# Super-rich: how does this tax avoidance strategy work? **URL:** \ **Category:** Factual Questions\ **Created:** [June 11, 2021, 9:58am UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029 "2021-06-11T09:58:40Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [June 12, 2021, 8:57am UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/21 "2021-06-12T08:57:00Z")
Yeah…so? When you buy something for $100 you pay more tax than when you buy something for $10. Everyone gets that. No one complains about it. If you earn $1 million dollars you should pay more than a person who earns $100,000. Same thing. Not rocket science. BUT…the tax story shows Elon Musk and Jeff Bezos (to name two…there are more) paid ZERO taxes some years. So, literally, a person earning minimum wage paid more in taxes (not just tax rate) than the wealthiest men on the planet. Please explain how that is ok. ---
**Author:** ![Chronos](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/chronos/32/134_2.png) [@Chronos](https://boards.straightdope.com/u/Chronos)\ **Post date:** [June 12, 2021, 12:35pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/22 "2021-06-12T12:35:13Z")
[Moderating] How an investment scheme works, legally and financially speaking, is an appropriate topic for GQ. Whether it should work, ethically or morally, is not an appropriate topic for GQ. Stick to the GQ topic here, and if you want to debate the GD topics, start a new thread for them in GD. ---
**Author:** ![Princhester](https://avatars.discourse-cdn.com/v4/letter/p/3e96dc/32.png) [@Princhester](https://boards.straightdope.com/u/Princhester)\ **Post date:** [June 12, 2021, 12:58pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/23 "2021-06-12T12:58:18Z")
No one said it was OK. But as a basic factual point, IME the Buffett quote continually gets misrepresented as you did. ---
**Author:** ![DavidNRockies](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/davidnrockies/32/6279_2.png) [@DavidNRockies](https://boards.straightdope.com/u/DavidNRockies)\ **Post date:** [June 12, 2021, 1:05pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/24 "2021-06-12T13:05:53Z")
In light of the moderation above, I’d like to humbly point interested Dopers toward a thread I started a while back: > [@Do the rich pay their fair share?](https://boards.straightdope.com/t/do-the-rich-pay-their-fair-share/921817): > > I did a quick search and found very little specifically about this. In association with the latest story about DJT’s tax returns, I heard a statistic that the wealthiest Americans pay an average of 24% in Federal Income Tax. I presume they’re talking about [Effective Tax Rate](https://www.thestreet.com/personal-finance/taxes/what-is-the-effective-tax-rate-15102865). But Effective Tax Rate reminds me of an old joke in medicine: The surgery was a complete success, but the patient died. Sometimes, our definitions differ from the definitions used by others. According to [Pew Research](https://www.pewresearch.org/fact-tank/2017/10/06/a-closer-look-at-who-does-and-doesnt-pay-u-s-income-tax/): … Full disclosure: I generate zero taxable income from the existence or growth of this thread, but hope to capitalize on its rising post count when **Cecil** takes SD public in the near future \ ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [June 12, 2021, 1:14pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/25 "2021-06-12T13:14:34Z")
What did I do? ---
**Author:** ![glowacks](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/glowacks/32/5548_2.png) [@glowacks](https://boards.straightdope.com/u/glowacks)\ **Post date:** [June 12, 2021, 9:39pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/26 "2021-06-12T21:39:25Z")
> [@Tired\_and\_Cranky](#): > > 1099 exchange You should Google this. You get redirected to 1031 exchanges. That’s probably what you’re thinking of. There are a number of problems with this though. 1031 exchanges can only currently be done with Real Estate as of the TCJA. Even pre-TCJA, they could only be done with tangible assets, not securities. That’s not to say that you’re not mostly right about how these things might work, you just have the terminology wrong. Contributing appreciated assets to a partnership, or to a corporation you control, does not cause you to recognize gain. Very similar to a 1031 exchange, except that they aren’t really “like-kind” exchanges when someone is contributing, say, physical assets. The code section saying there is no gain for assets transferred for partnership interests is 721, and for controlled corporations it is 351. > [@Tired\_and\_Cranky](#): > > - Bezos find a bank that’s willing to lend him money to buy more interests in the LLC. > This is an investment expense, so the interest will be deductible. > - Bezos borrows $900 from the bank and contributes it to the LLC. This is a capital contribution. In return, Bezos gets 9 more units. He posts all 19 units (100% of the outstanding units) to the bank as collateral on the loan. > - The LLC distributes his $900 capital contribution back to Bezos. A return of a capital contribution is not a taxable event. There are rules for tracing the proceeds of loans