October 11, 2006

I Am a Tax Cynic

by PG

Some conservatives are hoping to make hay of Senate Minority Leader Harry Reid's selling property to an LLC for the same price he'd paid to buy it, taking an ownership share in the LLC and gaining his profit from the ultimate disposition of the property, without informing Congress of the intermediate steps between his initial purchase and the final sale. Reid apparently continued to report himself as still the direct owner of the property, rather than as a shareholder in a corporation that owned the property. Sadly, after just half a semester of a tax course, I have trouble seeing this as terribly shady. Once I would have, and perhaps most Americans still retain my old innocent perspective that of course one never should take an action in order to minimize tax consequences.

Now, my only reaction is a contemptuous wonder that Reid is still so green as to continue to report his finances as they would seem to the average person, instead of as the elaborate charade of partnerships, trade-offs with untaxed entites (the professor explained arbitrage last week) and corporations existing solely to have assets transferred in and out of them that tax lawyers work so hard to create. There is no allegation that Reid attempted to hide any money he had made; the scandal is that he didn't lay out the whole mechanism in his ethics reports. Does he have any idea how many hours normally would be billed in building this? Show some respect for hard working tax attorneys, Senator!

In a similar vein, Sen. George Allen's neglecting to mention in 1999 that he had Xybernaut stock options, considering that those options never were exercised, in itself strikes me as fairly harmless. He filed amendments disclosing the options for his 2000 and 2001 returns, so it's not like we didn't know that he had ties to the company when he wrote a letter to the U.S. Army on Xybernaut's behalf in December 2001. Must have been a good letter, too; though the company's never had a profitable quarter, in September 2003 the U.S. Defense Department announced $2.13 million in contracts to buy the company's wearable computers. Indeed, the only part of the story that bothers me is Allen's jingoistic justification for keeping corporate disclosure rules loose:

In the Senate, Allen opposed an accounting rule change that requires companies to list options as an expense on their financial reports. Allen co-sponsored a measure to block the rule change and in a hearing that year linked the awarding of stock options to increasing the security of U.S. troops in Iraq. He said stock options make investments in technology companies more attractive, leading to innovations that helped make "it safer for our men and women in uniform."
Now that I hear a technologically-oriented former employer may be in trouble for its stock option grants -- rank-and-file employees there also could buy shares at lower prices in a given period -- I feel guilty for not doing more for the troops to justify my purchases.

October 11, 2006 10:14 PM | TrackBack
Comments

Sen. Reid's transfer of his property seems to have been an exchange for his ownership interest in the LLC, rather than a sale for cash, an exchange that is not generally recognized for purposes of gain or loss, similar to an IRC Section 351 incorporation. His ownership interest in the LLC was not liquid. This is a frequent, common non-recognition transaction, that provides certain benefits, including from the standpoint of limited liability. His failure to report the transaction was perhaps technical, although he continued to report the real estate as being owned by him.

As to Allen, there are some tax and ethical issues involving the granting of stock options to an attorney representing a corporation. (I do not know if the company that granted the option had its shares publicly traded.) But once Allen became Senator, he had an obligation under Senate rules to report these options.

Bottom line, there was more transparency with Reid's disclosures than with Allen's.

Posted by: Shag from Brookline at October 14, 2006 08:17 AM
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