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Editor: Paul L. Caron
Pepperdine University School of Law

Tuesday, January 10, 2017

NY Times:  Elizabeth Warren, Media Mischaracterize I.R.C. § 1043 As Tax Boondoggle For Trump Appointees

NY Times Dealbook (2013)Following up on my previous posts (links below):  New York Times DealBook: Critics Say Trump Appointees Can Dodge a Huge Tax Bill. That’s Not the Case, by Aaron Ross Sorkin:

“Not only is Donald Trump giving a gang of billionaires control of our government, he’s offering them a special tax break just for signing up.”

That was Senator Elizabeth Warren, Democrat of Massachusetts, last week criticizing what has been called a “loophole” in the tax code that allows government appointees to defer paying taxes on stock sales. These appointees — who currently include some of the wealthiest people in the country — are typically required to sell all of their stock in individual companies to comply with conflict-of-interest rules, and this tax-deferring aspect of a 1989 law is meant to help offset that requirement. (President-elect Donald J. Trump is not covered by the same rules. But that’s another column.)

You’re going to be hearing a lot about this “loophole” over the next couple of weeks, if you haven’t already, as Mr. Trump’s nominees — many of them billionaires with huge holdings that they will most likely have to sell — get grilled in hearings and their financial disclosure forms become public.

If you just read the headlines, you might be convinced that Mr. Trump’s nominees were about to receive the windfall of the century, a gift that would allow them to eliminate capital gains taxes on much of their wealth. ...

But that’s not how the tax rule works. The rule has been repeatedly misconstrued and misexplained, including by me.

The actual law, which was put in place by President George Bush, governs what is known as Section 1043 of the tax code. It allows government appointees to apply to the Office of Government Ethics to receive approval to defer paying capital gains on stock sales as part of any divestment plan that is required by their office. As long as appointees sell all of their stock and then reinvest it in Treasuries or mutual fund indexes that don’t pose a conflict with their roles in the administration, the capital gains are deferred until they sell the Treasuries or mutual funds.

But notice this: The taxes are not eliminated. Not at all. They will eventually have to be paid. ...

There are a lot of important issues to examine and reasons to worry about the remarkable conflicts of interests that Mr. Trump and his cabinet selections may present.

But — in this instance — the tax treatment they receive is not one of them.

Prior TaxProf Blog coverage:

http://taxprof.typepad.com/taxprof_blog/2017/01/ny-timeselizabeth-warren-media-mischaracterize-irc-1043-as-tax-boondoggle-for-trump-appointees.html

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Comments

The statement that the taxes eventually will have to be paid seems wrong. If the assets are held until death, there will never be any tax. Given that these people are billionaires or hundred millionaires, most of them will not feel a pressing need to sell the substituted-basis assets during their lifetime. Therefore, it seems reasonable to conclude that the tax deferral is equivalent to forgiveness in the typical situation at least.

Posted by: Victor Thuronyi | Jan 11, 2017 3:01:10 AM

Victor is absolutely correct on this and his position is stronger if the estate tax is repealed while section 1014 step up in basis remains, as has been proposed.

Posted by: Alice Abreu | Jan 11, 2017 10:06:02 PM

Yes, I sent the Times and Mr. Sorkin a comment on this Wednesday morning--as well as pointing out that, more subtly, the time value of money made his characterization a bit misleading.

Posted by: Andre LeDuc | Jan 13, 2017 8:29:34 AM