Gyroscopic Investing

Perhaps this has been spoken on here before but I was thinking about the Gift Tax and current Capital Gains rates for 10% and 15% income tax brackets. As a single person, you are able to gift $13,000 per year (or $26,000 for a married couple) to your children, friends, etc. without any taxable events occuring.

My plan was, giving $13,000 worth of a highly appreciated investment (such as stocks right now), to someone in the 10% or 15% ordinary income tax bracket. They would then sell the investment and on their taxes they wouldn't pay any capital gains on it. They would then give you back that money they sold it for and perhaps you give them a cut of what the capital gains taxes for you would have been as a "thank you".

Can anyone pokes holes in this loophole? Does this seem legit?

1NV35T0R (Greg) wrote: My plan was, giving $13,000 worth of a highly appreciated investment (such as stocks right now), to someone in the 10% or 15% ordinary income tax bracket. They would then sell the investment and on their taxes they wouldn't pay any capital gains on it. They would then give you back that money they sold it for and perhaps you give them a cut of what the capital gains taxes for you would have been as a "thank you".

This sounds like a great premise for a Judge Judy episode. Just sayin'. 

My off-the-cuff benchmark for how legit something is involves me imagining how I would explain it to Judge Judy if things went south. If her response to me might be, "You're an idiot!" it's probably a bad idea.

I'd check with a lawyer to see if that's kosher. The IRS (recent scandals notwithstanding) is not known for its sense of humor. If you are in any doubt, I'd just pay the tax.

This is totally legitimate and people do it all the time.  Appreciated shares of anything make great gifts for estate tax planning purposes.  You can do this same thing with charitable contributions.

Oops missed that part.

Maybe there's something preventing it, but short of that I'm not sure what would stop someone.

There are two possible terms that could apply here. One is "tax avoidance." The other is "tax evasion." The difference is the thickness of the walls in the Federal Penitentiary. I repeat my advice to seek legal council before trying this. Unless someone on here is a tax lawyer, this is one of those situations where I don't think I would be comfortable acting on the advice of the forum.

FWIW, it sounds way too simple and I would be surprised if the tax code does not prohibit this sort of thing. But then again I am NOT a lawyer.

it sounds unlikely to be OK, even if you could get away with it for a while before it caught up with you. i would expect penalty's and problems when it does... i wouldn't try it...

on the other hand if you are retired and in draw-down with a sizable estate likely to be left over, you could possibly make the gifts to your heirs (if they are trust worthy), letting you slowly disperse your estate as gifts with lower taxes than after death, and still have the  profits from funds you give them paying your bills...

not a tax lawyer !!!! not a tax lawyer !!!! not a tax lawyer !!!!
but it seems less likely that paying your retired parents bills and receiving legitimate gifts from them in the same year would be a tax conflict..



edit to add  -- don't commit fraud or tax evasion.... 
                  -- getting the legal benefits you qualify for... take them all....

Thanks for all the input people.

The government would know that PERSON A gave the money to PERSON B because it would show up as a gift and the government would know that PERSON B sold it for cash soon after receiving it.

However, wouldn't the government not know that PERSON B gives anything back to PERSON A if it is just all in cash? It wouldn't show up on any tax forms because it is already in cash (versus when it was in stock when PERSON A owned it originally). The government probably wouldn't be wise to it unless you grossly changed spending habits because of it but that's hard to do since $13,000 isn't TOO much money.

1NV35T0R (Greg) wrote: However, wouldn't the government not know that PERSON B gives anything back to PERSON A if it is just all in cash? It wouldn't show up on any tax forms because it is already in cash (versus when it was in stock when PERSON A owned it originally). The government probably wouldn't be wise to it unless you grossly changed spending habits because of it but that's hard to do since $13,000 isn't TOO much money.

I think they would find out when something goes wrong and person B decided to keep the money and you took them to court.

In an ideal world where it could be pulled off without a hitch between 100% trustworthy people, you could probably get away with it. But the world is rarely so kind to ideas like this. You're putting your financial life in someone else's hands with strategic gift transactions like these. What if that person falls on hard times during the period where they have the money and spends some of it to fend off bill collectors or something, knowing full well that they'll be able to get it back when you ask for it of course... and then they can't?

It really sounds like a Judge Judy episode waiting to happen.

