How the tax code works for billionaires


54 Responses to “How the tax code works for billionaires”

  1. Mitchell Glaser says:

    It is clearly time to take the money from the rich people and return it to those who actually work and produce things. Of course, I am the ideal person to be put in charge of the redistribution project.

  2. coffee100 says:

    They shorted their own stock.  They had an equity interest in reducing the value of their own company.  

    Is this capitalism?  Is this American?

  3. When people short stock they’re taking a huge risk. If I sell stock I don’t own at, say, $50/share, and it goes UP to $75/share, then eventually I am forced to cover my short-sale and have to actually cough up the shares in question, buying them for more than I sold them for (or, in the Lauders’ case, taking them from my personal inventory). There’s only a financial advantage to short-selling if you think the stock is overpriced.

    I’m not sure I really understand the hubbub. You or I can do this same thing if we want to (and some of us, including other BB commenters, I’m sure, have done so). And when you buy that stock, to cover the short-sale, you are still in fact subject to the standard capital gains taxes.

    Tax-DEFERMENT is not Tax-AVOIDANCE. You’re just postponing the inevitable.

    • scolbath says:

      The distinction here is that they are shorting stock that a relative owns, and with whom they probably have an agreement not to sell – meaning that they won’t have to cover the short and pay the gains.  And since they already own the exact shares, they never have to go out to the market to cover even if the stock shoots up.

      Your point that this is avoidance is technically correct, but using this technique allows them to ‘kick the can’ by many years.  Even if the tax rate goes up, they’ve had the use of that money for a lengthy interval – years to decades.

      • If they shorted it, then by definition they sold it. That’s how they received the cash in the first place, which is the whole point of the article. They borrowed the shares and sold them (which, since they no longer own them, puts them in the hole for XXX,000 shares), against the XXX,000 shares which they DO own, making them position-neutral. If they borrowed them and DIDN’T sell, they’d be “up” the additional shares, and not position-neutral.

        So, at least according to the facts presented in the article, they are on the hook for covering their short-sale (from existing holdings or from market-purchases) if the stock rises.

        (Edited to clarify position-neutrality)

        • scolbath says:

          You are correct – they are on the hook – but you don’t have to cover a short unless the person from whom you borrowed the shares sells them out from under you.  And presumably, that won’t happen in this case.  Of course, I’m sure there could be a case where things get acrimonious, but my guess is that Lauder had all this in writing…!

          • Well, at some point the stock-lender is going to want money from the short-seller, and unless they’re magnanimous, they’re going to want current-market-value for it and not its value from weeks/months/years ago. So I’m not sure how this is in any way “overly advantageous” for the short-seller.

          • scolbath says:

            Because of time value of money.  Let’s say you keep this game going for 15 years:  the short seller has had a 15-year interest free loan that they get to pay off with (assuming they set the short up today) 2026 dollars, paying whatever the cap gains rate is at that time, and realizing whatever additional gains may have occurred after the short sale, if any.  It’s always better to pay with tomorrow’s dollar than today’s.

            And that’s if the stock goes up!  If the stock tanks, my guess is that they’ve played with the float for 15 years, will profit from the short (and yes, probably pay taxes on that), but then get to write off the capital loss! 

          • coffee100 says:

            > Well, at some point the stock-lender is going to want money from the short-seller

            They don’t get money.  They get their shares.  If the short seller pays the stock lender directly it becomes a put option with a floating strike price.

          • Snig says:

            Also, you and I are not privy to insider information that a heir to the family fortune would be. This would enable them to time buying/selling. Yes, there are laws/controls put in place when a major change in the company is made, but the information that “nothing exciting is going to be happening internally over the next few weeks” is valuable info that they may have that you and I wouldn’t. And should the company’s stock show signs of improvement during a short, the people who control the company could easily spike the stock with any matter of activities.   These are not options available to a small investor.

          • LordBlagger says:

            Like all those car companies selling cars they haven’t built. Imagine selling something that doesn’t exist. 

          • Antinous / Moderator says:

            Like all those car companies selling cars they haven’t built. Imagine selling something that doesn’t exist.

            Where do you live that people buy imaginary cars? Here in the US of A, we mosey on down to the dealership and drive one off the lot.

          • Michael Hasse says:

            “Like all those car companies selling cars they haven’t built.”

            “Where do you live that people buy imaginary cars? Here in the US of A, we mosey on down to the dealership and drive one off the lot.”

