Practice Beat

October 25, 1999

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Financial Beat

By Bernice Napach, Senior Associate Editor

Taxes: Audit rates keep falling

Your odds of being audited by the IRS are lower now than they've beenin years. The agency expects to look at only 0.80 percent of all individualtax returns this year, down from 0.99 percent in 1998 and 1.28 percent in1997.

This trend has more to do with cuts in IRS staff than with a kinder,gentler agency makeover.

The agency has 1,600 fewer staffers this year than last, 13,000 fewerthan four years ago, and no new technology support, says Commissioner CharlesO. Rossotti. Yet its staff must implement provisions of the IRS Restructuringand Reform Act of 1998, which includes new protections of taxpayers' rights."We still have to fix the IRS, and it won't be fast or risk-free,"says Rossotti.

One recent improvement: an interactive calculator on the agency's Website (www.irs.ustreas.gov) thatlets taxpayers set up an installment plan for back taxes owed. You can figureout monthly payments and download the form you need to file. Go to "TaxInfo For You," then "Interactive Installment Payment Process."

Mutual Funds: Why young fund managers play "follow the leader"

Don't expect much original thinking from your mutual fund manager ifshe isn't experienced. She may be too worried about her job to get creative.Researchers at the University of Chicago and Massachusetts Institute ofTechnology have found that straying from the fund's stated goal is moredamaging to a young portfolio manager's career than to an older one's.

Portfolio managers whose funds underperformed the market by 15 percentin any year had a 37 percent chance of losing their job if they were youngerthan 45, but only a 17 percent chance of termination if they were 45 orolder. As a result, the researchers found, younger managers tend not totake risks by deviating from their funds' objectives.

The study looked at the career paths of 453 fund managers of growth andgrowth-and-income funds from 1992 through 1995.

Stocks: "A rose.com by any other name"

More evidence of Wall Street's love affair with the Internet: If a companyadds the words Internet or .com or .net to its name,its stock goes up--and not just temporarily. The company's main businessdoesn't even have to be Internet­related, according to researchers atPurdue University's Department of Finance. "A mere association withthe Internet is enough to provide a firm with a large and permanent valueincrease," the study says.

The researchers studied 52 stocks that had changed their names (and usuallytheir ticker symbols) to include an Internet connection--usually adding.com--between Jan. 1, 1998, and March 26, 1999. All but one weresmall-cap companies trading over the counter on the Nasdaq Bulletin Board.Some were heavily involved in Internet business; others simply added anInternet component.

From 15 days before the name change to 15 days after, the price of thesestocks rose from $2.15 to $5.86 on average, or 173 percent. Companies withno previous Internet connection but a new focus on Internet-related businessdid best of all. Their average stock price jumped from $3.83 to $11.06,almost 190 percent.

Individual investors seldom get wind of name changes early on, but thatdoesn't seem to matter. The researchers found that from one to 14 days afterthe name change was announced, these stocks gained 32 percent more thanthe Nasdaq computer index, on average. Many were still going strong 90 dayslater.

Bonds: Have your old savings bonds stopped earning interest?

The public holds $6.5 billion worth of US savings bonds that have maturedand no longer earn interest, according to new figures from the Bureau ofthe Public Debt. That's almost twice the amount of three years ago. Do youor your parents own any of them?

Here are the bonds to look for:

  • Series E, from May 1941 through October 1959.
  • Series E, from December 1965 through October 1969.
  • Series H, from June 1952 through October 1969.

Series E and EE bonds are the kind that are purchased at half their facevalue, then redeemed years later for the full amount. Series H and HH bonds,in contrast, are redeemed at their purchase price but pay interest everysix months in the meantime.

To redeem a bond that has stopped paying interest, visit your bank. Itcan cash Series E and EE bonds immediately, but it will have to transferSeries H and HH bonds to one of five Federal Reserve banks that handle suchtransactions. The Fed bank will then forward the check to your bank account.

You can also exchange an old bond for a new one via your bank or by mailingForm 3253 to a Federal Reserve Bank. That form can be ordered through theTreasury's public debt site at www.publicdebt.treas.gov. Go to "Savings Bonds," then "Forms."

The site can also tell you when various issues will stop earning interest,the value of specific bonds if redeemed before their maturity date, andwhen interest payments are made--information that is particularly usefulfor timing redemptions. If you redeem a bond in May that pays interest inJune, for example, you'll lose five months worth of interest.

Retirement: No more combined limits on what your funds may grow to

Come January, you'll be able to sock away a lot more retirement money,courtesy of a change in the law governing pension plan contributions andbenefits. You can participate in both a defined-contribution plan, suchas a 401(k), and a defined-benefit plan without being subject to the combinedcap that has long limited contributions to the first type and restrictedbenefits paid from the second.

Historically, a defined-benefit plan hasn't made sense for a medicalpractice. If the doctors maxed out their contributions to the 401(k), thecap would limit the defined-benefit plan to little or no payout. Eliminationof the cap ends all that. "It's a very significant change," saysFred Rumack, national director of tax and legal services at Buck Consultants,a New York employee benefits firm. "Now you can get full benefits froma defined-benefit plan and still make full contributions to a defined-contributionplan."

If your practice doesn't have a defined-benefit plan, creating one couldadd as much as $135,000 to what you can contribute to your retirement cache,based on current limits--and even more in the future, since that numberis indexed to inflation. Just remember that it must cover most employees,not only you and your partners. An added perk: Its assets cannot be touchedby creditors.

Livability:Do moving vans indicate the best places to live?

Every year, published lists claim to tell us the best and worst placesto live. The choices are subjective, of course, and tend to fluctuate suspiciously:One year's top city turns up 56th on the next year's list.

But now an economist at the Federal Reserve Bank in St. Louis has comeup with what he calls a more objective, simplified way to gauge the metropolitanareas that are truly the best places to live. Instead of using the traditionalyardsticks of livability--culture, climate, geography, and economic opportunity--HowardJ. Wall ranks cities by the size of their population change from 1990 through1997.

He reasons that the biggest increases indicate the most livable cities:People vote with their feet.

Wall's rationale can be used against him, however, since it ignores allthose people who "voted" not to move. His list places Chicagoamong the "least livable" places, for example, but more peoplestill reside there than in Las Vegas, the Fed economist's "most livable"area.

Then there are those who believe that fewer people make a city a betterplace to live.

In any case, these lists provide an interesting look at where populationis rising and falling, and may well indicate which locales are becomingmore or less livable.

*The number of people within the US moving into and out of an area. Excludesinternational immigrants and population changes due to births and deaths.

Joan Rose. Practice Beat. Medical Economics Oct. 25, 1999;76:30.