The enormous tax break for the rich hidden in Measure 84

By Jody Wiser of Portland, Oregon. Jody runs the citizen watchdog group, Tax Fairness Oregon. Previously, she contributed "Be green or it all goes to the greedy".

The campaign to repeal the estate tax spent nearly half a million to get on the ballot. But repeal of the estate tax is only half of the measure. Initiative profiteer Kevin Mannix’s language includes two tax breaks. The obvious one is that it phases out the estate tax over three years, with elimination on January 1, 2016. But the second, and potentially far larger tax loophole, is buried in section 4d of the measure (pdf).

The initiative title reads, “Phases out existing inheritance taxes on large estates and all taxes on intra-family property transfers.

What does the second half mean? It probably means that it removes primarily all capital gains taxes -- on sales of real, personal or intangible property between family members while they are living. It could mean that salaries and dividends paid to family members won’t be subject to state income tax. No doubt the court system will be asked to rule. The property transfer line in this “death tax” bill provides an avenue for easy tax avoidance: just pass a sale through a family member and avoid income taxes.

As CPA Dick Solomon noted in testimony to the Voters’ Pamphlet statement committees:

Section 4 effectively makes it easy to avoid all Oregon income tax on the sale of real, personal or intangible property. Thus, a well-advised taxpayer could avoid all Oregon tax on capital gains. This could easily be accomplished by the owner of any property (i.e. land or publicly-traded securities) selling the property at fair market value to the owner’s son and have the son immediately sell the property on the open market.

For example, a New York resident who owns $100 million of timberland with a basis of $1 million could sell the property to his son for the fair market value of $100 million; the son could then immediately sell the property for $100 million and neither father nor son would pay Oregon tax on the $99 million gain. The result would be the same for an Oregon resident who sells appreciated PetroChina stock.

It will be malpractice for lawyers and CPAs to fail to suggest the technique.

Comments

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    How likely is this measure to fall afoul of the "single question" rule?

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    As I have been hearing lately, the Oligarchy really wants to get itself down to zero taxation at both fed and state levels. Being "job creators" and beautiful people like Mitt should be enough for "you people" who are expected to pay their taxes for them.

    Each of Kevin Mannix's half dozen or so misleading claims about the estate tax will have to be refuted over and over again between now and the election.

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    Just to shed some general tax law on this section 4d. Jodi is correct in stating that further technical clarification may be needed from the courts, as is often the case in interpreting legislation. Tax law is filled with case history. A "transfer" is different than a "sale or exchange". A transfer of property does not require that money or other consideration be part of the transaction. Alternatively, a "sale or exchange" does in fact require money or other consideration be given. Section 4d seems to be addressing "gift tax" assessed upon transfers of property (in addition to inheritance tax). Gift tax is the sister of "inheritance" tax, and is potentially assessed on property transferred prior to death. At first blush, I do not read section 4d to be addressing foregoing any INCOME tax, as in the scenario provided in the VPS. I believe Sec. 4d is addressing solely INHERITANCE or GIFT tax upon "transfer", and not income tax upon "sale or exchange" of any property. I would venture to say this would be the interpretation of any court as well, but I am also cautious when it comes to reading any court's mind.

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      Representative Eyre,

      Thanks for coming by. Please do visit again.

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      Katie raises good points, but the truth is that we will not know exactly what we are getting if this measure passes. While it is not a constitutional measure so it can be fixed by the legislature, that doesn't always work out as proponents claim. Voters are looking at a measure that will cause a lot of problems if passed in addition to the fact that it will ensure more teacher layoffs.

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      The language doesn't have to be interpreted by a court. It is clear and unambiguous. A transfer between say a father and a daughter, whether that is for consideration or not, will result in no type of tax, because any tax that would be levied at such a time is defined in the measure as a death tax.

      And from the view of the proponents, it makes sense. If a father wanted to transfer a family business to a daughter while they were still alive rather than after death, but the father wanted to get some stream of income during the rest of his life, then proponents would argue that there shouldn't be a capital gains tax imposed, because the transfer is really just passing the property from father to daughter while maintaining some cash flow for Dad. If we get rid of the estate tax as proposed, the property could be passed down after the father died with no tax, so section 4.d simply allows the property transfer to occur earlier while allowing father some cash flow.

      So, it is clear that there cannot be any capital gains tax on any transfer between family members, because any such tax triggered by a transfer is defined as a death tax by 4.d

      If this measure is enacted as written, any competent attorney or CPA will be advising clients who sell anything with built in capital gains to first find a buyer. Then have their child buy the property at the same price on monday using a promissory note with payment due in a week. Then have the child sell the the real buyer on tuesday, and repay their father on wednesday. The father incurs no capital gains taxes because he sold to his child and its exempt from tax under 4.d. The child has no capital gains because they sold to the real buyer at the same price they purchased from father.

      And this isn't limited to Family farms, or family gas stations. It can be done for any property. Have 1000 shares of Apple stock you bought for $40/share that is now worth $660/share? Transfer it to your daughter in exchange for a $660,000 IOU, payable on demand. There aren't cap gains taxes because this is a related transfer under 4.d. She the sells it to unrelated third party the next day for $660,000, incurring no taxes because she didn't make any profit. Then she pays off the $660,000 promissory note to father.

      No taxes to anyone, even though dad just made $620,000 in profit.

      So Rep. Eyre, this measure is very poorly crafted and I'd suggest that if you're convinced that a court will have to ultimately decide what the measure means, then it isn't worthy of a yes vote

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      Jody, this is very helpful because it was not totally clear from the measure itself, as Katie Eyre pointed out, what was meant by 'transfer'. Thanks to Mannix we know what his intent was and therefore the debate going forward will not allow him to equivocate.

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    The quote from Dick Salomon states, "For example, a New York resident who owns $100 million of timberland with a basis of $1 million could sell the property to his son for the fair market value of $100 million;..."

    Should I assume that the timberland is in Oregon?

    What does "basis of $1 million" mean?

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    And yes, David, you should assume that it is Oregon timberland. If you live elsewhere, but sell Oregon property or earn income in Oregon , then you pay Oregon income tax on the profits.

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    The way the signature gatherers got so many to sign was to scare them into thinking that everyone had to pay the estate tax. Most people don't know that it applies only to the wealthy--730 out of 34,000 decedents last year or approximately 2%. Sec.4d is icing on the cake--"don't let the government get any of your family's hard earned money!"

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    From what Rep. Eyre wrote, it would appear that while not all transfers are sales or exchanges, sales and exchanges are transfers. More importantly, though, the courts rule on what the words say in the measure before the voters. The intent of the petitioners is only relevant insofar as the measure as drafted accurately reflects that intent. We've seen several cases where chief petitioners have tried to argue that a measure's interpretation should be based on what they, after the fact, say their intentions really were. The Supreme Court typically says that interpretation is its job, thank you very much.

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      "before the voters" as in "in front of the voters," not as in before the election.

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        Sue, the explanatory committees were told that the court looks at what the committees write and therefore the voters throught they were voting on. Unfortunately, one of the statements clearly says capital gains. We tried to keep that from happening, but alas....sometimes one wonders why dems bother to get elected.

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