to determine whether interest is deductible or not. Now I’m not 100% familiar with them, but I suspect that the IRS would look at this series of transactions and say the contribution of the $900 to the LLC and the $900 return of capital distribution are sham transactions with no economic effect - Bezos effectively would have the $900 he was loaned, and however he actually uses that money is how it is determined whether the interest is deductible. Do people get away with this sort of thing though? I’m sure they do. But that’s not something that we can fix in the law - we can only fix it by enforcing the laws we have. However, that’s just the issue of whether the interest is deductible. The general idea for people with appreciated assets whose sale would cause them a bunch of tax pain is to borrow against the assets, and periodically refinance when they need more cash and/or their asset values have gone up. This is the real way that money is made in real estate - leveraging yourself as much as possible to have as many properties as you can be going up in value while you have only 20% initial equity in them. You can do the same with other assets that continually appreciate as well, such as stock, though in most cases you can only borrow 50% of the value of stock, compared to 80% of real estate, as a cushion for the lenders to be able to get their money back in case the value of the stock falls. As to the step-up in basis and the avoidance of capital gains tax in this way, it’s somewhat mitigated by the estate tax. Now, it’s true that someone who dies with a billion dollars in cash owes the same in estate tax as someone who was the 100% owner of a billion dollar business they started with $1,000 of their own money, and as such avoided tax on most of that increase in value, while the guy with a billion in cash paid tax on all of the income. It’s really unconscionable to consider that we might force the guy to sell off part of his business to pay taxes on the unrealized gain if we’re taxing unrealized gain, plus it’s really hard to tell how much something is worth when it’s not publicly traded, so how would we be able to assess the tax? That said, I suppose I would agree that in addition to the estate tax, the estate should have to pay income tax on the hither-to unrealized gain. We need to value the estate in order to assess the correct amount of estate tax, so we’ll be able to say what the proceeds from the “sale” is. That sort of thing makes a lot of sense, and would fit in perfectly with the current taxation scheme. Estates already have to file income tax returns and pay tax on the income that the estate’s assets generates between the time of death and the distribution of the assets to the heirs (which is completely separate from the estate tax which is a tax on the total value of the estate at the time of death) and so there already is a procedure by which such income would be reported. ---
**Author:** ![Wesley\_Clark](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/wesley_clark/32/20581_2.png) [@Wesley\_Clark](https://boards.straightdope.com/u/Wesley_Clark)\ **Post date:** [June 13, 2021, 4:27am UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/27 "2021-06-13T04:27:51Z")
> [@mixdenny](#): > > Here is an article by Jonah Goldberg about why we shouldn’t tax wealth as opposed to income: > > [https://www.news-herald.com/opinion/outrage-over-billionaires-tax-returns-ignores-basic-facts-jonah-goldberg/article\_f1304342-caaf-11eb-b74f-e77337b8cb46.html](https://www.news-herald.com/opinion/outrage-over-billionaires-tax-returns-ignores-basic-facts-jonah-goldberg/article_f1304342-caaf-11eb-b74f-e77337b8cb46.html) The tax they do pay is capital gains which is 15-20%, vs an income tax which is almost 40%. Also that article was really misleading. Nobody is talking about taxing people for their wedding rings and baseball cards, unless their wedding rings cost at minimum 30-50 million dollars. Its like when they called the inheritance tax the death tax to make people who make minimum wage think they’ll be affected. Hes intentionally muddying the waters to mislead people about who is affected by a wealth tax. ---
**Author:** ![Cheesesteak](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cheesesteak/32/3694_2.png) [@Cheesesteak](https://boards.straightdope.com/u/Cheesesteak)\ **Post date:** [June 13, 2021, 11:59am UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/28 "2021-06-13T11:59:40Z")
How does step up in basis work with the estate tax? When Besos leaves me all his shares in Amazon, does the estate tax get its cut and then we step up the basis, or does the step up happen and estate tax takes nothing because there are ‘no gains’ to tax? ---
