Posted by akrowne on 08/16/09
Last updated 08/16/09

Robert Kahre, the Las Vegas businessman famous for catching flack from the authorities for paying employees and contractors in US gold and silver "Eagle" coins, has been convinced by a federal jury of tax evasion.  You can read a news release here.  A 2007 attempt by the federal government to pin something on Kahre failed to convict on all counts.

The controversy and legal battles center around the fact that US Eagle coins have a much lower face value than the prevailing market value for the gold and silver metal they contain.  Yet, the coins are lawfully as fully "legal tender" as any other US coinage, leading to an apparent tax loophole -- a $1 silver Eagle sells for over $15 in paper dollars these days, and a $20 gold Eagle for about $950, implying a dramatic reduction in tax exposure to about 1/15th and 1/50th, respectively.

But this seems too good to be true.  One might therefore be forgiven for assuming that Kahre was convinced simply for reporting the face value of the coins for tax purposes.   The violation seems quite intuitively clear.  But Kahre was not prosecuted on that theory, as this quote buried in the article shows:

Prosecutors at the Kahre trial showed that defendants selectively assigned a value of their coin income -- switching between face value and market value -- depending on whether they were trying to lower their tax liability, or qualify for a home or car loan.

Did you catch that?  The problem wasn't that Kahre and his associates were booking the coins at the face (low) value -- it is that they were representing them at two different values, depending on their whim!  That is, they were making representations of a higher dollar-value of the coins than they were reporting to the IRS in situations where it would be to their financial benefit to do so (such as when applying for loans).

But the basis for guilt still isn't obvious from this.  It isn't a "tax crime" to represent something as having one value to one party, and another value to another party -- that is in fact how the market works, through a bidding process.   Instead, the tax crime is that the "duplicitousness" of Kahre and his associates -- all duly recorded in the usual financial paper trails, I might add -- technically exposed the defendants to tax liability for a capital gain. 

It is actually common to book an asset at a low value, and then represent it (or tender it) at a higher value at a later time -- this situation is in fact fundamental to the process of "investing".  So tax law provides for this outcome by calling the difference a capital gain and requiring taxes to be paid on it (in general -- there are exceptions, discussed below).  Kahre and his associates did not do that, hence engaging in de facto tax evasion, for which their financial records provided ample proof.

This means that, yes, tax evasion occurred, and the government has put Kahre away on a valid theory and valid foundation of evidence.  But it also does not even remotely "disprove" the idea of gold and silver US Eagles being bookable at their face values! 

You won't find any mainstream article that reports this true meaning of the case (The LVRJ has probably already been intimidated -- see the free speech discussion below).  But the government's case is indeed valid, and the conviction(s) proper, based on the evidence admitted and agreed upon by both sides.  Its just that the legal theory isn't quite what you'd naively expect.

This isn't to say that there wasn't disinformation in the prosecution or coverage of the case, for example:

As proof, prosecutors cited business records suggesting Kahre kept only $40,000 in coins in his business safe in one three-month period, during which he covered a payroll of about $8 million.

It is nonsense to say the "payroll was about $8 million".  The payroll was in fact 40,000 dollars... in US Eagle gold coins.  That may roughly equate to $8 million in paper dollars at some arbitrary market rate, but since when do payments for services get reckoned in fluctuating market value for accounting purposes?  Kahre paid a fixed amount of legal tender money, as gold coin, in the amount of about $40,000.  That is all.  There is no "8 million" of anything, except in the prosecutors' imaginations.

However, propaganda aside, the government did find a way to convict Kahre based on the evidence and a valid reading of the tax law.  It is very important to the government, particularly in tax and monetary cases, to find some way to inflict criminal penalty upon the dissidents whom it is pursuing.  But more often than not, the manner of doing so fails to debunk or disprove the critiques motivating their "target."  Typically, this distinction will be missed by the media.  And so it is in the Kahre case.  It now becomes clear why the 2007 attempt on Kahre failed: the government had not found the right legal theory upon which convict him -- one that did not directly collide with the lawful, legal tender valuation of US Eagle coins, which is what the IRS really objects to.

