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.