**Author:** ![Mighty\_Mouse](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/mighty_mouse/32/7776_2.png) [@Mighty\_Mouse](https://boards.straightdope.com/u/Mighty_Mouse)\ **Post date:** [June 13, 2021, 12:21pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/29 "2021-06-13T12:21:22Z")
When a friend died who had 11 rental properties (total value around 5M) the properties went to his kids with a tax basis of the value at the time of his death. So even though he had deducted several million dollars in depreciation over the years, none of that was recaptured when the kids sold the properties. They actually had capital LOSSES on the sales because of transaction costs (commissions, legal fees, etc). And no estate tax either federal or state either. For Bezos type of money, I’m sure there are many other ways of structuring the estate to avoid inheritance taxes. I’m not paying tens of millions in legal fees a year, so I don’t know what those are. ---
**Author:** ![Falchion](https://avatars.discourse-cdn.com/v4/letter/f/a88e57/32.png) [@Falchion](https://boards.straightdope.com/u/Falchion)\ **Post date:** [June 13, 2021, 2:47pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/30 "2021-06-13T14:47:17Z")
> [@Cheesesteak](#): > > How does step up in basis work with the estate tax? When Besos leaves me all his shares in Amazon, does the estate tax get its cut and then we step up the basis, or does the step up happen and estate tax takes nothing because there are ‘no gains’ to tax? Unless I’m mistaken, the estate tax will be owed on the total value of the estate, so you would have to liquidate enough assets to pay any estate tax (_and_, with the exception of a primary residence, the estate will also owe capital gains tax on any gains on the sale of the estate assets). ---
**Author:** ![Bootb](https://avatars.discourse-cdn.com/v4/letter/b/e19b73/32.png) [@Bootb](https://boards.straightdope.com/u/Bootb)\ **Post date:** [June 13, 2021, 3:04pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/31 "2021-06-13T15:04:04Z")
> [@Wesley\_Clark](#): > > Its like when they called the inheritance tax the death tax to make people who make minimum wage think they’ll be affected. Hes intentionally muddying the waters to mislead people about who is affected by a wealth tax. Please enlighten us–at what times _other than_ death does the inheritance tax come into play? I eagerly await your answer. ---
**Author:** ![k9bfriender](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/k9bfriender/32/3283_2.png) [@k9bfriender](https://boards.straightdope.com/u/k9bfriender)\ **Post date:** [June 13, 2021, 3:08pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/32 "2021-06-13T15:08:25Z")
> [@Bootb](#): > > Please enlighten us–at what times _other than_ death does the inheritance tax come into play? It seems as though you have somehow entirely misunderstood the point that @Wesley_Clark was making here. Please enlighten me as to how many people are actually affected by the inheritance tax. ---
**Author:** ![DavidNRockies](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/davidnrockies/32/6279_2.png) [@DavidNRockies](https://boards.straightdope.com/u/DavidNRockies)\ **Post date:** [June 13, 2021, 3:34pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/33 "2021-06-13T15:34:14Z")
It’s never too difficult to rile up the _**[temporarily embarrassed millionaire](http://www.temporarilyembarrassedmillionaires.org/)**_ cohort, is it ? ---
**Author:** ![LSLGuy](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lslguy/32/5813_2.png) [@LSLGuy](https://boards.straightdope.com/u/LSLGuy)\ **Post date:** [June 13, 2021, 3:47pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/34 "2021-06-13T15:47:38Z")
> [@Bootb](#): > > Please enlighten us–at what times _other than_ death does the inheritance tax come into play? I eagerly await your answer. That seems like a deliberate misunderstanding. A “sales tax” is a tax levied on (generally all) sales. An “income tax” is a tax levied on (generally all) sales. So an unsophisticated reader would naturally assume a “death tax” is a tax levied on (generally all) deaths. Conversely, under current US law, inheritance taxes are levied on a pretty small fraction of all inheritances and a truly tiny fraction of all deaths. IOW it’s typical old-style political polemic that mostly misleads without _quite_ outright lying. This being GQ I’ll stop right here with my bumper only slightly into the intersection. ---
**Author:** ![Mighty\_Mouse](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/mighty_mouse/32/7776_2.png) [@Mighty\_Mouse](https://boards.straightdope.com/u/Mighty_Mouse)\ **Post date:** [June 13, 2021, 4:11pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/35 "2021-06-13T16:11:13Z")
Deleted after seeing this is GQ ---
**Author:** ![Arcite](https://avatars.discourse-cdn.com/v4/letter/a/67e7ee/32.png) [@Arcite](https://boards.straightdope.com/u/Arcite)\ **Post date:** [June 13, 2021, 4:43pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/36 "2021-06-13T16:43:08Z")
Right, that’s why it’s called an estate tax and not inheritance tax. They’re not the same thing. ---