If at first you don't succeed, try, try again.  And apparently no cost is too high to "bring in" a prominent critic of the duplicitous and abusive US monetary regime.

Practical Implications

One thing we can surmise from the Kahre case is that you do not expose yourself to any (legitimate) tax liability from reciept of gold and silver US coins at face value as long as you do not tender them at a higher market value -- either at all, or in a way that the IRS counts for tax liability.  For example, you could just not sell the coins -- booking them at the face value for tax purposes, but postponing any tax liability until such time as you sell.  (This might be a particularly attractive strategy to someone who does not expect the government's income tax regime, or the government itself, to last much longer.)

Another strategy could be to tender them in an unconventional manner -- such as barter.  Who is to say how much of any good or service you should receive for each silver or gold eagle coin tendered, especially if there is no established paper-dollar price?  Get my drift?

However, it is admittedly difficult to "scale up" these methods like Kahre attempted to, significantly limiting the benefits of booking US Eagles at face value for any sizeable business enterprise. 

I should add, using the coins as collateral for bank loans is precisely not the type of thing someone concerned with sound money should be doing.  This in a sense is a betrayal of the principals Kahre was advocating, so it is not surprising that this became his Achilles heel in the case.

Chilling of Free Speech

There's another important scandal surrounding this case.  An earlier (May 26th) Las Vegas Review Journal article about the case prompted a Federal subpoena demanding the identifying information of all people who posted comments to the online version of the article.   No justification was initially given for the subpoena.  Later, under a firestorm of criticism and resistence from the paper, the subpoena was narrowed to some posts the prosecution claims are a "threat".   The ACLU has joined the fray to quash the subpoena.

As far as I know, this is the first example of the federal government demanding to know the identities of anonymous internet commenters based upon little to no justification (the practice is common from private parties).   It seems likely that the motivation was the subject matter: tax "protesting" and the question sound money.   It is obvious to me that the government subpoena'd the paper in an attempt to bolster its list of anti-government "dissidents", which now likely includes those who simply question the tax or monetary regime, and/or to intimidate such people.

I suspect the subpoena will indeed be thrown out, but the mere fact the government went forward with this inquisition is extremely disturbing, and may still successfully create a chilling effect for free speech.  Still, because the criticism won't go away, and the abuses and breakdowns of our economic system are becoming obvious, a backlash regarding the government's tax and monetary regimes is likely to worsen.

Note that if the venue had been a small, online-only shop, and not been a brick-and-mortar outlet, the costs of fighting the subpoena would likely have been prohibitive, and the site would have had to give in to the government's demands.  When you are just a blog or small online independent news outlet, the ACLU does not rush to your aid, as I can assure you from repeated experience (such as here, or this time, or this other time -- ah, memories).

This means we have a de facto elimination of free and identity-protected speech online to blogs and any other "non-mainstream" outlets.   And so you, dear reader, may become the target of a government subpoena, should you dare to comment on this article. 

On that note, please contact the ACLU and tell them to get their act together and start throwing their weight behind blogs and other independent outlets if they want to maintain their free-speech-defending relevance at all.

Comments on the Tax Regime Relative to Gold and Silver

Despite my comments above that the Kahre prosecution was valid, let there be no mistake on whether I don't think the current tax regime is indeed ridiculous, punitive, unconstitutional, and criminal when it comes to the treatment of gold and silver.  This can be shown concretely.

To begin, here is the current list of gold and silver capital gains tax rates compared to the other main types of capital gains taxes most taxpayers encounter:

• gold and silver: 28%
• stocks and bonds: 15% (under the Bush regime) or 5% (when gross income is low)
• owner-occupied real estate: 0% (when occupied at least 5 years), 5% or 15% (as above)

Is it obvious yet how gold and silver are being treated punitively? 

The reason for the 28% rate is that gold and silver bullion are classified as "collectibles" and that this tax rate was not modified for the Bush tax cuts.  [Interestingly, this even holds for precious metals exchange-traded funds (ETFs) which do not even guarantee to be 100%-backed by metal -- see here, and here and here.  So you can be taxed 28% on capital gains for precious metals shares that might not be backed by any metal all!]

