila is negotiating with the would-be buyer, who did not attend the auction. Bank of America has a mortgage of about $5.3-million on the property. 

Details about the house and the auction are at Fisher Auction. The bankrtupcy court document regarding the auction is here.

Sunday update: Orlando Sentinel story on the auction.

[Credit: Fisher Auction]

Restitution, the $200-million judgment and more

There seems to be a lot of confusion over the issue of restitution through the plea agreement, so I thought I'd try to offer some explanations:

1. The court is ordering Lou to make restitution to all victims. However, if he doesn't have the money, there is nothing the court can do about it. He does not have to pay this before his sentencing and his prison term will not be extended for failure to make restitution.

2.  The list of assets for forfeiture includes a $200-million money judgment (page 10 of the plea agreement). Sadly, this is not a judgment that Pearlman obtained against someone else and which the government can now collect. Rather this is a judgment against Pearlman in favor of the government for $200-million. The cars and checks being forfeited and other assets discovered in the future go toward satisfying the judgment, which will not go away until it is paid off. Some have questioned why the amount of the judgment is $200-million when the amount of the theft acknowledged in the plea is $300-million plus. I don't know the answer, but it really doesn't matter since even the $200-million is unlikely to be paid.

3. The payment of anything to victims is dependent on the success in recovering additional assets. The way things stand now, Soneet Kapila is in charge of asset recovery and the bankruptcy court will be in charge of any distribution. The government (US Attorney's office) already agreed to turn over the cars and checks listed in the plea agreement to Kapila, although it reserved the right to take them back. We can expect that government attorneys and investigators will assist Kapila in whatever ways might be helpful, but they most likely are not going to duplicate efforts.

4. We really don't know how much in assets might possibly be recovered. Kapila said a lot of money has yet to be accounted for. Has it been spent? Is it in somebody's Swiss bank account? Maybe he'll find out and if it's still there, maybe he can recover part of it. This process will be lengthy and most likely will involve additional lawsuits and legal fees.

New special report on Pearlman up on Times Web site

A big thanks to the Times Web department, which has put together this special report page on the Lou Pearlman investment scam. It includes key original documents, major stories in the Times and a couple of multimedia reports. I hope it will be a resource for anyone looking for background information on this scam.

Also here are: Today's St. Petersburg Times story   Today's Orlando Sentinel story

Pearlman accepts the blame

Lou Pearlman stood up in an Orlando courtroom this morning and admitted he stole more than $300-million from banks and investors. "I am accepting full responsibility," he told U.S. District Judge G. Kendall Sharp. The judge set a sentencing date of May 21, although it could be postponed.

The federal crimes Pearlman confessed to carry a maximum penalty of 25 years in prison, although he is hoping to get a lesser sentence by cooperating with the government in locating assets and pointing the finger at his accomplices.

On several occasions Pearlman made references to his accomplices without naming any names. When Judge Sharp asked if the famed Cohen & Siegel accounting firm was merely a figment of his imagination, Pearlman replied: "myself and some other people."

Although the crimes also carry the potential of $1-million in penalties, the judge indicated there was "no need to additionally impose a fine" since a $200-million judgment is being entered against Pearlman and he is being required to forefeit all his assets toward that judgment. The judge went through the plea agreement  pretty much paragraph by paragraph, repeatedly asking Pearlman if he did the things he has been accused of doing. Mostly Pearlman answered with a simple "yes," although sometimes offered a few words of elaboration. Read more in my story tomorrow.

About 50 people were in the audience, including lots of Orlando-area media, lawyers and courthouse workers. Bankruptcy trustee Soneet Kapila was there. He said he is ready to talk to Pearlman about asset recovery as soon as that can be arranged.

Orange County Corrections Department vans arrive with prisoners, including Orlando music mogul Lou Pearlman, at the U.S. Courthouse in downtown Orlando, Fla., early Thursday, March 6, 2008. [Joe Burbank, AP Photo]

 

Here's how Lou Pearlman's victims can have a say in his sentencing

Judge Sharp set sentencing for May 21, although it could be delayed.

Lou Pearlman victims who would like to explain the impact his crimes had on their lives can do so by writing John Mason, supervisor, U.S. Probation Office, Suite 1400, U.S. Courthouse, 401 West Central Blvd., Orlando, FL 32801-0140. Letters will be included in the pretrial report presented to U.S. District Judge G. Kendall Sharp to consider in the sentencing.

Victims also are able to speak at the sentencing.

Other items: A report about the auction of the house this Saturday by celebrity blogger Perez Hilton apparently attracted a lot of attention to Fisher Auctions. A letter to the editor in the Orlando Sentinel mentions Pearlman.

