Like most people, I habitually whine about taxes. In my case it’s because I have been “randomly” audited for nine years in a row. (not feeling so random) For this reason, I think I have special rights to whine.

My main problem with the tax code is its complexity. I can remember many years ago when Ross Perot had his little speech where he put his hand upon the tax code which was nearly as tall as he was. It’s just too complex.

My other complaint is the number of times my money gets taxed. Every couple of weeks, I get my paycheck with federal and state taxes already removed. When I put gas in my car I pay federal and state taxes on the gas with my already taxed income. I pay real-estate taxes with my already taxed income. I pay sales taxes with my already taxed income. On and on it goes…

In my state you not only pay sales tax on your vehicle, you pay tax on the license plates. Here in Colorado a new car will run $400 - $1000 for license plates alone. Mind you this is paid with your already taxed income with which you already paid state sales tax for the car.

You are probably wondering why I started whining about this in late August. I was reading something about capital gains distributions in mutual funds (some of these funds have close to a 50% distribution looming). Some time ago, before Al Gore invented the Internet, I was in some good discussions in newsgroups about indexed funds vs. standard funds returns.

It turns out that one of the biggest benefits of index funds is the low turnover. This is probably not a shock to most of you but it does raise question of cap gain taxation. When the distribution occurs in the fund the price is lowered by the amount of the distribution. So, really, there is no gain there. It’s a net zero transaction. This is just the government trying to be greedy and get their money early.

If the price was not lowered for the distribution then when you (or your heirs) eventually sell the shares there would be a gain or loss as appropriate. Why add all the extra complexity to the tax code and my accounting? The government seems to be patient enough for death er… estate taxes.

If I buy Microsoft stock, I don’t have to declare a capital gain every time Microsoft sells an used computer or some piece of real-estate — it is built into the price. Was there something flawed with this model that I missed?

It would seem there should be some kind of loophole here, and maybe it’s exploited and I just missed it. Let me take my Microsoft example one step further, lets say Microsoft buys IBM and then later divests it. Do I get passed a capital gain? no… It seems I should be able to create a company that buys and sells stakes in companies without declaring capital gains distribution.

More reasonably, it seems that the government should just get rid of taxation on capital gains distributions. It would allow fund managers more flexibility when choosing stocks and stop punishing all us little guys in the world.

Until the Government gets some common sense it would be prudent to check with your funds to see if there is a big gain distribution looming. You might be wise to sell some of these funds to miss the distribution. But don’t forget wash sale rules.