I suspect the application of the punitive 28% rate to bullion wasn't an accident -- it achieves a concrete government policy objective.   Namely, discouraging the ownership of gold and silver over favored assets, like stocks, bonds (including government bonds), real estate, and the dollar in general.  It works.  How could anyone but a contrarian possibly consider putting their life savings in gold and silver for safe keeping, at a nearly 30% punitive tax, when zero capital gains tax is being offered on houses?  Is it any wonder that the gold and silver price might end up suppressed, and real estate prices might end up inflated?

To anyone who has even a slight inkling that this bias is not outrageous, ask yourself how well this system has worked out for the country.

[The hilarious thing is this bias is still not enough to make precious metals the worse option, though few realize it. For example if you are in the bottom tax bracket and get the 5% capital gains tax on stocks, your stock holdings would still be down more than 40% from the beginning of 2008 to now, spanning the big market crash.  If you had bought gold a year before the crash, however, it would have gone from about $800/oz to about $950/oz, which would still be up 13.5%, even after the punitive 28% tax rate!  Yet, it is undeniable that tax biases work because people's motivation to "avoid and reduce tax exposure" distorts financial decisions far beyond the level that is truly justified.]

Fundamentally, the gold and silver bullion taxation regime, and especially its application to legal tender US Eagle coins, makes no sense.   Something that is "legal tender" is supposed to be official money.  When something is official money, exchanges of money for money are not taxable, by definition.   For example, you are not taxed when you exchange two quarters for ten nickels, even though the nickels are worth more in metal value than the quarters (in fact, the nickels have recently been worth more in metal value than face value, just like gold and silver eagles!)  The reason is that both sets of coins are worth exactly fifty cents legal tender value, and you are simply exchanging legal tender money for other legal tender money.

Thus, there should be no fundamental problem with receiving gold and silver eagles for anything at their face value in an even exchange (or better).    And there should be no problem in exchanging a 1-ounce gold eagle for $1000 or $1000 "worth" of goods and services -- you are just receiving a "windfall" of approximately $950 relative to the coin's face value, at the buyer's option.   Should someone hand you $50 in paper money in exchange for a gold Eagle, there should be no question under our system in general that your "windfall" of $950 in "value" is not taxable.

In fact, gold bullion is still on the government's books at the "Bretton-Woods" level of $45/oz!  I am surprised no one has pointed out in court -- or for tax purposes -- that this valuation is the government's own authoritative valuation at the Fed and Treasury.  This is clearly more definitive than "market value" for government accounting purposes -- and hence should resolve any tax questions of "capital gain".  On this basis, in fact, the Kahre case would "go away" -- the only "crime" would be inflating the dollar value of the coins to private parties when seeking loans; resulting in loan fraud, not tax fraud!  But, I am certainly not a lawyer...

Conclusion

The government has clearly contradicted itself by making US gold and silver eagles legal tender at a low face value, fully knowing that the precious metals are worth more, while continuing to tax them at punitive "collectibles" rate so they can receive the benefit of the market value they do not acknowledge.  The goal here is obviously to heap scorn on precious metals and make them seem devalued relative to the dollar, so that the dollar's "intrinsic worth" (which is absent) will tend not to be questioned.  At any rate, legal tender money is clearly not a "collectible", so the laws of the land are not harmonized.  Someone who was enterprising enough could certainly take this matter to the Supreme Court.

But who knows, perhaps they will arbitrarily extend the nonsense for a while longer, and one day soon you will be subject to capital gains taxes on jars of pennies and nickels, as the dollar plummets well below their intrinsic metal value.  Gives a new meaning to the saying "heads, you lose, tails they win," doesn't it?

Posted by akrowne on 08/11/09
Last updated 08/11/09

So now I can check one off my "bucket list" -- I've been kicked out of a public "town hall"  meeting for doing nothing (complete with police escort).  Sweeet.

The meeting was last night, at the Georgia 4th Congressional district in Clarkston, held by Congressman Hank Johnson (D).  The facilities of the Clarkston campus of Georgia Perimeter College were used.

A number of us liberty-minded folks (C4L and otherwise), and some GOP faithful showed up to ensure, at the minimum, skepticism accounted for and to see a real debate fostered over the proposed national health care legislation.  As far as I know there was no "right wing" or otherwise organized effort to "swamp" the meetings.

