Last Chance Millionaire, by Douglas R. Andrew (Hardcover, 2007)|
(You can print this review in landscape mode, if you
want a hardcopy)
Mark Lamendola, author of over 6,000 articles.
This book presents a seemingly compelling case for a particular
investment strategy. However, it gives only a pro forma nod to the
risks. I will address those risks, later in this review.
Regardless of any analysis of the author's recommendations, the
issues he addresses are ones everyone should look into carefully. Even
if you decide his investment strategy is not for you, this book is worth
the read if it prompts you to look at how you are investing now. I agree
with Andrew that most of us don't handle our money or our equity very
Andrew brings up many good points that can help people improve their
personal balance sheets. In that sense, he does us all a service by
offering this book. On the other hand, he takes the reader beyond that
onto ice so thin I can hear it cracking as I read. If you can tell where
the cracks start, you can make good use of this book and not fall into
I caution the reader against assuming that because some of the
author's conclusions and opinions are correct that all of them are. In
this case, there are some notable exceptions. Let's look at three
In the first paragraph on page 52, he claims the motivation for tax
breaks derives from the government's understanding and desire for social
good. I felt like leaving a quarter under his pillow when I read that.
Tax policy has nothing to do with anything benevolent, except for
bestowing goodies on the
special interest groups who control the legislative body. Our federal
income tax code runs something like 65,000 pages. Even after a century
of tinkering with this code, Congress still hasn't come up with
something that makes any sense.
The federal income tax is not needed for funding the
government, and that's not its purpose. It is a tool for redistributing wealth to pay
back campaign donors at the expense of the Treasury and those who are
not in positions of influence. There is no wise wizard in Congress
showering tax breaks on ordinary Americans to help create jobs or to
reduce the cost of funding social programs, as Andrew appears to
Here's how it does work. Federal politicians curry favor and make
promises, so they can raise the millions of dollars needed to win an
election. (Obama raised $80 million for a presidential election as of
July, 2007, for the November, 2008 election). Once in office, they have
to make good on those promises or face ruin (or worse). There's a reason
the Demopublicans consistently present us with a slate of losers,
incompetents, and the ethically bankrupt. By "electing" those folks, we
an be assured the reigns of government remain firmly in the hands of
special interest groups. This pattern is consistent all the way back to
post Civil War Reconstruction.
One way to pay back special interest groups is to develop a
hopelessly complex federal income tax code that gives these people
millions of dollars in an indirect manner. If Congress were properly
concerned about funding the cost of government, the first thing they
would do is abolish the income tax. The federal income tax is not the
main way the federal government feeds its spending habit. Many experts
believe that the
compliance costs, administrative costs, and costs of economic drag
generated by this whacko system are greater than the revenue raised.
In a second example, when discussing how a (scissor) jack works, he
claims a car weighs 2,000 lbs. That's light even for a small car. A 2007
Toyota Corolla weighs in at over 2600 lbs. Upgrade to a Camry, and
you're at 3200 lbs. Go with the 2007 Nissan Maxima, and you're
at 3600 lbs. Mini-cars, such as the Chevy Metro, Honda Insight, and
Suzuki Swift do fall into the 2,000lb and under group. But even the
Chevrolet Prism and Ford Escort exceed that weight. One could say,
"Let's not quibble over numbers," but what is this book about?
The typical scissor jack is rated for 2,000 lbs, and that makes it
sufficient for changing a tire. But it's not raising the whole car. It's
merely tipping up one side of it, which means it's lifting far less than
the weight of the car. This is an example of where he gets the basic
facts wrong, but uses them to explain one of his key concepts. He's
discussing leverage, so this makes me question his understanding of how
A third example is his referring to transactions as "tax free." You
pay 128 taxes on a single loaf of bread. Nothing in America is tax-free.
As the late economist, Nobel Prize winning Dr. Milton Friedman,
explained, your level of true taxation is equal to the amount spent by
the government. We have federal, state, county, and city governments all
spending like there's no tomorrow. The federal debt alone is some $9
trillion, and future obligations with no apparent source of funding are around
$52 trillion. Yes, we can probably assume what he meant was "free from
federal income tax." But that's not what he said, and what he said was
wrong. When you're talking about using your home equity in a complicated
investment strategy, getting even one "little" detail wrong can cause
you to lose everything.
Andrew brushes off the risk involved in tax-based investment
strategies by claiming that revenuers would be shooting themselves in
the foot if they messed with these tax breaks. News flash. They do this
all the time.
