Capital Gains Issue a Yawner for the Tax-Savvy Superrich

By Jane Bryant Quinn 1995, Washington Post Writers Group | St Louis Post-Dispatch (MO), December 5, 1995 | Go to article overview

Capital Gains Issue a Yawner for the Tax-Savvy Superrich


Jane Bryant Quinn 1995, Washington Post Writers Group, St Louis Post-Dispatch (MO)


The truly rich just yawn when they hear that Congress plans to cut taxes on capital gains. That's because they avoid this tax, thanks to loopholes large enough to drive a zillion-dollar fortune through.

Congress proposes to let people with garden-variety money exclude half their capital gains from tax - effectively cutting the top rate to 19.8 percent, from 28 percent now. The rate remains zero, however, for the tax-savvy superrich. Thanks to clever lawyers and new financial instruments, they're carving gaps in the tax code that seem beyond the reach of the Internal Revenue Service.

If these loopholes were closed, the deficit might drop by several billion dollars a year. But so far, Congress has chosen to balance the budget on other people's backs.

How do the plutocrats get away with it? Here are two of the ways:

Short sales of stock, against the box. People of ordinary wealth also use this technique, in an abbreviated version. But for them it just puts off the tax rather than erasing it.

As an example of how it works, say you bought Widgetex Co. at $10. In this bull market, the price leaped to $50. If you sell, you owe taxes this year on a $40 capital gain. If you don't sell, you risk losing your profit if stock prices fall.

Your alternative is to borrow shares of Widgetex from your broker, and sell those shares instead of selling your own (that's selling "against the box," which means against shares that you already own). The broker earns interest on the loan. You pocket the full $50 and owe no current tax. Your $40 profit is locked in. Any losses run up on one side of this trade will be offset by profits on the other.

Sometime next year, you typically close out your position by giving your stockbroker the shares of Widgetex you own. Only then do you book your $40 profit, which defers your tax into 1996.

The truly rich, however, are learning how to play this game with a twist. They borrow the shares from institutions or other large holders, and duly sell them for a pile of cash. But during their lifetimes, they never close out their positions. So they get their money and never have to pay the tax. The shares they borrowed are returned only after they die (death erases any capital gains tax owed).

That's the way Ronald Lauder recently sold around $250 million of his shares in cosmetics giant Estee Lauder - avoiding an estimated $74 million in tax.

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