Super-rich: how does this tax avoidance strategy work?

[Tired_and_Cranky]

@md-2000

But if you transfer the shares to the LLP are you not doing the equivalent of selling them, at face value, thus realizing gains.

In a qualifying 1099 exchange, you can trade one investment (like Amazon stock) for a similar investment (like LLC units) without realizing a gain. It’s used in real estate all the time but it can also be used for financial investments.

@md-2000

If you have Amazon that you bought at $100 now worth $1000, then you are either:
-transferring at $1000, so you realized a gain; but now have stock in a company that owns shares valued at $1000.

In a 1099 exchange, you don’t realize a gain but the new property takes the cost basis of the old property rather. So he started with $1000 of Amazon stock with $100 of tax basis (in your example) and winds up with LLC units worth $1000 and $100 of tax basis. Under a 1099 exchange, the tax law pretends that nothing happened. .

@md-2000

So you’re saying the shares are $100, but the LLP prints 9 more and sells them, so now Buffetzos (Bozos?) owns 10 shares worth $100 for a LLP holding a stock valued at $1000. Having sold those shares, the LLP now has cash as well ($900) and distributes that to the shareholder(s)?

No, the process I’m speculating about goes like this:

1. Bezos has $1000 of Amazon stock.
2. Bezos contributes the stock to the LLC and receives in exchange 10 LLC units. This is a non-taxable event in a 1099 exchange. The LLC has no activity, assets, or liabilities other than holding the Amazon stock.
3. 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.
4. 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.
5. The LLC distributes his $900 capital contribution back to Bezos. A return of a capital contribution is not a taxable event. (Imagine for a moment you invested $100 in a restaurant. A year later, they go out of business, wind up their affairs, and return what’s left. By sheer coincidence, you get exactly $100 back. This is not taxable. You have realized no capital gain or loss, and there were no profits to distribute. You just get your own money back. That’s what Bezos is doing).

So now, with the loan, Bezos has realized no gain or loss and he has $900 million in his pocket to spend however he would like. He’ll pay interest on $1 billion and that interest will be deductible against other income.