The Curious Problem of Gold and Silver Coins as Legal U.S. Tender

by: Tim Iacono

The idea that gold and silver coins are still legal tender in the U.S. has always struck me as one of the more intriguing aspects of our monetary system, a system that appears to teeter a bit more each and every year, its fate sure to be the same as all prior fiat money systems throughout history - they never end well.

The notion that a quarter or a dime from the 1950s or early-1960s that contains 90 percent silver might be worth ten times its face value seems like more of an oddity than anything else since the values are so small.

A dime being worth more than a dollar really isn't that big a deal until you get a whole bag full of them. Then you can sell these coins with a face value of $1,000 for more than $10,000 (maybe $11,000 by the end of the day given how metal prices are soaring).

The name "junk silver" really doesn't do these coins justice as the real "junk" is clearly what followed silver quarters and silver dimes, the citizenry promptly removing them from circulation after the government discontinued them - something about bad money forcing out good money as Gresham once said.

But, gold presents a whole new set of math.

Currently about 63 times as valuable as silver by the ounce (roughly $960 an ounce versus $15 an ounce), the U.S. Mint continues to produce these coins with dollar values printed right on their face.

As shown to the right, a one-ounce American Eagle will get you $50 if you take it to a bank, but, if you wander into a coin shop, you'll be able to get almost 20 times that amount.

Though it's not clear what a bank teller would actually do if confronted with a customer seeking to make such a deposit (a smart one would surely exchange some of their own paper money and pocket the difference), it sets up a host of other odd possibilities.

Say, for example, you wanted to buy a house that costs $400,000 in paper money using gold coins. Could you specify the purchase price as $20,000 payable in gold coins?

That would surely create some interesting questions as far as the Internal Revenue Service was concerned and both the buyer and the seller would likely watch the gold price like a hawk, probably demanding an exceptionally quick escrow.

What if you ran an entire business where payroll transactions were based exclusively on these "legal tender" gold coins? All of a sudden, a salary of $40,000 would turn into income of just $2,000 and Uncle Sam would surely not be happy about the tax implications of that adjustment.

Well, there just so happens to be such a business in Nevada and, according to this report in the Las Vegas Review Journal, many of the above questions are about to be answered as they are about to have their day in court.

Robert Kahre, who owns numerous construction businesses in Las Vegas, is standing trial on 57 counts of income tax evasion, tax fraud and criminal conspiracy. If convicted on most counts, he could live out his life in prison.

But attorney William Cohan paints Kahre as an American "hero" who believes his payroll system helped keep the U.S. monetary system sound, and was also a form of legal tax avoidance.

A self-made entrepreneur, Kahre, 48, paid his workers in gold and silver coin, and said they could go by the coins' face value -- rather than the much higher market value of their precious metal content -- for federal tax purposes. He did not withhold taxes from their wages, and he provided the same payroll system to 35 outside clients, which were other local businesses.
Kahre contends his workers had agreed to be independent contractors, so he did not have to withhold taxes for them. His six businesses are in the trades of painting, drywall, tiling, plumbing, heating-cooling and electrical work.

Further, the $50 gold coins and the silver dollars Kahre used for payroll are designated by Congress as legal tender, so people are entitled to value them at their stamped denominations, he also contends. Taken at face value, each defendant's annual coin income placed him below the threshold for filing a federal tax return.
Cohan described Kahre's payroll system as a "boycott of the Federal Reserve." But when the lawyer attempted to elaborate on Kahre's view that the nation has debased its paper currency by abandoning its former gold standard, Ezra added, "We're not here to convince the jury that the ... (U.S.) monetary system belongs to an international cabal."

Fascinating stuff...