            And those would often be (some of) the cars in question, a year or so later!  It is quite common for the auto manufacturers to “sell” cars to dealers in one quarter to boost their numbers, then have them “returned” the next quarter.  Yes, it’s stupid, and it doesn’t really do much for the long run, but it has a few advantages:
            - any retiring VIP can take a larger than normal bonus and leave the downside to his successor
            - a badly-selling model can be kept out of the trade magazines by masking the true sale numbers
            - annual numbers can be made to look better with 364 days to make it true
            - dealerships can get better bank rates with more inventory (supposedly) on the lot as collateral
            etc etc

    • Paul232 says:

      Of course you’re correct, but falling on deaf ears around here.

  4. LordBlagger says:

    Any one can do this. 

    If you want to lock in a profit in tax sheltered investment, you spread bet (at least in the UK). Bets are tax free, as is the extra profit and loss in the tax sheltered investment.

    If you have the share in a non tax sheltered set up, then you use a CFD. That way you can offset losses against gains. 

    Far from being for the rich only, its a sensible strategy. 

  5. KWillets says:

    “Any taxpayer lucky enough to have appreciated property is usually put to a choice: cash out and pay some tax, or hold the property and risk the vagaries of the market”

    Property can be used as collateral for a loan instead of selling it.  That’s what a mortgage is, or a margin loan on stock.  Neither of these instruments is restricted to the ultra-rich.  People cash out their home equity all the time without a taxable event.

  6. bargainoutlet says:

    I think Boing Boing needs to have these kinds of technical financial posts double checked by someone familiar with these things before posting them. I am not for the 1% but you have to be accurate when making certain allegations.

  7. aynrandspenismighty says:

    Look, if you’re not going to tell us what OWS wants were just going to keep saying ‘get a job and take a bath, hippies.’

  8. Brian Sprague says:

    You mean “How the tax code used to work for billionaires 14 years ago.”

    “[T]he Taxpayer Relief Act of 1997 (TRA97) no longer allows short selling against the box as a valid tax deferral practice. Under TRA97, capital gains or losses incurred from short selling against the box are not deferred. The tax implication is that any related capital gains taxes will be owed in the current year.”

    • KWillets says:

      This loophole only applies to the 1% who can afford time machines to go back to the past and use it.  So unfair!

      • sgtdoom says:

        Wiser words were never spoken, and you may or may not be aware of the classic Louis B. Mayers’ tax clause, circa early 1950s, when he hired attorneys to pay off congress critters to insert a customized clause allowing him to keep much of his fortune after retirement — it was specifically written such that ONLY Mayers would benefit from this clause, as it affected no one in his situation afterwards (after the date of this tax clause), only prior!

        And far too much, most likely every single page, of the Internal Revenue Code is written like this!

        • Michael Hasse says:

          Virtually every Wisconsin coal-mining company operates tax-free due to tax code loopholes that are known only to those who wrote them.  They’re very generic-sounding of course, but only a few specific companies fit the criteria defined.

    • Snig says:

      If you read the article, you’d know it was mentioned because the Lauder heirs are the ones who inspired the law, after they avoided paying $95 million in taxes.  The article is more about the current means they use to avoid taxes, none of which work well on a small scale.

    • frankiestout says:

      There is still a modicum of benefit to shorting against the box. See here:

      “You first must close out your short position by the 30th day after the end of the tax year in which the transaction occurred, says Tesser. For most investors, this would be Jan. 30 of the following year. But for those of you whose tax year ends on, say, June 30, you’d have to close the position by July 30. Then, beginning on the day the short position is closed, you must hold the original long position for at least another 60 days. This must be a “hold naked” position for the entire 60 days. That means you can’t use options to reduce your risk on these shares in any other way. So if you sell short against
      the box in January, you can hedge yourself for nearly 13 months, maximum, as long as you’re willing to be unhedged for another 60 days after that.”

      Speaking as a former margin clerk, you still see the occasional short against the box transaction from someone who wants to take advantage of the now sharply decreased tax loophole it creates. From what I could tell, most of the people who short against the box nowadays are not quite as clever as they think they are, and the short against the box is often part of a larger scheme of manipulations that may or may not work as intended. But, as we all know, the Cheney administration severely cut funding for IRS enforcement, and FINRA is considerably more toothless than its constituent agencies used to be. So you might just get away with it (whatever “it” is), if you’ve got a decent tax lawyer & accountant.

