Frantic Grab at Loopholes Rings Out Old Tax Year
Who was responsible for the brand-new Mercedes-Benz appearing in Barbara Bachman’s garage on Christmas Eve?
Not Santa Claus, said her husband, Roger. The $28,000 car isn’t, strictly speaking, a Christmas gift, he said, even though the purchase was conditional on delivery by Dec. 24. The car is, strictly speaking, a business vehicle, Bachman said.
It arrived in Irvine in time for Christmas thanks to the Internal Revenue Service--which had not suddenly became generous but which is going to become a whole lot stingier next year.
“Like our tax man advised, if you’re going to buy something anyway, go ahead and buy it now,” Bachman said.
Under tax reform legislation enacted this year, many of the income-tax deductions long a part of business and personal financial planning will disappear at 12:01 a.m. New Year’s Day.
Among the changes: Individuals no longer may deduct the sales tax or consumer-loan interest they pay, and the tax on capital gains--the profit made selling real estate and stocks and the like--will be taxed at a much higher rate.
Among the results: a salesman’s paradise at car dealerships, a Realtor’s hell at escrow companies and a clerk’s nightmare at the Orange County recorder’s office, where real estate transactions are recorded.
With only three working days left in 1986, some are experiencing an urgency that has escalated to frenzy.
“This is my professional, legal opinion,” said Ella Smith, an attorney and assistant county recorder. “We’re going to be going bananas here. I’m being told by everyone, ‘Just brace yourselves.’ ”
This all comes as good news to someone like Lee Shear, the salesman who sold Bachman his new Mercedes at Jim Slemons Imports in Newport Beach.
Shear’s problem is too few cars, not a lack of eager buyers, and it’s the same “for anyone who sells any big-ticket item,” he said. “My wife sells furniture, and they’re swamped, too.”
There is substantial money to be saved. Buy a new car in 1986 for $35,000--the average price of a Mercedes--and you are allowed to deduct $2,100 in sales tax and $500 to $800 in license fees from your 1986 income. If you can afford such a car, you’re probably in the 40% to 50% tax bracket, so those deductions will save you perhaps $1,450 in federal income tax.
For such potential savings you may need to make a few sacrifices. For example, Bachman preferred the palomino interior but had to settle for cream beige if he wanted the car before year-end.
Even then, Slemons had to send a driver to a Bakersfield dealership on Christmas Eve to bring back a car that would fill Bachman’s order.
Pat Bolter, Slemons’ sales manager, said customers are so eager to buy before year-end that they are buying cars sight unseen. One man plopped down $70,000 in advance for a car that won’t be on American soil until late January, he said.
For Slemons, it means that during a year in which average monthly sales numbered 90 to 100 cars, December’s sales hit 120 cars by Christmas with the probability that 40 more will be sold by New Year’s Eve, Bolter said. He credits the changes in tax law for the extra rush of buying.
Salesmen Aren’t Kicking
This is the kind of government intrusion that brings no complaint during sales meetings, Shear conceded. “We’re not going to have any Boston Tea Party over this. “
The effect on other businesses has been equally dramatic and ironic, according to Alec Valk of Laguna Niguel, tax department chief at the law firm of Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey.
“We’re advising clients just the opposite of what we’ve been advising the last five years: put it (paying taxes) off and put it off,” Valk said. One of his clients’ cases is “a classic example” of the role reversals the tax law has prompted, he said.
The client is selling land to developers, but the sale doesn’t consummate until March--too late to take advantage of 1986’s lower capital gains taxes.
“So they’ve set up a sort of installment sale,” Valk said. “They get the earnest money now and use it to pay taxes based on 1986 tax rates. . . . They want to go to the IRS and say, ‘We want to pay tax earlier than we usually would.’ And the IRS will probably attack it. This is a 180-degree turnaround on both sides.”
Valk said the tax law “has put almost all the pressure on the seller” who is trying to close his real estate deal under 1986’s more favorable tax rules.
This pressure, he said, has prompted many sellers to deed property to buyers before year-end without receiving some of the usual protections and up-front money.
“I’m hesitant to give anything away until I’m paid for it, but now you’re having to make sales without actually receiving the money,” Valk said. “The tax tail is wagging the dog.”
Clamoring for Action
Those with a chance to close their real estate deals in 1986--and even some with no chance--are flooding escrow offices demanding fast action.
“We all knew it was going to happen,” said Larry Buster, regional counsel for First American Title Insurance Co. in Santa Ana. That’s why there probably isn’t a single title insurance or escrow employee on vacation this month, he said.
“It’s definitely a frenzy,” Buster said. “I’ve got guys working here until 9 o’clock each night.”
He said that even real estate agents who usually take time off during the normally slack Christmas season “now are hopping. They’re trying to come up with ideas to close deals this year.”
And law firms involved in the deals are so busy, they are renting conference room space at First American “just so they have a place to meet,” Buster said. “Their own conference rooms are overflowing.”
By Christmas Day, First American’s volume was up 40% over the previous year to date, and Buster said that percentage is bound to rise by plenty before year-end. “The number of orders we haven’t closed yet is very great,” he said.
Too Much for Competitors
Every escrow and title insurance business is in the same boat, Buster said. First American has been referring business it cannot handle to some of its competitors, but “they are calling us asking us to stop referring,” he said.
“You want to see something interesting?” Buster said. “Come down to an escrow or title company on Dec. 31. No matter what the situation, people will be panicking, because if, for some reason, a deal doesn’t close in time, you’ll probably see lawsuits over the money lost on taxes. You have to be extremely careful, and it’s very, very difficult being quick and careful.”
But his employees will make it to New Year’s Eve parties, he said. “We’ll just arrive a little late.”
“We aren’t making any plans for New Year’s Eve parties,” said Ella Smith of the recorder’s office. “Last year we got out at quarter of 10, and I don’t think we’ll manage it that early this year.”
Smith said she knows lots of people in the escrow business, “and I don’t know an escrow officer who isn’t physically and mentally exhausted.” But workers at the recorder’s office are probably past that point, due to the “ridiculous volume” of documents to be recorded.
At the beginning of 1986, the recorder’s office was receiving 2,100 documents a day, she said. By Thanksgiving, the number had more than doubled, to 4,290, and next week each day will probably bring in considerably more than 5,000, she said.
“Our people have been working overtime for months,” she said. “Our people are starting as early as 6 o’clock some mornings. This morning (Friday) we had maybe 10 of them come in.”
Many of the documents are mailed in, and one examiner reported Friday that only one-third of the documents he processed could be accepted for filing. It meant that many of the others were certain to miss the Dec. 31 deadline for a tax break.
Many more will be lining up at the recorder’s office on the last day to file documents in person. If something is wrong with their documents, there is some chance to straighten it out in time, Smith said.
But there is also the chance of turning the documents away. “The pressure is great,” Buster said. “Especially on the 31st, if the documents are deficient and they have to say they can’t accept them, you can imagine the pressure put on them to accept.”