**Author:** ![Wesley\_Clark](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/wesley_clark/32/20581_2.png) [@Wesley\_Clark](https://boards.straightdope.com/u/Wesley_Clark)\ **Post date:** [June 13, 2021, 5:23pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/37 "2021-06-13T17:23:09Z")
> [@Bootb](#): > > > [@Wesley\_Clark](#): > > > > Its like when they called the inheritance tax the death tax to make people who make minimum wage think they’ll be affected. Hes intentionally muddying the waters to mislead people about who is affected by a wealth tax. > > Please enlighten us–at what times _other than_ death does the inheritance tax come into play? I eagerly await your answer. As others said you are intentionally misunderstanding my point. The estate tax only applies to estates over 11 million, but by deliberately trying to make people ignorant and misinformed, the right has convinced people who won’t have anywhere near 11 million dollars in assets that the tax will apply to them. Its a way to trick people in opposing policies that only affect the wealthy by misleading them into thinking people like themselves will also be affected. By the same token, Goldberg is using the same lies and misinformation by implying that wedding rings or baseball card collections will be subject to the wealth tax. They will not, the wealth tax proposals I’ve seen don’t even kick in until you have 32-50 million in wealth as a bare minimum. Nobody has a baseball card collection or wedding ring worth 32+ million dollars. ---
**Author:** ![md-2000](https://avatars.discourse-cdn.com/v4/letter/m/9d8465/32.png) [@md-2000](https://boards.straightdope.com/u/md-2000)\ **Post date:** [June 14, 2021, 4:10pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/38 "2021-06-14T16:10:46Z")
But what are the implications of a capital redistribution? If I contribute $900 to a corporation and get 9 shares, then when they “give back” the $900 doesn’t that cancel out the 9 shares? Or is the first $X of any corporation actually giving back capital (until invested capital is zero) not dividends on profits? Also, how could shares in _Avoidance LLP_ be valued at $100 per Amazon share it holds if their market value of the Amazon shares is $1000? You are effectively buying $1000 for $100. The effective value of the original shares should be the same as the current value of the Amazon shares. Recall the famous sewer tunnel robbery in Marseilles? News reports at the time suggested it would be difficult to determine the amount stolen from safety deposit boxes because France has a wealth tax, people must pay a percentage of their net worth each year (over a certain amount, I presume). As a result, wealthy people would hide some assets in cash and valuables in safety deposit boxes. If the worth of your wedding ring figures into your wealth tax in a significant way, either that’s one helluva ring or you’re being conned (like the inheritance tax) to think that a tax for the super-rich also applies to you. As for Musk - IIRC from the article I read, he paid $455M one year one of the highest total amounts of the list of top billionaires. The sensationalism of the reporting neglects to distinguish between value of stock etc. held, and amount cashed out for income. Unlike other uber-rich, I don’t hear of Musk (or Buffet for that matter) living a high life of expensive yachts, mega-homes, and lavish parties. Gates seems to have put much of his wealth toward charity, although he may be shopping for a new home. ---
**Author:** ![bump](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bump](https://boards.straightdope.com/u/bump)\ **Post date:** [June 14, 2021, 4:28pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/39 "2021-06-14T16:28:34Z")
> [@Tired\_and\_Cranky](#): > > It’s not income because we don’t define income that way. If we said, “income includes unrealized capital gains on stocks,” it would be income. Sure, but that’s not the way it is, and likely never will be. That would basically hamstring every single investor, from your fat-cat rich guys, to the little old ladies living off their 401k accounts. > [@Whack-a-Mole](#): > > BUT…the tax story shows Elon Musk and Jeff Bezos (to name two…there are more) paid ZERO taxes some years. So, literally, a person earning minimum wage paid more in taxes (not just tax rate) than the wealthiest men on the planet. > > Please explain how that is ok. You’re confusing wealth with income, and they’re not the same thing. Look at it this way; if you dig a hole in your backyard and find a giant lump of gold that weighs 500 lbs, and you wash it off and put it in your garage, you have wealth. But your income isn’t any different than it was before you picked up that shovel. Why would you suddenly start paying more in income taxes? You didn’t sell that lump of gold- it’s worth something, but your actual income did not change. ---
**Author:** ![Lightnin](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lightnin/32/180_2.png) [@Lightnin](https://boards.straightdope.com/u/Lightnin)\ **Post date:** [June 14, 2021, 5:08pm UTC](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029/40 "2021-06-14T17:08:06Z")
> [@bump](#): > > Why would you suddenly start paying more in income taxes? You didn’t sell that lump of gold- it’s worth something, but your actual income did not change. But what if you took out a loan with that lump of gold as collateral, and then use _that_ for your personal expenses? [Previous page](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029.md?page=1) [Next page](https://boards.straightdope.com/t/super-rich-how-does-this-tax-avoidance-strategy-work/944029.md?page=3)