US Debt Reduction Sequester Tax Solution #45: Inherited Property Should Get Carry Over Tax Basis

Presently, when someone dies, the individual inheriting property gets to step up the tax basis of this inherited property to its fair market value and there is not income tax paid by anyone even though this property's tax basis is stepped up.

The end result here is that capital gain tax on the increase in the value of the property is completely avoided by both the giver and receiver of the property.  This is one of the most egregious tax loopholes and defies logic.  And it's another case of a US Congress that has continued to legislate only for the top 1%.

My recommendation here is that the individual inheriting the property should use the tax basis the property had in the hands of the person who died.....thus the inheritor of the property gets carry over tax basis, instead of using the stepped up fair market value of the property inherited.

Thus, when this inherited property is subsequently sold, there will be a much higher capital gain recognized for US federal income tax purposes.

US Debt Reduction Sequester Tax Solution #44: Increase US Federal Excise Tax on Fossil Fuel Sales to Fund Increased US Infrastructure Investments

The country is in desperate need of wisely vetted infrastructure investments.  This is not just good for the future of the US economy, but it is also good for US job creation.

It seems logical to me that these US infrastructure investments be funded by the beneficiaries of these US infrastructures.  Thus, users of fixed up bridges should pay a toll to cross the fixed up bridges.  Users of fixed up mass transit should be charged additional fees to use the fixed up mass transit.  Users of fixed up airport facilities should be charged additional fees to use the fixed up airport facilities. 

And users of the fixed up roads should be charged a fee to drive on the fixed up roads.

Since individuals driving gas-powered motor vehicles are the main beneficiaries of these fixed up roads, then it seems only logical that the US Federal Excise Tax on gas sales be raised to fund these increased road infrastructure investments.

US Debt Reduction Sequester Tax Solution #43: Eliminate Tax Deferral on Non-Monetary Exchanges

Presently, gains realized from like-kind exchanges of non-monetary assets are not currently income taxed for US Federal Income Tax Purposes.

I think it is only fair that this tax loophole be closed and the money raised here should be used to reduce the US Debt.

US Debt Reduction Sequester Tax Solution #42: SubS Corp Income Should Not Be Passive Income

Presently, SubS Corp Income is considered Passive Income, rather than Active Income.  As Passive Income, Passive Losses from activities such as Rental Real Estate can be applied against this SubS Corp Passive Income, thereby reducing the amount of US federal income tax currently owed at the individual level.

I think it is only fair that this loophole be closed and used to reduce US Government Debt.

US Debt Reduction Sequester Tax Solution #41: SubS Corp Income Should Be Subject to Payroll Taxes

Presently, SubS Corp Income is not subject to the 15.3% self-employment tax, as are sole proprietorships and partners in a partnership.

Clearly this is a tax loophole that in all fairness needs to be closed.  By using this tax loophole, desperately needed Medicare and Social Security Trust Funds are being robbed. 

In order to lower the US Government Debt, I think it is far better to close this avoidance of payroll taxes by using a SubS Corp legal structure than by reducing Medicare, Medicaid and Social Security Benefits.

US Big Corp 1Q 2013 Earnings Very Early Insight…..Retailers Up 9%, Techs Down 3%, Other Sectors Up 13%

I found 61 US Big Corps filing with the SEC with Non-GAAP Adjusted Net Income or Net Loss of at least $100 mil each in their January or February quarters of either 2013 or 2012 and which have released their January or February 2013 quarterly earnings.  There are several companies that haven't released these quarterly earnings yet and thus they weren't included in these 61 Corps.

Non-GAAP Adjusted Net Income is on an after income tax basis and is what the Companies disclose as their Ongoing Core Earnings in their earnings releases.  It is also what Wall Street uses, for the most part, as the Companies' Ongoing Core Earnings.

The 28 Publicly-held Retailers did just great with their Total Adjusted Earnings up a very robust 10.2% and their Total Company-Earnings-Weighted Earnings Per Share (EPS) up an even more robust 14.6%.  This Add on EPS increase of 4.4% is due to so many of these retailers having very robust common stock buyback programs.

It should be pointed out that the 1Q 2013 earnings of many of these retailers benefited from having 14 weeks as compared to 13 weeks in the 1Q 2012.

When I add in Toys R US, this Total Adjusted Earnings Increase of these Retailers decreases a bit to 9.2%.

It is pretty clear to me that the US economists were off target when they were projecting that the elimination of the US payroll tax holiday would severely hurt US consumer spending in early 2013.

On the other hand, the 16 Technology Corps continued to struggle, with their 1Q 2013 Total Adjusted Earnings declining by 3.1% from the 1Q 2012.  These 16 Technology Corps received a 2.7% EPS Growth benefit from some of them having very robust common stock buyback programs.  Thus on an EPS basis, the Total Adjusted Earnings decline was only 0.4%.