This kind of reminded me of the other day when my grown adult daughter asked me if I would put a car in my name for her and also allow her to claim that she lived in my house so she could afford insurance after a drunk driving conviction. My response was absolutely not for the primary reason that having the car in my name would leave me vulnerable to losing my life's savings in a lawsuit. I didn't even bother to explain the secondary reason that it would be legally fraudulent (and interestingly, the cockamamie idea was suggested by her insurance agent).

As for how this relates to the subject of this post - assuming those people you will be giving the gifts to are friends or relatives, do you really feel okay about involving them in this fraudulent activity - and facing possible prosecution if you get caught?

Sounds like we are now looking for advice on tax evasion. Sorry, can't help with that.

Don't worry about tax evasion. The IRS is busy these days going after the Tea Party types.

Reub wrote: Don't worry about tax evasion. The IRS is busy these days going after the Tea Party types.

I think he is a tea party type. I'd worry about the tax evasion.

I'm not saying I am going to do this. It was more of an idea I wanted people to see if they could poke holes in. I would do more research and check with a tax specialist before I did this type of thing. Also not sure if you're talking about me with the tea party type but for the most part I don't identify with them very much.

1NV35T0R (Greg) wrote: I'm not saying I am going to do this. It was more of an idea I wanted people to see if they could poke holes in. I would do more research and check with a tax specialist before I did this type of thing. Also not sure if you're talking about me with the tea party type but for the most part I don't identify with them very much.

I stand corrected. Do check with a lawyer. This does not sound kosher to me.

I'll potentially find a tax lawyer about this, it's just an interesting thought to lower taxes. Also, I can't say that I don't identify with some attributes of the tea party, but it's the same way that I identify with some attributes of the democrats. Regardless I'm not a big fan of labels with political parties. It makes it easier to categorize but at the same time even every tea party has different thoughts on tea party ideas, ideals, etc.

Then I guess it comes to I think moda put it as couldn't two people give the max amount to each other? Let's say for instance PERSON A has $13,000 worth of stock in General Electric and PERSON B has $13,000 worth of stock in Boeing Co.

PERSON A wants to have Boeing Co Stock but doesn't have enough money to buy it unless he sells his position in General Electric. He wants to trade for PERSON B's Boeing Co Stock (even if it has capital gains itself that he would have to pay someday if he sells it)

PERSON B wants the same thing as PERSON A but in reverse.

Would this not be legal?

Unless there is a tax lawyer on this forum you are posting questions that we can't answer. Talk to a lawyer. Seriously. I know you desperately want someone here to tell you that your tax dodging scheme is kosher. But I really don't think anyone here is qualified. And unless you are willing to risk possible criminal sanctions, there is no way I would act on something like that without the official OK from a lawyer.

Probatio vincit praesumptionem.

1NV35T0R (Greg) wrote: Then I guess it comes to I think moda put it as couldn't two people give the max amount to each other?

It seems like there would be something in the tax code prohibiting this reciprocal giving, even if you made it a chain of 3 or more people.

If the scheme relies on the untracibility of cash to work, it's probably illegal. Save your money, don't bother with the lawyer.

This is a fantastic idea.  Go ahead and give me the stock.

If I forget to give the mony back to you, of course there's not much you can do about it without admitting to tax fraud (purposely mischaracterizing a contract for profit as a gift).

dragoncar wrote: This is a fantastic idea.  Go ahead and give me the stock.

If I forget to give the mony back to you, of course there's not much you can do about it without admitting to tax fraud (purposely mischaracterizing a contract for profit as a gift).

Exactly. Then 1NV35T0R has two options: accept the loss, or sue you. In the latter case, you play dumb and say, "I really thought it was a gift!" and then he has to either admit to tax fraud or play even dumber, leading to Judy yelling, "You're an idiot!" 

I seem to remember 2 guys getting busted for something similar to this.  They  gave each other the maximum "gift" and each wrote it off on his tax return.  Which of course is a wash, so the IRS went after them.  Not the exact same scenario, but similar. 

If somebody gives you something as a gift, it's tax-free.  That much I know.  So I'm not sure how the IRS would know if the person you gave the gift to decided to give it back to you?  I guess as long as the other person didn't also claim the gift deduction, the IRS wouldn't know about it. 

That said, there must be easier (and less suspicious) ways to avoid taxes on investments.