By contrast, it was obvious that organized left-wing groups turned out in force.  People sporting "Teamster" colors were plentiful, as well as Obama acolytes and "single payer" health care system advocacy groups.

The original time for the meeting was 7pm.  Within the day before, it was mysteriously moved up to 6:15 -- perhaps to make sure that working people hit the maximum rush hour.  No matter; I got there around 5:30, so I got an early-enough place in line to get into the main auditorium.   It was pathetically small for the crowd lined up "around the block" to attend the meeting, so only a small portion of the crowd got in.  Me and some C4Lers were among them.  Others ended up in overflow rooms, having become spectators, watching the proceedings on large TVs.

I first got a bad feeling about the whole event being orchestrated when police started warning people not to bring cameras in.  No cameras?  At a public meeting on a public facility?  That's odd.  Well, they weren't going to stop me from making a voice recording using my small sansa mp3 player.
 
My next signal something was "off" was when, upon entering, I had my pamphlets and fliers confiscated from me by the police.  No explanation was given, just that I "couldn't have them".  This annoyed me, because I had been handed some useful campaign materials and other informational leaflets, including one which had bullet points critically-examining the proposed legislation.  But I had little choice.

The reason for this confiscation became clear once we were inside and seated: we were given instead "official" materials from Johnson and the Democratic party and the Obama administration, including a glossy promotional piece supporting the legislation.  Surprise, surprise.

The first part of the "meeting" was relatively calm.  Johnson of course gave his speech on why we needed this legislation, correctly pointing out high costs, declining coverage, and declining quality, but also excoriating health insurance companies for being "profiteering" (taking sure to make note of the executives "getting paid millions") and saying that "deregulation like the financial sector" was responsible for the problems in the health care sector.   It was pretty much the usual left-wing "politics as usual", with zero admission whatsoever of the role government interference has played in creating the problem (which I would define as a government-protected cartel of health insurers -- privatized, but not free market).  None of this was any surprise.

We then moved on to the panelists, virtually all of whom were biased strongly towards a "solution" in the proposed, nationalized format.  The one exception, second to last, was a Dr. Todd Williamson, from the Medical Association of Georgia, who advocated fixing the tax code, making people's health insurance dollars portable and as tax-free as they are for employers, and moving to a system where people's health insurance follows them and is not tied to a job (largely solving the "pre-existing condition" problem).  He strongly opposed putting government between people and their doctors, and suggested that like in medicare, a government option for health insurance in general would soon turn into virtually the "only option".  He got a rousing ovation from us and a large portion of the crowd -- the first and strongest standing ovation of the night.   He was, however, the token dissenter.

We then moved on to two pre-screened citizen testimonials, presented from the stage.   One was a woman who had chronic illness in her family with her children, and could not even remotely afford health insurance, with costs reaching astronomical levels (as high as $3000 a month just for premiums, she said).  Another was a woman who ran a nursing service, who said she could only afford to provide a very poor health plan for her employees because of the cost.  She advocated a public option to remove this burden.

These are of course characteristic problem cases with our current dysfunctional system, and few serious critics dispute these issues.   However, no cases were brought forward that illustrate how the problem is due to the tax structure and other regulatory quirks.  For example, my insurance premiums (the total of the employer part plus "my" part -- both of which are really my part) went down from over $400 a month to about $100 a month -- for the exact same high-deductible plan -- when I left my last major employer and became self-employed.  This case is typical and shows how the inflexibility and tax bias of the employer-linked health insurance system is used to inflate premiums, which in turn inflates all medical costs.  But, no coverage of this was presented -- perhaps because that would show that the government's tax code and other aspects of regulation are largely responsible.

In my observation, government is intimately involved in creating the existing broken-down system, but it has not even remotely fessed up to this role (in constrast to Hank Johnson's blaise assertions, there has never been a health care "deregulation" -- only more regulation).  That is my main criticism with the proposed health care reform plan and the general debate around the issue -- you cannot solve a problem until you understand what caused it, and "evil health insurance profiteers" falls a bit short.  I am not necessarily against a government option, as long as it is not structured so that it edges out free market health insurance for most of us.  But any government option put in place without solving the structural cost issues of the private portion of the system will inevitably gobble up most of, if not the entire market.  This threatens to simply become another area where the government comes in to provide "something for nothing", but fails to contain costs for society as a whole, and simply ends up printing money to make up the gap -- a cost everyone pays but few see.