Clearly, the US Government should be taking steps to improve the environment for these US Technology Corps, which have been so key to the overall success of the US economy.

The 16 US Big Corps in Sectors other than Retailing and Technology did very well in the 1Q 2013 with their Total Adjusted Earnings up by a very robust 12.8% over the 1Q 2012.

Below here are the Adjusted Earnings for both the 1Q 2013 and the 1Q 2012 for each of these 61 US Big Corps:

			Adjusted	Adjusted
	1Q	1Q	Net	Net
	2013	2012	Income	Income
	Adjusted	Adjusted	Increase	Increase
	Net	Net	(Decrease)	(Decrease)
	Income	Income	Amount	%
	mils of $s	mils of $s	mils of $s
Retail
Walmart	5,606	5,194	412	7.9%
Target	1,079	1,009	70	6.9%
Home Depot	1,021	774	247	31.9%
Macy's	818	729	89	12.2%
TJX	605	475	130	27.4%
Best Buy	554	783	(229)	-29.2%
Limited Brands	519	459	60	13.1%
Costco	485	394	91	23.1%
Kroger	462	284	178	62.7%
Kohls	378	455	(77)	-16.9%
GAP	351	218	133	61.0%
Dollar General	317	299	18	6.0%
Staples	308	284	24	8.5%
Lowes	288	322	(34)	-10.6%
Nordstrom	284	236	48	20.3%
GameStoop	262	240	22	9.2%
Ross Stores	237	192	45	23.4%
Dollar Tree	229	188	41	21.8%
Tiffany	180	178	2	1.1%
Autozone	176	167	9	5.4%
Dillard's	138	113	25	22.1%
Darden Restaurants	135	164	(29)	-17.7%
PetSmart	134	102	32	31.4%
Williams-Sonoma	134	123	11	8.9%
Dick's Sporting Goods	130	111	19	17.1%
Big Lots	120	115	5	4.3%
Foot Locker	111	84	27	32.1%
American Eagle Outfitters	111	76	35	46.1%
Total all 28 Retailers	15,172	13,768	1,404	10.2%
Toys R Us	239	343	(104)	-30.3%
Total all 29 Retailers	15,411	14,111	1,300	9.2%
Technology
Oracle	3,108	3,128	(20)	-0.6%
Cisco Systems	2,722	2,563	159	6.2%
Hewlett Packard	1,605	1,832	(227)	-12.4%
Accenture	720	714	6	0.8%
Dell	702	913	(211)	-23.1%
Agilent Technologies	222	244	(22)	-9.0%
Nvidia	215	158	57	36.1%
NetApp	243	216	27	12.5%
Analog Devices	131	139	(8)	-5.8%
Paychex	145	135	10	7.4%
Jabil Circuit	109	123	(14)	-11.4%
Marvell Technology	104	127	(23)	-18.1%
SAIC	182	106	76	71.7%
Autodesk	121	106	15	14.2%
Adobe Systems	179	285	(106)	-37.2%
Intuit	100	158	(58)	-36.7%
Total all 16 Techs	10,608	10,947	(339)	-3.1%
Other Sectors
Monsanto	1,479	1,204	275	22.8%
Medtronic	946	888	58	6.5%
Walgreen's	915	767	148	19.3%
Nike	662	569	93	16.3%
Deere	650	533	117	22.0%
General Mills	421	366	55	15.0%
FedEx	390	490	(100)	-20.4%
Mosaic	378	308	70	22.7%
HJ Heinz	320	311	9	2.9%
ConAgra Foods	230	223	7	3.1%
Campbell Soup	220	207	13	6.3%
JM Smucker	159	138	21	15.2%
Brown Forman	158	133	25	18.8%
Joy Global	140	135	5	3.7%
Hormell Foods	130	128	2	1.6%
PVH	119	87	32	36.8%
Total all 16 in Other Sectors	7,317	6,487	830	12.8%
Total 61 in all Sectors	33,336	31,545	1,791	5.7%

And below here is a comparison of the Total Adjusted Earnings Growth, the Total Adjusted EPS Growth, and the resultant Add-on EPS Growth Due to Common Stock Buybacks in the 1Q 2013 for each of the publicly-held Retailers and Technology Corps:

