IRS Files Released of Super Rich

[Burnaby49]

Ms. Macomber did not get a little bit richer. The stock dividend was, in economic substance, a pure stock split; there was no transfer of money -- or any other kind of property -- from the corporation to her. In economic substance, the corporation simply divided each of her shares into smaller units, with her total remaining the same percentage of ownership in the corporation.

This has always, and continues, to astonish me. I have no idea why a stock split is considered an increase in wealth. It's just taking your 1/8th slice of a pizza you're sharing with friends and cutting it into two slices. You now have twice as many slices but exactly the same amount of the pizza.

[NYGman]

No one minds when you borrow money from a Home Equity Credit line instead of selling stock in your portfolio, to pay for a large expense. You are not taxed when you borrow those funds, and will only pay income tax on the money you earn to pay off the balance. If you can earn more from your portfolio then you are doing very well. Many non-wealthy people do this, a tax free advance on income, effectively. The fact that the more assets you have, the more you can borrow, and the more current tax you can avoid, it just kicks the can down the road. At some point you have to realize income to pay of the debt, this could be previously earned income, or newly earned income. You also still have to have the income to service the debt. Simple economics says the more you borrow, the higher the cost. While I guess you can also borrow the money to pay the interest, at some point you are going to have to earn money and pay back the loans, or tax on that income. It really is an issue of timing, but that is where they field may not be as level, ultra-wealthy estate planning and maximizing the step-up, results in taxes never being paid. So isn't this really an estate tax issue, driving the losses?

[The Observer]

No one minds when you borrow money from a Home Equity Credit line instead of selling stock in your portfolio, to pay for a large expense. You are not taxed when you borrow those funds, and will only pay income tax on the money you earn to pay off the balance.

True enough. But for those who fail to pay back the funds and received a forgiveness of the debt that was still owed after the foreclosure, the loan becomes income and is subject to being taxed. A great number of people ended up with tax liabilities that they did not expect to have after the sub-prime loan debacle.

[Famspear]

Ms. Macomber did not get a little bit richer. The stock dividend was, in economic substance, a pure stock split; there was no transfer of money -- or any other kind of property -- from the corporation to her. In economic substance, the corporation simply divided each of her shares into smaller units, with her total remaining the same percentage of ownership in the corporation.

This has always, and continues, to astonish me. I have no idea why a stock split is considered an increase in wealth. It's just taking your 1/8th slice of a pizza you're sharing with friends and cutting it into two slices. You now have twice as many slices but exactly the same amount of the pizza.

Exactly.

What a true stock split can sometimes do is make each share a little more marketable. Let's say you own one share of XYZ Corporation and the share has a current fair market value of $10,000. If the corporation executes a 100 for 1 stock split, you now have 100 shares, each share being worth $100. Your total fair market value is still $10,000. However, your shares are now easier to sell, because it's easier for a potential buyer to come up with a per share price than it was before the stock split.

[NYGman]

No one minds when you borrow money from a Home Equity Credit line instead of selling stock in your portfolio, to pay for a large expense. You are not taxed when you borrow those funds, and will only pay income tax on the money you earn to pay off the balance.

True enough. But for those who fail to pay back the funds and received a forgiveness of the debt that was still owed after the foreclosure, the loan becomes income and is subject to being taxed. A great number of people ended up with tax liabilities that they did not expect to have after the sub-prime loan debacle.

Agreed, the whole Cancelation of indebtedness and income thing always surprises people. It's not enough to have the debt forgiven, income tax on that windfall is hardly ever a consideration, and the 1099COD is often a surprise. But it makes perfect sense that it's income. You are essentially being released of your obligation to repay, resulting in the lender taking a loss, with the offset being income recognized to the extent of the forgiveness. It's no different to receiving that amount in the lottery and using it to pay of the debt. You would get taxed on that windfall, just as the forgiven amount is also taxable. Reminds me of some ploy I saw back in the day, where worthless debt was "purchased" by a SA company who didn't need to recognize COD income. The whole thing was a bit dodgy and I refused to work on it.

[Duke2Earl]

Cutting to the chase....it's a policy issue whether the super rich are paying enough income taxes. If we, as a society, want the super rich to pay more in taxes, it would be a relatively simple matter to change the law to accomplish that result. But people are not criminals to use the law to pay the least tax. If you don't like the result....change the laws.