This has not worked so well in housing or education.  Shouldn't we be worried about the feat being reproduced in health care?  That was my concern, at least.

Finally, we moved to floor comments.  However, only residents of the 4th District were to be allowed to comment with priority, so I didn't bother to get up and make my comments above.  I decided to just listen. 

The comments were an interesting mix.  It did seem that a majority complained of health care costs and simply wanted a government option to be provided so they could have these costs eliminated.  Some were obviously "career welfare recipients" -- so their perspective is inevitably going to be less concerned with nominal prices and more concerned with having expenses in general eliminated.  But some were not -- such as a gentleman who reported his wife and new baby were kicked out of the hospital a day early after a C-section -- because insurance didn't cover the extra day. 

These comments, again, were typical, and certainly represented accurate complaints about the cost and coverage pressures of the existing "system".  These are the things no one is arguing.

But there were some insightful points from some people that I didn't know, and did not appear to have any particular political affiliation.

One Asian woman was a doctor and supported reform, but expressed concern at the cost, especially given the huge deficits we are accumulating for various bailouts.   She also expressed concern with many millions of people still being left uninsured, as well as millions being forced off their existing plans (Johnson and his aide replied that "things had changed" since the earlier version of the bill, and all concerns would be taken care of).

An elderly black man expressed frustration at the lack of "good information" on the proposed legislation, complaining of nothing but "sound bites" from all sides.  He expressed a desire for straight "answers" on what is going to happen to medicare (Johnson assured there would be no change).

A black woman seemed peeved at all of the people who had come before her begging for more welfare.  She said she had always "supported herself", and told Johnson to "woman up" to the insurance companies, as they would be the ones to "truly benefit" from this legislation.  She suggested that the problems could be fixed without any cost to the federal government with mandates requiring certain aspects of coverage (such as children, domestic partners), and that Congress's health plan should be offered generally by the same insurers.  She made a point that prices seemed to be based on some sort of insurance racket.

A caucasian man announced himself as a Catholic, acknowledged there were problems, and explained that (based on principles borrowed from Catholicism) we should seek to solve them at a more local level before going directly for a national solution (Johnson replied by asserting that the problems could "only be solved at the national level.")

And perhaps the most important general comment from those queued up came from a gentleman (I cannot recall his appearance) who expressed confusion at the many bills, but asked if we could somehow have a town meeting when a single bill had been settled on, but before it had passed.

Tellingly, Hank Johnson sputtered and bumbled, but finally responded that no, it was not likely we could actually debate the bill that was going to be passed.  But, he said, we could certainly have a town hall meeting after the bill had passed!

This drew laughs and hackles from the entire crowd.  Johnson responded bizarrely by launching into diversionary criticism of the Blue Dog Democrats and Republicans, capping off with an exhortation that we "have gotta do something" (nationally, of course).

This was perhaps the most telling interaction about how the whole system works: we are to be swamped by a confusion of conflicting principles and directives and details, and end up arguing with each other about things that perhaps are in only one version of a bill or another (or none at all), which may or may not appear in a final bill.   Then the bill will be passed quickly by congress, after its usual horse trading, and we'll be unravelling the monstrosity for months if not years to come.  This process belies utter contempt for the citizenry and perhaps reveals that our government has reached a stage where it simply cannot function if proposed legislation is clearly and methodically open to scrutiny.

Anyway...

The session was in its final few minutes when the "big confrontation" happened.  While the "critics" had been booing, cheering, and heckling Johnson and others from the floor the whole time (and the whole audience was certainly guilty of applausing and cheering out of turn), it was not until C4Ler Sean Mangieri bellowed out "where in the Constitution does it authorize you to do this?" that some sort of invisible line was crossed.  Johnson began responding, fumbling a bogus justification that the "general welfare clause" gives the government authority to do anything, but apparently the order had been given.  The police came over and tapped me on the shoulder, apparently thinking it was me who had made the remark; to which I said "I didn't say anything."  Various people in the audience pointed to Sean, who was sitting next to me, and he was "tapped out" by the police.  However, they returned anyway and told me I had to go as well and this was my "last chance".  When I protested again that I didn't say anything, the reply was "it doesn't matter, they want you out."