			Add-On
			EPS
			Growth
	Adjusted		Over
	Net	Adjusted	Earnings
	Income	EPS	Growth
	Increase	Increase	Positive
	(Decrease)	(Decrease)	%
	%	%	Spread
Retail
Walmart	7.9%	10.6%	2.7%
Target	6.9%	10.7%	3.8%
Home Depot	31.9%	36.0%	4.1%
Macy's	12.2%	20.6%	8.4%
TJX	27.4%	32.3%	4.9%
Best Buy	-29.2%	-24.8%	4.5%
Limited Brands	13.1%	17.3%	4.3%
Costco	23.1%	22.2%	-0.9%
Kroger	62.7%	76.0%	13.3%
Kohls	-16.9%	-8.3%	8.6%
GAP	61.0%	65.9%	4.9%
Dollar General	6.0%	11.5%	5.5%
Staples	8.5%	12.2%	3.7%
Lowes	-10.6%	0.0%	10.6%
Nordstrom	20.3%	26.1%	5.8%
GameStoop	9.2%	24.9%	15.7%
Ross Stores	23.4%	25.9%	2.4%
Dollar Tree	21.8%	26.3%	4.4%
Tiffany	1.1%	0.7%	-0.4%
Autozone	5.4%	15.2%	9.8%
Dillard's	22.1%	29.9%	7.7%
Darden Restaurants	-17.7%	-18.4%	-0.7%
PetSmart	31.4%	36.3%	4.9%
Williams-Sonoma	8.9%	14.5%	5.6%
Dick's Sporting Goods	17.1%	17.0%	-0.1%
Big Lots	4.3%	19.4%	15.1%
Foot Locker	32.1%	32.7%	0.6%
American Eagle Outfitters	46.1%	41.0%	-5.0%
Total all 28 Retailers	10.2%	14.6%	4.4%
Technology
Oracle	-0.6%	4.8%	5.5%
Cisco Systems	6.2%	8.5%	2.3%
Hewlett Packard	-12.4%	-10.9%	1.5%
Accenture	0.8%	3.1%	2.3%
Dell	-23.1%	-21.6%	1.5%
Agilent Technologies	-9.0%	-8.7%	0.3%
Nvidia	36.1%	34.6%	-1.5%
NetApp	12.5%	15.5%	3.0%
Analog Devices	-5.8%	-8.7%	-2.9%
Paychex	7.4%	8.1%	0.7%
Jabil Circuit	-11.4%	-8.6%	2.8%
Marvell Technology	-18.1%	-9.5%	8.6%
SAIC	71.7%	68.8%	-2.9%
Autodesk	14.2%	15.2%	1.1%
Adobe Systems	-37.2%	-38.6%	-1.4%
Intuit	-36.7%	-36.5%	0.2%
Total all 16 Techs	-3.1%	-0.4%	2.7%

Fannie Mae 2012 Earnings On Fire

Before 2007, Fannie Mae generated consistently large pretax earnings of at least $4 bil per year for more than a decade.

Then in 2007, these annual pretax earnings started turning into pretax losses, which peaked in 2009 at a massive $73.0 bil.

These annual losses continued through 2011.  Thus, for the five years from 2007 to 2011, these cumulative pretax losses totaled a gargantuan $154 bil.  Since US taxpayers are effectively on the hook for Fannie Mae's losses, US citizens were rightly enraged at the amounts of these losses.

On the somewhat positive side, the amounts of Fannie Mae's pretax losses were much lower in 2011 ($16.9 bil) and in 2010 ($14.1 bil) than they were in 2009 ($73.0 bil) and 2008 ($44.6 bil).  But still, those large losses in 2010 and 2011 were nothing to write home about.

So, what happened in the current year 2012?  Well, Fannie Mae completely turned around these losses with pretax earnings of a massive $17.2 bil.  No, that's not a misprint.  US taxpayers have to be just elated with what happened in 2012 with Fannie Mae's earnings.

So, what's going on here behind just the bottom line earnings and losses numbers?

Well, it's really three items which have caused this incredible earnings and loss pattern.

The first two are related to the financial meltdown and subsequent housing improvement.  But it should be pointed out that the US Fed provided major assistance here by providing an incredibly low interest rate environment since the 2008 financial meltdown.

Fannie Mae's Provision For Credit and Guarantee Losses totaled $156.8 bil for the five years from 2007 to 2011.  And then what happened in 2012?  Incredibly, these Credit Losses completely turned around from a $26.7 bil Provision (i.e. Loss) in 2011 into a $0.9 bil Benefit (i.e Income) in 2012.

And Fannie Mae's Impairment of Available-For-Sale Debt Securities Earnings Charges totaled $18.7 bil for the five years from 2007 to 2011, maxing out at $9.9 bil in 2009, and dropping dramatically since then to only $0.7 bil in 2012.

The other item causing Fannie Mae's earnings decline was its Derivative Losses, which totaled $34.7 bil for the five years from 2007 to 2011.  Particularly notable here were massive Derivative Losses of $20.1 bil in 2008, and another $6.6 bil in 2011.