[notorial dissent]

The usual reason for a stock split is that the share price has gotten, in some ones opinion, too high. The usual hope is that after the split the stock will again appreciate and that is where the increase in value comes in as there are now more shares more at a purchasable price.

[KickahaOta]

No one minds when you borrow money from a Home Equity Credit line instead of selling stock in your portfolio, to pay for a large expense. You are not taxed when you borrow those funds, and will only pay income tax on the money you earn to pay off the balance. If you can earn more from your portfolio then you are doing very well. Many non-wealthy people do this, a tax free advance on income, effectively. The fact that the more assets you have, the more you can borrow, and the more current tax you can avoid, it just kicks the can down the road. At some point you have to realize income to pay of the debt, this could be previously earned income, or newly earned income. You also still have to have the income to service the debt. Simple economics says the more you borrow, the higher the cost. While I guess you can also borrow the money to pay the interest, at some point you are going to have to earn money and pay back the loans, or tax on that income. It really is an issue of timing, but that is where they field may not be as level, ultra-wealthy estate planning and maximizing the step-up, results in taxes never being paid. So isn't this really an estate tax issue, driving the losses?

In the scenario where you're starting a company, no, it's not. A properly-used Roth IRA can break the income tax completely in that scenario. That's how Peter Thiel has managed to start with around $2000 in cash and amass $5 billion that -- as long as he survives until 2027 -- neither he nor his heirs will ever have to pay income tax on.

Here's how it works:

• You incorporate your new company.
• You start a Roth IRA with around $2000 of seed money, which you pay the income tax on.
• You use the seed money to buy shares in your new company, charging yourself a fraction of a cent per share. It is extremely difficult for the IRS to challenge the valuations set on stock in this way, especially since the IRS's budget for these sorts of investigations has been repeatedly cut. (Peter Thiel put in $1700 and bought 1.7 million shares of PayPal -- a tenth of a cent per share.)
• If your company busts, then you lose the money, as expected. Your only extra expense is the cost of setting up the Roth IRA.
• If your company succeeds and goes public, then the value of the shares in the Roth IRA explodes.
• Now you can start selling some of those shares, using the proceeds to invest in other companies, etc. Since all of these transactions are staying inside the Roth IRA, none of the capital gains are taxed.
• Once you reach age 59-1/2, you can start withdrawing the proceeds, and none of it is taxed.

[Arthur Rubin]

In the scenario where you're starting a company, no, it's not. A properly-used Roth IRA can break the income tax completely in that scenario. That's how Peter Thiel has managed to start with around $2000 in cash and amass $5 billion that -- as long as he survives until 2027 -- neither he nor his heirs will ever have to pay income tax on.

Here's how it works:

• You incorporate your new company.
• You start a Roth IRA with around $2000 of seed money, which you pay the income tax on.
• You use the seed money to buy shares in your new company, charging yourself a fraction of a cent per share. It is extremely difficult for the IRS to challenge the valuations set on stock in this way, especially since the IRS's budget for these sorts of investigations has been repeatedly cut. (Peter Thiel put in $1700 and bought 1.7 million shares of PayPal -- a tenth of a cent per share.)
• ...

Isn't that "self-dealing", illegal in an IRA? It's not a valuation question.

[The Observer]

The Wall Street Journal covers the Thiel Roth IRA here.

[Number Six]

Good grief. Are you serious? You really believe that an employee of the Internal Revenue Service would be doing the right thing by committing a felony under section 7213(a)(1) as long as the employee feels or believes that the information is "vital" to some sort of "public interest"? A "public interest" as defined by whom? Who gets to decide that people who believe in not violating Federal criminal laws have their "priorities off"? Any IRS employee who has access to the information?

No, pointing out that such conduct would be criminal is not "silly."

No point in pointing out the obvious Fam. Number 6 obviously believes that people who are following the law to the letter are some type of criminal. Every time one of his gurus post an article he links it and starts the whole argument anew. This time he's talking about a "whistleblower" who, at great risk to him/herself let us know that people aren't breaking the law and that, somehow, is a great justice.

I strongly disagree with your disparaging characterizations which verge into psychoanalyzing people. Your biases are clear and obvious. This is the type of sick delight at the stupid lower income tax protestors while defending the wealthy as somehow very productive. They just play the money game with sharp accountants and lawyers.

Actually those who will defend to the nth degree the wealthy while berating those who question their advantages as envious or harboring other unhealthy emotions--I find that extremely childish and warped as if those with wealth deserve any more advantages. The founders hated the concept of oligarchs, the aristocracy, inherited wealth and those who take advantage of others through advantage.