Two other people we know were thrown out in this sweep as well, one of whom had just been "warned" not to shout any more comments, but was ejected without having said anything additional.

I have the whole session up until that point recorded (audio only; 23MB mp3).

An AP story and CBS piece are available which quote from Mr. Mangieri.

Altogether, I am very disappointed with what passes for "debate" in this country on pressing issues of national concern and relevance to our basic freedoms.  It is obvious from this interaction that Johnson, like so many others in Congress, has made up his mind and is acting as part of the party machinery.  It seems he expected only to get a "rubber stamp" from "friendlies" in the audience, and inasmuch as that did not happen, police were brought in to intimidate and eject.   His comments about not being able to debate the final bill, and not being restricted by the Constitution, really do tell all.

UPDATE: Here is a short YouTube video that a fellow attendee put together over the above soundtrack, with some snapshots of the event and "follow along" subtitles of Johnson's torturing of the Constitution.

Posted 08/11/09 Bill Greene Amelia Court House, VA

You guys are counted amongst my heroes. :-)

Posted 08/11/09 jtworkman Spencerville, IN

I think it might be time to make a few calls to these wonderful congressmen.

Posted 08/11/09 Oscar DeGrouch Sunnyside, NY

I think we should all post the AP and CBS articles wherever we can, highlighting the paragraph "The atmosphere grew testy when Sean Mangieri asked Johnson to point out whether the Constitution gave the government the authority to provide health care. He and two friends were soon surrounded by campus police officers and, as Johson drew applause saying there was "sound legal footing" for the bill, the three were quickly escorted out."

Posted 08/11/09 sjaye Chicago, IL

That paragraph points out how our constitutional rights to free speech are being trampled on by a political establishment that is acting increasingly dictatorial.

Posted 08/11/09 Paul S. Brighton, MI

Oh man, sorry to see that you were unjustly accused and that your papers were take against the Bill of Rights. Redistribution of wealth is unjust. Saying it acceptable for the common welfare is false. If the government takes tax money from all to give to a few, how is that for everyone's good? When the demolition of the World Trade Centers brought in billions in voluntary aid from across the country, I knew where the true heart of this country was. Free men are good men. So is there a C4L candidate for Georgia's 4th District.

Posted 08/11/09 Fozz Cockeysville, MD

Stories like this make me so angry

Posted 08/11/09 MountainDoc Lewisburg, WV

Would the taking of your campaign material be an illegal search and seizure? Emphasis on seizure there. If so you might have a grievance against the officers at the least - and possible the congressman if they were acting under his orders.

Posted 08/11/09 Paul Hogan Middle Village, NY

I'm glad you can have a sense of humor about this, I wish I could. Confiscating literature and being thrown out of the meeting for bringing up the Constitution is very upsetting to me. On a positive note the incident has been recorded and displayed. Sadly, if our legislatures have no respect for the Constitution why would the courts? You are a true minuteman. Corruption is like cancer, it eventually destroys the host. We need to make sure that the host is the government and not the people. In Liberty, Paul Hogan

Posted 08/11/09 AuthenticAuthor , TX

And of course, the reps (rulers) in question DID NOTHING about the use of force on a perfectly peaceful use of one's lips. You should feel glad they didn't tazer you. I take it Georgia police have their own version of a MIAC Strategic Report too.

Posted 08/11/09 take your stand Carlsbad, CA

My God, listen to his response... "uh, err, uh.. The preamble... Uh the preamble to the ... Uh... Uh.... General welfare of the people, uh....this is definitely authorized by the constitution. Definitely authorized." next question!" *as he signals to the officers to remove the 'nuisance' it's sick. This guy needs to get FIRED. NOW. how in the world are these people getting into office? I think he has The Constitution confused with the communist manifesto.