August 15, 2000 IRS Continues to Accept Excuse For Late Filed S Elections Normally, corporations that want to be S corporations must file Form 2553 with the IRS no more than 2 ½ months after the tax year has started. The IRS recently ruled, in three cases, that where one shareholder signed the election form but the other owner did not, because his secretary mistakenly put the election form in a file cabinet, where the firms’ owners did not realize that they had to elect S status with the IRS and in a third case where a firm’s lawyer was directed to file a Form 2553 but failed to do so, the S Corporation status was valid. Note that in all situations, the companies and their shareholders had filed their tax returns as if their businesses were S Corporations. We do not advocate you acting as the foregoing did; please understand these are litigation positions. Why an Index Fund Does Not Mirror the Market Many investors may think that they are protected from volatile stock markets by investing in a large stock index fund. They couldn’t be more wrong. After years of soaring performances, investing on auto pilot has gone into a stall. With the major market indexes lurching to the precipice and back, it is more important than ever that investors understand the limitations of index investing, today. Although index funds provide an inexpensive way for investors to mirror the performance of broad market indexes like the Standard and Poor’s 500, the strategy has become increasingly risky in recent years. Because of the way these funds are put together, they are much less diversified than they used to be, making it important for investors to take a more active role in broadening their portfolios. After years of soaring performances, investing on auto pilot has gone into a stall. Funds that try to reproduce the action of the S & P 500, by far the most popular of the index funds, were up only 2.13% on average, in the first quarter; a far cry from the gains of 20% and more that investors in these funds have grown accustomed to seeing in recent years. As gains in the major indexes have slowed, many money managers have been finding the S & P 500 an easy benchmark to beat. Perhaps the biggest problem, is the idea that an investment in a S & P 500 index fund is an investment in the broadly diversified overall market. The index is composed of widely held stocks often used as a proxy for the stock market. Contrary to what some investors seem to think, the index does not comprise equally weighted holdings in America’s 500 largest stocks. It is weighted according to the stocks’ market capitalization. So, as stocks rise in price, their impact on the index’s behavior rises as well. Similarly, as a stock falls in price, its contribution to the S & P 500’s performance declines too. Indeed, S & P 500 index funds are less diversified today than ever. Last year, only 31 stocks accounted for all the S & P’s 21 percent gain. By contrast, in 1995, 341 stocks were responsible for the index’s 37.6 percent climb. Additionally, technology stocks have become a much larger part of the index. They account for approximately one-third of its value, up from 9 percent ten years ago. That big leap owes to the fact that the S & P 500 as an index weighted by market capitalization can become dominated by stocks that have seen big jumps in their value. The fact is that making a big bet on technology may not be what many index funds investors had in mind when they poured their retirement dollars into funds that are supposed to mirror the market. These, after all, are among the most volatile stocks trading today. Tax Quote of the Day Death and taxes may be certain, but we don’t have to die every year. -Anonymous Uncle Alan Gets It! “What differentiates this period (1995 on) from other periods in our history is the extraordinary role played by information and communication technologies. The affect of these technologies could rival and arguably surpass the impact the telegraph had prior to, and just after, the Civil War”. The foregoing was not spoken by an Internet crazed futurist but our own doddering, skeptical, non-techie, Alan Greenspan. The foregoing speech made on June 13 and virtually ignored by the media shows that the Federal Reserve Chairman understands he is not dealing with the same economy he dealt with in the early 1990’s. Why has inflation stayed low during this boom? Greenspan credits the Net. “The major expansion and diffusion of new technologies…allowed firms to boost earnings in the face of intense competitive pressures through a reduction in the growth of unit costs.” In order words, monetary policy did not do it, Clinton did not do it, Al Gore didn’t do it, Silicon Valley did. Now if he will only stop tightening interest rates. IRS Plans Inspections of Auto Donations Statements from the IRS indicate it is looking into vehicle donation programs. Any mention of car donation programs brings to mind the ubiquitous ads seen throughout local papers. Some charitable programs allow third party for-profit companies to place the ads, pick up the donated cars and dispose of the car in the used car market. Then the company pays the charity so much per car. The IRS says that in some states a “donated” car is not deductible if the charity never held ownership over the title. Stay tuned for further developments! If you are thinking of donating a vehicle, forewarned if forearmed! Congress is Running Out of Time in this session. Legislators plan to finish by October 6 so they can go home and campaign. That rules out GOP plans for large tax cuts and not enough time to work out a deal with Clinton. Tax reduction issues will be left up to the voters in November, a choice between George W’s big tax cuts or the smaller ones that Gore favors.