Let's talk about a tax break; some may even call it a gimmick. It will never affect your or me, unless we go into the federal government.
Here is Code
section 1043:
Sale of property to comply with conflict-of-interest requirements
(a) Nonrecognition of gain
If an eligible person sells any property pursuant to a certificate of divestiture, at the election of the taxpayer, gain from such sale shall be recognized only to the extent that the amount realized on such sale exceeds the cost (to the extent not previously taken into account under this subsection) of any permitted property purchased by the taxpayer during the 60-day period beginning on the date of such sale.
(b) Definitions
For purposes of this section -
(1) Eligible person
The term "eligible person" means -
(A) an officer or employee of the executive branch, or a judicial officer, of the Federal Government, but does not mean a special Government employee as defined in section 202 of title 18, United States Code, and
(B) any spouse or minor or dependent child whose ownership of any property is attributable under statute, regulation, rule, judicial canon, or executive order referred to in paragraph (2) t a person referred to in subparagraph (A).
Let's say
that you are pulling down several million dollars a year from your day job. You
have the opportunity to head-up the EPA or the National Park Service. It is
almost certain that your paycheck will shrink, and the Congressional committee
investigating you may request you sell certain investments or other holdings to
avoid conflict of interest concerns.
Folks, this
is an uber-elite tax problem.
To ease your
decision, the tax Code will allow you to sell your investments without paying
any tax. To do so you are required to buy replacement securities within 60
days, and the non-taxed gain will reduce your basis in the new securities.
OBFUSCATION ALERT: To say it differently, your "basis" in the old securities sold will carry-over as your basis in the new securities.
By way, it
is not necessary to have Congress to tell you to unload your investments. There
is a more lenient "reasonably necessary" standard that might work for
you. I am reasonably certain I could come up with some necessary argument so I would not pay tax.
While sweet,
Section 1043 is not a complete escape clause. If you think about it, all you
have done is delay the taxable gain until you sell the new securities. I
suppose an escape clause is to die without selling, but I generally do not
consider dying to be a viable tax strategy.
The numbers
can add-up, though. It is estimated that Paul O'Neill, a former Treasury
Secretary, sold approximately $100 million of Alcoa stock when he took the
position. I do not know what the gain would have been (as we do not know the
cost), but the tax he deferred must have been eye-opening.
By the way,
you can get the same break by drawing a judicial appointment.
I do have a
question: do you wonder why the politicos never mention Section 1043 whenever
they rail against "tax breaks" used by wealthy people?
Nah, there
is no wonder at all.