  9. cservant says:

    I’m not sure how taxes apply on shorting in the States.  It’s not a capital gain?

    However, I thought it was illegal, if not questionably unethical to short your own company.

  10. eFarther says:

    First, if you’re going to introduce an article about something then the introduction “…blah…donating millions of dollars’ worth of art to their own charitable trusts, then taking a gigantic tax write-off. blah…” should relate to the excerpt “…blah…by using a hedging technique known as shorting against the box. ” No connection between the two at all here.

    Second, going “long” is often hedged by going “short”. That’s normal stock market stuff. Nothing illegal nor immoral there.

    Third, donating to your own charity is also not illegal nor immoral. But it is a great idea!

    Fourth, making money is all a numbers game. If you “invest” $25 million and I invest $2500 and the payoff is 10% then you make $250,000 and I make $250. We both make 10% since that’s the return, no more, no less. Nothing illegal nor immoral there either. Be sure to adjust your thinking properly before judging someone’s return on an investment.

    • jerwin says:

       If you “invest” $25 million and I invest $2500 and the payoff is 10% then you make $250,000 and I make $250

      And somehow 2.25 million dollars of my profit disappears into a nebulous collection of tax shelters, deferred and hedged until someone is foolish enough to enact a tax amnesty.

    • frankiestout says:

      “Third, donating to your own charity is also not illegal nor immoral. But it is a great idea!

      Read up on the ways that trust management fees are used by wealthy individuals to manipulate their taxable income. A lot of this so-called “charity” has exactly one beneficiary: the rich person who contributed the money in the first place.

    • sgtdoom says:

      “..donating to your own charity is also not illegal nor immoral..”

      No, but the matter they have historically done so, is indeed unethical, amoral, and absolutely destructive of the tax base.

      Example:  they purchase a work of art for $10,000 then donate it to a museum while claiming its value at $60,000, thus writing said donation on their taxes, and realizes a $50,000 profit at the expense of the tax base (i.e., taxpayers, etc.).

      And there are far more extensive tax evasion and tax avoidance schemes than that.

      Every American should have read Ferdinand Lundberg’s The Rich and the Super-Rich.

  11. Richard says:

    This type of short selling is available to virtually everyone that want to participate. There is inherent risk involved. If this is the best example of how the1% avoid paying taxes then you better change your tune or do some more homework. This example does not avoid paying tax it only postpones the inevitable. They could lose their shirts in this example! 
    This article is an example of how the media wants to portray the rich, greedy self centered people when in fact it is the media that are greedy for headlines, which means more readers and viewers which translates to more profit. I would say the greedy here are not the Lauders but media and the the Professor from Colorado!!! Look in the mirror please! 

  12. Kurt says:

    The problem isn’t shorting, it’s “shorting against the box” — shorting stocks that they already owned.

    Let’s say Mr. L owns 50,000,000 shares of company E.  If he sells 12M shares, he’ll owe capital gains taxes on the sale.  If instead, he borrows 12M shares from a relative, and sells those (thus shorting the stock), he doesn’t owe capital gains taxes (they weren’t his shares he sold, they were the borrowed shares), and if the price goes down, he can cover the short from the market.  If on the other hand, the price goes up, he can cover the short from his own stocks.  The problem is even though this later case is generally identical to if he had sold his own shares (he is down 12M shares, for which he was paid), it was not being taxed in the same manner as a sale.

  13. curveclimber says:

    @ Derek: You seem quite adamant that this is nothing out of the ordinary.   My question to you is, then why would they go to all this trouble?  Somehow this is giving them an advantage.

    • Michael Hasse says:

      “My question to you is, then why would they go to all this trouble?  Somehow this is giving them an advantage.”

      Same reason you would take deductions on your taxes for contributions to non-profit charities.  It (was) a valid option for tax avoidance/deferral.  Everybody does things like this, just thee and me usually do it for less-than-newsworthy dollar amounts.  :)

  14. Layne says:

    In other news – the NYT itself engages in the same kinds of practices that they’re busy smearing the Lauder family over:

    Hypocrisy – how does it work? 
    So the big revelation churned up by all this investigative journalism is that people like to keep their own money and will use most legal means necessary to keep it from being hoovered up by the taxman?

    To the barricades!

