U.S. BILLIONAIRES PAY NO TAXES
Dr. Pinna says:
Below, we print excerpts from an article in Bloomberg describing how U.S. billionaires avoid paying taxes to the IRS, and hence cause other Americans to pay more.
What is not described is how the IRS intimidates low income tax payers who have no accountants and other professional defenders to pay more than they should by claiming they underpaid their taxes.
In addition, it does not describe the trillions of taxes not paid by U.S. conglomerates such as GE and GM, etc., who keep their foreign earnings off shore and also use such complex techniques of tax avoidance that the simple minded IRS agents cannot decipher the hidden nuances and these corporations end up paying nothing.
Also, if the IRS does insist on payments, the tax avoiding individuals and companies go to court and their attorneys, much better trained and paid than government attorneys, almost always win.
The bottom line? The USA like the EU is too big and too complex for the ordinary citizen. The big fat cats will always win and the lowly citizen will always lose.
U.S. Billionaires Avoid Reporting Gains to IRS
By Jesse Drucker, From Bloomberg
When billionaire Billy Joe “Red†McCombs, co-founder of Clear Channel Communications Inc., reported a $9.8 million loss on his tax return, he failed to include about $259 million from a lucrative stock transaction.
After an audit, the Internal Revenue Service ordered him to pay $44.7 million in back taxes. McCombs, who is worth an estimated $1.4 billion and is a former owner of the Minnesota Vikings, Denver Nuggets and San Antonio Spurs sports franchises, sued the IRS, settling the case in March for about half the disputed amount.
McCombs’s fight with the IRS illustrates an overlooked facet in the debate over tax rates paid by the nation’s wealthiest. Billionaires — from McCombs to Philip Anschutz to Ronald S. Lauder — who derive the bulk of their wealth from stock appreciation are using strategies that reap hundreds of millions of dollars from those valuable shares in ways the IRS often doesn’t classify as taxable income, securities filings and tax court records show.
“The 800-pound gorilla is unrealized appreciation,†said Edward J. McCaffery, a professor of law, economics and political science at the University of Southern California in Los Angeles.
While Warren Buffett has generated attention with his complaints that he and his fellow billionaires pay federal income taxes at a lower rate than his secretary — about 17 percent — the real figure is often smaller, said David S. Miller, former chair of the tax section of the New York State Bar Association and a partner at Cadwalader, Wickersham & Taft LLP in New York.
“The problem is not that people like Warren Buffett pay tax at a 17 percent rate, it’s that they can use complex transactions not available to most Americans to get cash from their appreciated stock without paying any taxes at all,â€Miller said.
Tip of Iceberg
The rate at which the 400 U.S. taxpayers with the highest adjusted gross income actually paid federal income taxes –their so-called effective tax rate -- fell to about 18 percent in 2008 from almost 30 percent in 1995, IRS data show. That’s the tip of the iceberg, since much of their wealth never converts into income on a tax return, McCaffery said.
In the McCombs case, the billionaire entered into transactions known as variable prepaid forward contracts. He received about $259 million for lending an investment bank his Clear Channel shares with a promise to deliver the stock for good a few years later. The arrangement enabled McCombs to defer paying capital gains tax because he hadn’t sold his shares, lawyers for the billionaire said. The IRS deemed the transaction a sale since the bank paid McCombs cash and got the use of his stock almost immediately.
Taxes on Millionaires
Transactions like these may complicate plans by U.S. President Barack Obama to help close the federal deficit by increasing taxes on millionaires. Obama has said the tax codeshould contain a “Buffett Rule†to ensure that millionaires pay taxes at least at the same rate as middle-class Americans. Republicans have said they prefer lowering tax rates for businesses and the wealthy. Buffett declined to comment.
In the past two years, some of the wealthiest executives in the U.S. have used deals similar to McCombs’s to reap returns while deferring the taxes without running afoul of IRS rules, securities filings show.
Dole Food Co. Chairman David H. Murdock received about $228.6 million in 2009 against his Dole shares — tax-free until he is scheduled to deliver shares in November 2012, a filing shows.
Starr International
Starr International Co., the investment vehicle run by Maurice “Hank†Greenberg — forced from his position as chairman and chief executive officer of American International Group Inc. (AIG) in 2005 — utilized a prepaid forward agreement last year to receive $278.2 million from an investment bank, according to a March 2010 regulatory filing. The investment vehicle isn’t slated to deliver the AIG stock until 2013.
Lauder received $72.9 million in June as part of a variable prepaid forward sale and is scheduled to deliver the Estee Lauder Cos. shares in June 2014, according to a filing with the U.S. Securities and Exchange Commission.
Realized Gains
While the tax treatment of these plans isn’t disclosed in the filings, “there’s no other reason to enter into such a convoluted arrangement,†said Robert Willens, an independent tax accounting analyst in New York. These arrangements can cost several million dollars in fees, according to tax planners.
Taxes on capital gains are triggered when assets like appreciated shares are sold — a process called realization. What constitutes a realized, taxable sale is a frequent bone of contention between the IRS and the clients of tax planners.
The IRS objected and claimed Winn and his partner should have reported a $12 million taxable gain. A U.S. Tax Court judge sided with Winn on one aspect of the deal; others were settled with the government. The details haven’t been disclosed.
Mark-to-Market
Miller, the former chair of the tax section of the New York State Bar Association, has proposed a so-called mark-to-market system to tax the annual appreciation in the stock holdings of the top 1/10th of 1 percent of taxpayers. That would essentially tax gains in a given year regardless of whether the shares are sold. In a 2005 article in the journal Tax Notes he estimated this approach would raise between $490 billion and $750 billion over a decade.
Borrowing against appreciated stock and real estate is a popular tax deferral strategy particularly as interest ratesplummet, said Randy Beeman, a private wealth manager at The Wise Investor Group in Reston, Virginia, a unit of Robert W. Baird & Co. The interest rate on loans to some wealthy individuals has hovered around 1 percent.
Benefits and Burdens
Over the years, the IRS has tried to crack down on such deals. In 2006, the agency declared that including a share loan meant these types of transactions were sales, triggering an immediate income tax obligation. In McCombs’s case, his lawyers contended that the share loan was separate from the first part of the transaction, and thus didn’t transfer the so-called“benefits and burdens†of owning the stock. He settled his case for $23 million in back taxes plus interest.
In 2010, a U.S. Tax Court judge found Philip Anschutz, the entertainment, oil and media investor, owed $94 million in taxes after he used transactions similar to the ones used by McCombs. Anschutz, identified by Forbes as the 39th richest man in the U.S., is appealing the decision.
Dr. Pinna says:
You see the technique… DON’T PAY. ARGUE. GO TO COURT. IF YOU LOSE, APPEAL. IN THE LONG RUN, YOU PAY NOTHING OR VERY LITTLE. SMART PEOPLE IN A FUZZY SITUATION NEVER LOSE.
THAT’S NATURE.
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