A glimpse of Pearlman's life on the lam

Lou Pearlman's plea agreement provides a glimpse into his life on the lam last year. In addition to keeping up to date on bankruptcy proceedings by email, he played an active role in the process, the plea says. Documents related to German Savings Bank were found in Pearlman's briefcase when he was captured in Indonesia last June:

"Those documents show that Pearlman, while abroad, was creating a seal and other documents to make German Savings Bank seem legitimate....Emails show that it was Pearlman who was directing other conspirators in how to make German Savings Bank appear to be legitimate and how those conspirators should prepare false documents that purported to be from German Savings Bank to be filed in bankruptcy proceedings.." (page 28)

Here's an example of some of the fake documents filed with the bankruptcy court.

Today's media coverage: St.Petersburg Times story,  Orlando Sentinel story, Associated Press story

Here's where some of the money went: Lou Pearlman Livin' Large

Lou Pearlman defrauded banks of more than $100-million and investors of more than $200-million and converted some of that money to his personal use. How is it possible to spend so much money so quickly?

Lou's money supported unprofitable business ventures, went to make payments to investors, banks and  unnamed co-conspirators. However, a good-sized chunk went to support his own lavish lifestyle, which is documented here in a fascinating five-minute video. The video, "Large and In Charge: Livin' Large" offers a Lou-narrated glimpse of his life, including a tour of his home. He shows off his $250,000 Rolex, his boats and jet skis, his Rolls Royce, his Escalade with the "Big Pop" license plate and his Gulfstream jet. The video was mailed to me and I don't know how it came to be made. It has a certain tongue-in-cheek quality, but I have been told that Lou showed it to some investors. What do you think? Was it made to impress people? Or was he poking fun at himself?

[Pictured above: Lou Pearlman in the show "Living Large," with the boy-band "Natural," at his Orlando estate.]

Here is Lou Pearlman's plea agreement

Federal Prosecutors and Lou Pearlman and his defense lawyers just filed this plea agreement in U.S. District Court in Orlando. It is still subject to the approval of Judge Kendall Sharp, who will determine how much of the maximum 25-year sentence Pearlman receives.

The agreement includes rather stringent requirements for cooperation--complete disclosure of everything he knows, production of documents, etc. If he doesn't tell the truth, he can be prosecuted for perjury. He agrees to make full restitution to every investor and bank victim, although there is no penalty mentioned for failing to do so. 

There are more details about the $500,000 transfer to the Netherlands in November 2006 and the involvement of German Savings. One interesting tidbit: The last tax return Pearlman filed was for tax year 2001, when he claimed a loss of $3-million. The fake tax returns he showed banks for succeeding years always showed an income of more than $10-million.

If you go Thursday....

If you are interested in attending Lou Pearlman's hearings Thursday, here's the info:

9:30 a.m., Courtroom 6D, Magistrate Judge David A. Baker, arraignment on the new charges (referred to as the superseding information)

10 am., Courtroom 6C, Senior Judge G. Kendall Sharp, change of plea hearing.

Both are on the sixth floor of the U.S. Courthouse, 401 West Central Blvd., Orlando 3801. There is metered parking across the street. Lou is scheduled to attend both. The public can attend but not speak. I hope to attend and would like to include in my story some comments from investors who are present. If you are willing to make on-the-record comments, come up and introduce yourself to me after the hearing. 

Pearlman takes responsibility for misdeeds

Lou Pearlman has issued a statement to Tyler Gray at Radar Online taking responsibility for "questionable corporate activities."

"Pearlman will help to fully restore victims up to 200 million dollars," he told Radar. "Others will be charged as part for a conspiracy scheme."

Prosecutors charge Pearlman with conspiracy in investment fraud

Federal prosecutors filed new fraud charges Monday against former boy band producer Lou Pearlman, who faces a sentence of up to 25 years in prison under a plea deal. Pearlman, 53, will plead guilty under the agreement with prosecutors expected to be presented at a hearing Thursday morning in U.S. District Court in Orlando.

In a four-count court filing late Monday, prosecutors expanded the bank fraud charges against Pearlman to include conspiracy to defraud investors through a Ponzi scheme he ran out of his Orlando office, as well as mail and wire fraud, money laundering and bankruptcy fraud.

Pearlman raised more than $200-million from at least 1,300 investors, prosecutors said. The charges cover both a savings plan labeled an “Employee Investment Savings Account” and a stock purchase plan run through Pearlman companies Trans Continental Airlines and Transcontinental Airlines Travel Service.

Pearlman spun a web of lies, disarming both investors and bankers with his genial nature and reams of falsified documents. He told savings program investors their accounts were FDIC-insured then reinsured for up to $1-million through Lloyd’s of London. He told stock investors the corporation was about to go public.