    • millie fink says:

      Do you work for

      I’ve been wondering just who funds it. Not that its paid promoters would know.

      I was on a campus the other day where some sidewalk theater was going on. Anti-security-state theater, wherein youngish people acted out an extreme airport scenario (a guy got his book taken away). “Do you want the government interfering in your life like this?!” A few students who’d stopped to look shook their heads no, then took the offered pamphlets. Turns out the agitprop was put on by a Libertarian group. A completely student-run Libertarian group? I doubt it.

      The tentacles of the Koch Bros. and their ilk are long, subtle, and slimy promoters of the supposed Virtues of Selfishness. They sure do get around a lot these days.

      • I’ve worked and taken classes on college campuses were there were, in fact, completely student organized conservative and libertarian organizations. And one of these colleges I’m speaking of is probably in the “top 5 most liberal of liberal arts” schools you would think of. 

        It is possible for students to reach opinions other than the ones we might hold dear, even on college campuses where such thinking runs counter to the norm.

  15. millie fink says:

    even on college campuses where such thinking runs counter to the norm.

    Yeah, they’re real rebels, those radical, Libertarian-minded college kids.


  16. hinten says:

    Shorting against the box is illegal at this point.
    I thought I would point that out since the article obfuscates that point by simply stating: “Under I.R.S. rules at the time.”

    As usual, it’s up to the reader to decide if they are purposefully being mislead or if this is a simple omission for clarity sake.

  17. sgtdoom says:

    We don’t pay taxes; only the little people pay taxes. – Leona Helmsley

  18. Cameron Huff says:

    Wow.  I currently owe the IRS $800 plus dollars and I can’t pay it.  They have sent me a nice threatening letter saying they will grab my property to pay the debt I owe (no I can’t file for bankruptcy cause it would cost money that I don’t have).  But these ‘people’ owe millions or billions in taxes and the IRS simply looks the other way and does nothing.

    What a f**ked up country this is…

    • The difference is your tax was DUE at some point in the past, and their tax is DUE at some point in the future. 

    • Michael Hasse says:

      Filing for bankruptcy wouldn’t help you anyway, taxes owed are exempt.  The IRS does, however, have various repayment options which are actually quite reasonable and if you can demonstrate hardship, (which you probably can at this point!), you can get complete deferment for a year at a time for up to several years.  Additionally, while you will have to pay interest, the accumulated penalties can be waived if you request it and have a good story (w/documentation of course) for why things all fell apart.  If your local IRS agent is not helpful you can also (politely!) request that your case be assigned to somebody else.  A good accountant helps a lot as well as they have more direct access to IRS records and often know more about such things than the agents, especially if they deal with IRS audits on a regular basis.  HTH – good luck!

  19. flyoverland says:

    Uh, if they donated cash or property, its no longer theirs. How is that avoiding taxes? If they would have kept the money, they would have been better off paying the tax. Also, shorting is not some obscure tactic. Its done millions of times a day by all types of investors. Again, they didn’t avoid the tax, they only postponed it. Some day, they will have to cover the short. The difference between the price where they put the short and a lower price will be taxable as a capital gain. If the stock goes up, they will lose money on the deal. The only way you can avoid taxes on a short sale is if the company goes bankrupt. That is one loophole. Because you can never cover the short, no tax is due. This really isn’t a great example of people avoiding taxes. 

    • Michael Hasse says:

      “Uh, if they donated cash or property, its no longer theirs. How is that avoiding taxes? If they would have kept the money, they would have been better off paying the tax.”

      In two ways.  First, the property usually remains in their possession until death.  Second, the write-off amount is for the “value” of the piece, *not* what they actually paid for it, so it can actually shelter more than the (no longer) taxable cash value.

      • Under most circumstances, you can not take a deduction for a value higher than your acquisition cost. See IRS Publication 526 for details.

      • flyoverland says:

        Why shouldn’t they get the value of the item they donated? If they sold it, would they get the current value (more or less) or what they paid for it? Your argument doesn’t make any sense. I made a six figure donation this year. I didn’t get to keep it. Its gone. Out of my control. Now owned by a university. 

  20. Vincent Maldia says:

    a book on how the 99% can also do that would sell like hotcakes.

    the law is the law. as the saying goes, it may be harsh but its the law. If you dont like it, petition to have the law changed by your congressman. And in fact, thats what happened

    the aricle says “that Congress later enacted a law forbidding the tactic,”

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