On page 288, he gives advice that makes me shudder. Basically, he's
advocating calling a withdrawal a loan and then treating it that way for
tax purposes. The IRS loves this kind of thing. This is called a "sham
transaction for tax avoidance purposes" and IRS can come back on you at
any time to nail you with more interest and penalties than you are
capable of earning in a lifetime.
IRS has lots of fine print that allows them to ignore the Statute of
Limitations and anything else you might mistakenly believe protects you
from actions of theirs that might be illegal, immoral, unethical,
unfair, unjust, illogical, unduly burdensome, or just plain crazy. There
is no protection of that sort, period..
So you might be sailing along merrily for 20 or 30 years before suddenly
finding yourself with no home, no assets, and no income. IRS does not
have to notify you of an assessment. They merely need to assess (enter
into their records) that you owe a tax and let that simmer while
interests and penalties pile up. Then, after they
seize your assets, you can spend several million dollars in tax court
pretending the judge will care about what's right or will actually give
evidence any weight. That's not how Tax Court works.
The way Tax Court works is the court tries to find some fine print
somewhere justifying whatever IRS did. The taxpayer doesn't just have
the burden of proving he isn't guilty, the taxpayer also has the
burden of proving IRS hasn't got some loosely interpreted statute
backing whatever action they've taken. Read Tax Court cases, and you'll
IRS also has a history of welching on their written letters of
approval, after people have strung out sufficient rope with which to
hang themselves. This is one of the things that happened in the Hoyt
Fiasco. Investors asked IRS for clarification, and they got it in
writing--but IRS later recanted while leaving those folks who relied on
IRS' word to twist in the breeze. IRS also told the Hoyt investors, in
writing, to contact their Tax Matters Partner (Hoyt)--despite the fact
IRS had known for 20 years proving Hoyt was defrauding both the
investors and the U.S. Treasury. IRS employees just watched the whole
thing, biding their time until they could destroy the very people who
Yes, it may be possible to skate along with Andrew' investment
strategy. But it seems doubtful. Any tax-favored investment strategy is
basically a field of landmines. We can look at the Hoyt Fiasco or the
AMCOR mess as prime examples. In the Hoyt Fiasco, 4300 people invested
in a tax-favored business that allowed them to defer taxes and build
wealth using OPM (Other People's Money, which Andrew refers to
People didn't just lose the money they had invested. They were on the
hook for huge sums they could never pay back. When IRS is involved, you
can expect all kinds of games to be played such that you have no
recourse. If they decide to retroactively deny tax-favored status, for
whatever reason, they will. The IRS answers to nobody, which is why they
get away with these things.
So if the government approves of a tax-deferred or tax-favored
investment strategy, the strategy makes sense on paper, and the person
promoting it is very convincing, does that make it safe? Ask the 4300
victims of the Hoyt Fiasco what they think.
It is with this thought that I caution the reader against following
Andrew the whole way. Before "thinking outside the box," learn why the
box is there in the first place. Maybe those other financial advisors
aren't stupid for recommending those "slow" investments.
Andrews may be right, and he may be crossing all of this T's and
dotting all of his I's so that IRS is a happy camper. But IRS is also
capricious. And when IRS changes its mind, for whatever reason (or no
particular reason at all), the "gray area" that you thought was safe
turns into the very definition of terror.
Until such time as the US replaces the federal income tax with a
system that is fair, ethical, and logical, any investment that relies on
tax-favored rules is highly risky. Andrews points to a prime example himself,
when he talks about IRA's and 401(k)s. These tax-favored investments
were not designed with the best interests of the investor in mind.
Andrew does us a service by pointing this out quite clearly.
But then he goes on to recommend other tax-favored
investments, but ones that he admits are complex and can trigger various
undesirable results. I'm very uncomfortable with his treating a
withdrawal as a loan. As they say, "Wishin' don't make it so." You may
recall that Microsoft had to pay millions in employment taxes,
penalties, and other payments after IRS told them that calling people
contractors doesn't make them contractors. The fact Andrew recommends
stepping out onto this particular plank should give anyone pause.
Your best be may be to read Chapters 1 through 5, and readjust your
portfolio. Then, look at your spending patterns so you can keep more of
what you earn. Finally, look at where you can add value using your
talents and experience. Many people live quite nicely in retirement by
running a small business and working part-time. This gives them a sense
of purpose, plus that financial cushion and some modest tax breaks. What
is it you enjoy doing?