Buffett-Ducking Billionaires and an 800 pound gorilla

Jesse Drucker has another fine article, Buffett-Ducking Billionaires Avoid Reporting Cash Gains to IRS published yesterday in Bloomberg:

"When billionaire Billy Joe “Red” McCombs, co-founder of Clear Channel Communications Inc., reported a $9.8 million loss on his tax return, he failed to include about $259 million from a lucrative stock transaction.

After an audit, the Internal Revenue Service ordered him to pay $44.7 million in back taxes. McCombs, who is worth an estimated $1.4 billion and is a former owner of the Minnesota Vikings, Denver Nuggets and San Antonio Spurs sports franchises, sued the IRS, settling the case in March for about half the disputed amount.

McCombs’s fight with the IRS illustrates an overlooked facet in the debate over tax rates paid by the nation’s wealthiest. Billionaires -- from McCombs to Philip Anschutz to Ronald S. Lauder -- who derive the bulk of their wealth from stock appreciation are using strategies that reap hundreds of millions of dollars from those valuable shares in ways the IRS often doesn’t classify as taxable income, securities filings and tax court records show.

“The 800-pound gorilla is unrealized appreciation,” said Edward J. McCaffery, a professor of law, economics and political science at the University of Southern California in Los Angeles.

In referring to Warren Buffett's stance on tax dodging, the article points out:

“The problem is not that people like Warren Buffett pay tax at a 17 percent rate, it’s that they can use complex transactions not available to most Americans to get cash from their appreciated stock without paying any taxes at all”.

The article provides explanation and more stories of billionaire tax dodging through convoluted financial arrangements. Well worth reading through.

Although the IRS has tried to crack down on these deals, such efforts appear to have had limited effect so far. The article closes with a quote from an accounting analyst:

“It’s still desirable to defer the tax and wind up with an interest free loan from the government,” he said. “Chances are you don’t get audited and if it does get challenged the odds are good you’ll have a settlement for some fraction of the amount you saved. Who wouldn’t want that?”