While Fannie Mae's Credit Losses and Debt Securities Impairment charges were driven by the housing crisis and subsequent improvement, I don't think the same can be said of the Derivative Losses.

Financial Derivatives are a zero-sum game, for every dollar of losses, there is the same dollar of gains.

Thus, Fannie Mae's massive amounts of Derivative Losses should be particularly troubling to US taxpayers.  I think that Fannie Mae got its clock cleaned in the financial derivative markets by much more savvy traders.

On the positive side, it seems that Fannie Mae did much better in 2012, with Derivative Losses of a much lower, but still significant $3.0 bil.

Fannie Mae's 2012 pretax earnings also received a $1.3 bil benefit from its settlement with Bank of America.

Fannie Mae should do well in 2013, but you won't see a massive pretax earnings improvement in 2013 vs. 2012 as you saw in 2012 vs. 2011.

But what you should see in 2013 for Fannie Mae is a massive after-tax Net Income increase due to the release of its large Deferred Income Tax Valuation Allowance driven by its substantially improved pretax earnings in 2012, which should continue for the foreseeable future.  This Deferred Income Tax Valuation Allowance was established due to Fannie Mae not receiving an income tax benefit in earnings for many of its losses incurred in 2008 through 2011.

But still, if Fannie Mae can just match its 2012 Pretax earnings of $17.2 bil here on out, then it would be able to pay back the money it was bailed out by US taxpayers certainly in less than fifteen years, perhaps even in less than ten years.  So from any reasonable CBO scoring over the next ten years, there should be a huge US Debt Reduction from this huge $34.165 bil recovery in Fannie Mae's pretax earnings in 2012.....going from a pretax loss of $16.945 bil in 2011 to pretax earnings of $17.220 bil in 2012.  Whew!

Pundits are giving way too much credit for the improvement in the US housing market being the cause of this near miraculous earnings turnaround in 2012 of both Fannie Mae and Freddie Mac.

Much more than that it's due to the US Government.  The US Fed was the main driver here by providing an extremely low interest rate environment.  And then the Obama Administration, behind the scenes and without taking an ounce of the credit, has worked with all parties involved to substantially improve Fannie Mae and Freddie Mac's financial strength and earnings prospects.

And it's also clear to me that both Fannie Mae and Freddie Mac got a subsequent upgrade in their management, particularly in their financial management.  The key here isn't the number of people working there, but rather it's the quality of the people.

But still, underwater mortgage homeowners can't be happy with the US Government first bailing out and subsequently substantially improving the financial status of both Fannie Mae and Freddie Mac, when at the same time, the US Government, including the US Fed, the US Congress, and Ed Demarco, the Head of the Federal Housing Finance Agency overseeing both Fannie and Freddie, has done so little to improve the financial status of these underwater homeowners.

After all, where did Fannie Mae and Freddie Mac get their huge earnings in 2012?.....It came from the interest paid by homeowners.  To illustrate this point, below here is the Net Interest Income (i.e. the Excess of Interest Income over Interest Expense) for Fannie Mae for the last six years:

	mils of $s
2012	21,501
2011	19,281
2010	16,409
2009	14,510
2008	8,782
2007	4,581

Yeah, this Net Interest Income of Fannie Mae of $21.5 bil in the most recent year 2012 is $16.9 bil higher than it was in 2007 before the financial meltdown hit in 2008.

Just another case of the 99% getting shafted.  And who got bailed out by the US Government for their trillions of dollars of Investments in Fannie Mae and Freddie Mac debt securities which were substantially impaired when the 2008 financial meltdown hit?  It was the 1%, including many of the major US corporations.  One of these days the 99% is going to figure it out that it's all stacked against them, and the US Congress and the US Fed are taking action only to benefit the 1%.  Just where's the fairness here?

Below here are Fannie Mae's earnings and loss elements for the six years from 2007 to 2012:

							Total
							5 Years
	2012	2011	2010	2009	2008	2007	2007-2011
Fannie Mae	mils $s	mils $s	mils $s	mils $s	mils $s	mils $s	mils $s
Net Income (Loss)	17,220	(16,855)	(14,018)	(72,022)	(58,319)	(2,056)	(163,270)
Pretax Income (Loss)	17,220	(16,945)	(14,100)	(73,007)	(44,570)	(5,147)	(153,769)
(Provision) Benefit For Credit and Guarantee Losses	852	(26,718)	(24,896)	(72,626)	(27,951)	(4,564)	(156,755)
Derivative (Losses)	(2,977)	(6,621)	(511)	(2,811)	(20,129)	(4,668)	(34,740)
Available-For-Sale Debt Securities Impairment Earnings Charge	(713)	(308)	(722)	(9,861)	(6,974)	(814)	(18,679)