The early returns are in; What is an abusive tax shelter?; and Congress is back until the Easter Recess
1. The tax preparers are busy at work, and the early returns are in: income is up, taxes are up and there is lots of money to pay the taxman
Income is up, taxes are up, and there is money to pay the taxman, are good signs, but just as election results have exit polls, we have exit polls, and the news is: 'short term capital gains, including gains from mutual funds are WAY UP.' What happens when there are short term capital losses, and no short term or long term capital gains? These losses, as we know, are limited to $3,000 per year, which is not very exciting if you are in your 70's.
Suppose all those early filers were told that all market gains [short and long], up to $750,000, could be deferred if reinvested within 180 days, what would the early filers do? What if they were not told about that tax option by their tax preparer? Suppose it was $50,000 and 60 days to reinvest, would that make a difference? What if the numbers were $2M and 180 days to reivest or $250,000 and 60 days?
The numbers of $500,000 and $1,000,000 of lifetime market gains, subject to annual limitations of $50,000 for individuals and $250,000 for corporations is currently the law under IRC Section 1044, and has been since 1993. Is it possible that individual taxpayers have had $500,000 in market gains since 1993?, and corporations, which are not entitled to capital gains [California has no capital gains for individuals or corporations], have had $1,000,000 of market gains since 1993? Have they been told by their tax preparers that these gains could have been deferred if reinvested per IRC Section 1044?
2. UCLA is a great university, and is well known to many
In 1964, John Wooden, the then college basketball coach with the greatest number of NCAA Championships began his ten year [1964- 1974] run at the NCAA Final Four Play Offs, and we have seen many of them, including his last in San Diego in 1974.
We also found out in 1964 what an 'abusive tax shelter' was, when the U.S. Supreme Court, in a 5 to 4 decision, upheld a Ninth Circuit Court of Appeals decision for a taxpayer who had sold their Oregon Corporation to a charitable foundation located at the UCLA Medical School, and then promptly leased it back, on the advice of the charity's tax lawyers.
The Supreme Court does not take many tax cases, but when they speak everyone listens, and in this case Congress changed the law [The swing vote in the 5 to 4 decision strongly suggested that it was not the Court's role to clean up the tax law; that is the role of Congress he said]. Today 46 years later, the jury is still out, but the stakes are getting higher; if it's an 'abusive tax shelter' there are serious penalties. Has that stopped the charitable foundations and their creative Beverly Hills law firms? Not if you read the full page ads in the Los Angeles Times in December of last year. They are as busy as ever, with the Supreme Court's 5 to 4 decision to support them.
3. Tax savings begins at home and within 60 days changes are coming according to the little birdy
Congress and the President, and the Presidential Candidates are all chasing the ear of the voters, and their lobbiests, for their votes and their MONEY; and based on the early returns we will see tax legislation sooner than later. (Check the TaxAnalysts.org website for this and other related home-based and small business tax topics.)
Yesterday the House Ways and Means Committee in a voice vote passed the Seniors' Social Security Tax Relief Act, which is retroactive to December 31, 1999, and the full House may pass it today on a voice vote.
The Senate is working on their Education Tax Package, and just added tax incentives for teachers [The Teachers' Unions are one of the biggest, and they have carried the day for Vice President Al Gore]. That will be passed this week, with the House in hot pursuit. Small Business Tax Relief has been passed in the Senate, and is ready for a vote in the full House. The Marriage Penalty Relief Act is ready for the Senate Finance Committee. (Check the TaxAnalysts.org website for this and other related home-based and small business tax topics.)
Quietly, amongst all this noise is one of the biggest tax changes we have seen in many a year, the change to IRC Section 1044, as noted above. $750,000 in market gains [short or long term] for individuals, and $2M for Corporations, all available at once, effective for all gains realized after enactment [you heard that first here] is about ready to be passed with the full support of the President and the House of Representatives.
If you want the latest results check out www.TaxPlanet.com, or if you really want to become a tax aware person, with online seminars and all check out www.financiallearning.com which was launched yesterday by GE, the owners of MSNBC [they started touting GE's new financial planning Web Site, with appropriate disclaimers of course, on their COOL SITE of the day on MS-NBC]. For a quick check of your potential tax liability for 2000 check out this site, with a little editorial bias, of course.
As an aside, the Supreme Court is not always right, but they have the final word. The Tax Court is not always right, and the Court of Appeals are very often split in their review of Tax Court tax opinions, especially when dealing with the 'intent of a taxpayer' in search of an economic profit.
Does having a Web Site, telling everyone that you want an 'economic profit,' make your case? Is Amazon.com., Inc., which lost $700M last year, and never has had a profit since formation an 'abusive tax shelter?' What about biotech companies that must get FDA approvals? What if you advertise your Web Site in the Print Media, or on TV, or Cable? What if you give the product away for FREE such as they did with Netscape or Blue Mountain Card Company? Is that an 'abusive tax shelter?' This is the New Economy.
In 1974 a building in downtown San Diego was purchased for $500,000 and within days it was resold for $5,000,000, the Supreme Court ruled that this was not a legitimate deal, the price was too artificial. Today that same building was sold for $5M and is being converted to work/live lofts, or a boutique hotel, just like the historic building across the street, and its value may be $10M.
However, if the new owners charge 50% of market rent, and take stock for the remaining 50%, at $01 per share from their DOT-COM tenants [It becomes a DOT-COM Incubator] who knows what the value may be.
A group of college professors from UCSD started a company in San Diego in 1985 and the insiders, including the then UCSD Chancellor, invested at $.01 per share and are now worth between $275M to $3B individually. College professors from UCLA did the same in 1996/7. Now that is serious money.
If the Supreme Court is asked again, in 2004, if these college professors and their friends invested their money for a profit or for tax losses, when they bought a historic building and called it a DOT-COM Incubator, what will the 'fianl answer be,' for profits, of course, it is the New Economy].
Jim Schneider, LL.M.
The Taxman86 Speaks... is copyright 1998-2010 by James E. Schneider, LL.M. Inc.