And this transparently false argument that those making arguments for more just taxation need to change the laws if they don't like them is based on that even being possible or likely given the huge armies of accountants, lawyers and lobbyists who can be called on to fight every attempt at laws where the wealthy would pay higher rates like they used to.

[Famspear]

I strongly disagree with your disparaging characterizations which verge into psychoanalyzing people.

I understand that you feel this way. What you describe as my "disparaging characterizations" are indeed in some sense "verges" in "psychoanalyzing" people. However, there is nothing wrong with that.

Further, I have stated in a related thread on July 10th that I have no expertise in psychology.

Your biases are clear and obvious.

No, my "biases" are not "clear and obvious." (You haven't even clearly identified what you believe my "biases" are.) If Congress wants to change the laws to impose additional Federal income tax on wealthy people, that's fine (fine with me, at least). (There is a big issue about whether Congress can impose a valid wealth tax -- a type of national property tax -- without first having an amendment to the Constitution, but that's a separate problem.)

This is the type of sick delight at the stupid lower income tax protestors while defending the wealthy as somehow very productive.

No, that's false. I don't feel any "sick delight", and no, I'm not "defending the wealthy". I suggest that you go back and re-read my posts.

Actually those who will defend to the nth degree the wealthy while berating those who question their advantages as envious or harboring other unhealthy emotions--I find that extremely childish and warped as if those with wealth deserve any more advantages. The founders hated the concept of oligarchs, the aristocracy, inherited wealth and those who take advantage of others through advantage.

You're wrong. Pointing out that some authors might have hidden psychological motivations for what they write in an article about wealthy people and the U.S. Federal tax system is neither childish nor warped.

And this transparently false argument that those making arguments for more just taxation need to change the laws if they don't like them is based on that even being possible or likely given the huge armies of accountants, lawyers and lobbyists who can be called on to fight every attempt at laws where the wealthy would pay higher rates like they used to.

No, that is incorrect. It is not a false argument. If (for the sake of "argument") we assume (as it does appear to be the case) that the authors of the ProPublica article want more taxation of wealthy persons (whether this be a new wealth tax or more income tax), then changing the laws is exactly what needs to happen if the authors want to achieve what they claim they want to achieve.

Yes, it is certainly possible that making those types of legal changes may be constitutionally or politically difficult -- or impossible.

[Famspear]

Cutting to the chase....it's a policy issue whether the super rich are paying enough income taxes. If we, as a society, want the super rich to pay more in taxes, it would be a relatively simple matter to change the law to accomplish that result. But people are not criminals to use the law to pay the least tax. If you don't like the result....change the laws.

Well said.

Here's another great quote from Duke2Earl from a while back:

[ . . . ] The actual hard truth is we have the tax system we have because we want it to be that way. Nobody wants a tax system that "makes economic sense." They want a tax system they can game and dodge and has personal goodies and loopholes. No evil god came down from outer space and imposed this system on us. We got it because we wanted it. Every time we have done anything whatsoever to make the system simpler or more logical it has lasted very few years before it is worse than ever.

--by Duke2Earl, March 15, 2015, at:

https://www.quatloos.com/Q-Forum/viewto ... f7#p185598

[JamesVincent]

Actually those who will defend to the nth degree the wealthy while berating those who question their advantages as envious or harboring other unhealthy emotions--I find that extremely childish and warped as if those with wealth deserve any more advantages. The founders hated the concept of oligarchs, the aristocracy, inherited wealth and those who take advantage of others through advantage.

And this transparently false argument that those making arguments for more just taxation need to change the laws if they don't like them is based on that even being possible or likely given the huge armies of accountants, lawyers and lobbyists who can be called on to fight every attempt at laws where the wealthy would pay higher rates like they used to.

Not a single person here has defended the wealthy. What they have done is point out that the law allows it. And as far as childish goes you own that one completely. It does not matter how many times the obvious is pointed out you degrade into fits because you don't get your way.

So passing laws is a false argument? And you wonder why you just got called childish? Don't like the laws then work to change them. Otherwise shut up.

None of these people screaming for a "fair" system actually want a fair system, they want a system that makes them feel superior. They envy the ones that have more and want them to share by force. Nothing at all to do with "fairness".

[The Observer]

Ok, the thread is taking a turn downhill. Locking it.