He convinced both investors and banks that his companies were financially sound, showing them false financial statements prepared by a fictitious accounting firm. He gave them documents “signed” by a dead man and told them he had millions of dollars at his disposal in a German trust.

Prosecutors’ newest charge is that Pearlman presented a false claim for $5-million in the bankruptcy case of FF Station, the entity that owned the Church Street Station complex where Pearlman’s companies had their headquarters. While abroad eluding federal agents and creditors, Pearlman caused a claim to be filed purporting to represent a loan German Savings Bank had made to FF Station in 2005, the prosecutors said.

The court filing says Pearlman used money he got from investors and banks to repay earlier investors and make payments on earlier bank loans. In addition, they say he and his unnamed co-conspirators converted some of the money to their personal use.

The charges filed Monday call for Pearlman to forfeit his interest in any property that was involved in criminal activity or that was derived from proceeds from the criminal activity.

A plea agreement in federal court does not specify the term of the sentence, which is left to the discretion of the judge. In agreeing to a plea deal, defendants typically hope to reduce their sentences by cooperating with prosecutors. In Pearlman’s case, he might cooperate in locating assets or in bringing charges against his associates.

The charges Monday took the form of an information rather than a superseding indictment. Pearlman waived his right to be prosecuted by indictment.

Tuesday Update: Here is the Orlando Sentinel's version of the story. Also, here's my story as published in the Times. (Basically the same as what was posted here Monday.)

Lou Pearlman will change his plea

Lou Pearlman wasn't joking around when he told friends that he was talking to prosecutors about a plea agreement, as The Times reported last week. A notice filed this morning in U.S. District Court in Orlando says that a change of plea has been set for Thursday at 10 a.m. The hearing is open to the public.

Pearlman, the producer behind boy bands *NSync and the Back Street Boys, has been behind bars since his arrest last June in Indonesia. U.S. Magistrate Judge Donald Dietrich entered a “not guilty” plea on  Pearlman’s behalf in July on federal bank fraud charges. In federal court the possible choices for a plea are not guilty, guilty and "nolo contendere" (no contest). Although he has only been charged with bank fraud so far, his plea deal could include other charges since prosecutors said publicly they were working on a superseding indictment.

Here is some information about federal criminal procedures. Scroll down to the bottom of the document. And here is more.

Orlando Sentinel report. WTVT Orlando report.

Can I make an additional nondeductible IRA contribution?

Q: Could someone who is age 45 and has already made the maximum allowable IRA contribution for 2007 make a non-deductible contribution for 2007 (I assume that interest and dividends would accrue tax-deferred) and, if before they reach 59-1/2 they needed to get the non-deductible contribution dollars back, is it possible to do so without paying taxes or penalties for early withdrawal?

A: First: If you already have made the maximum IRA contribution for 2007 ($4,000 since you are younger than 50), you cannot contribute any more to any type of IRA. You are, however, free to make a 2008 contribution (up to $5,000).

Second: The deductibility of your contribution is not determined when you make the contribution, but when you file your tax return. If you want your contribution to be nondeductible, then don't deduct it. Instead, file a Form 8606 with your tax return. If you already filed your 2007 tax return, you can amend it by filing a 1040X. Of course, you will have to pay taxes if the amount previously deducted is added back into your income.

Third: Sadly, you are not allowed to withdraw only your nondeductible contributions from an IRA. Once you have made nondeductible contributions, all withdrawals will be partly taxable and partly tax-free. The taxable part will be subject to the 10 percent penalty for early withdrawal.

Claiming a rebate when your income is too low to be required to file a return

Q: My mother has a small pension from Canada in addition to her Social Security. Should she add this in with her Social Security amount on the 1040 for the stimulus rebate? The person at the IRS that I spoke to did not seem to be able to answer that for me.

A: When Congress extended rebates to nontaxpayers, the issue became a lot more complex for everyone, including the IRS. Your mother and others whose income is too low to pay taxes have the option of partially filling out the 1040A or 1040--that means writing "stimulus rebate" at the top of the form, completing the top section with her personal info, filling in the amount of her Social Security benefits, with the taxable amount as zero, filling in the bank account information under "refund" if she wants her rebate direct deposited, signing and dating the form. OR she call fill out the form completely, which would mean including her Canadian income, interest income, etc. She would not add her Canadian pension to her Social Security, but would report it on a separate line.'

Having said all that, I highly recommend that people who are not accustomed to filling out tax forms, get someone to help them. Go here, enter your zip code and find a free tax help site near you.

Good news for Florida teachers saving for retirement

Florida teachers have some of the worst retirement savings options out there with fees so high that many of them would be better off putting their money in taxable accounts with low cost providers. Their choices are about to get a whole lot better, at least in counties where school boards adopt a model plan put forth last week by the Independent Benefits Council. Read more about it in my column today.