Gyroscopic Investing

Hello all, it's been a whiles since I've posted (started a small start-up robotics company, but nevermind that). I actually had an idea I wanted to run by the group and see if y'all think it has anything illegal about it.

My father has a bunch of appreciated stock that has capital gains. For a wedding gift for me (I got married), he is giving me appreciated stock and I'm then selling it since I'm in the 15% federal tax bracket even after the gift capital gains which means I pay 0% capital gains tax.

The legal limit is $28k per married couple per person. Couldn't he effectively give a lot of appreciated stock out to people that are in the 0% capital gains brackets, they sell all of the stock, then give the proceeds back to him? It's essentially a way for him to skirt around paying capital gains tax by funneling it through those that don't have a high enough income to bring them into the 25% tax bracket. The only hazy area is trusting that when you gift the appreciated stock to someone that they will then gift the money back to you after they sell the stock since it is legally "their" money/stocks now.

Does this seem legal? I wanted to ask y'all because you're a bunch of very intelligent people on here and maybe one of you have thought about this before. Thanks!

- Greg

I am not a tax attorney but I think the IRS would call that tax evasion. Check with a lawyer.

P.S. Actually the more I think about it, the more that looks like not just tax evasion, but conspiracy to commit the same. I would not even think about trying that without a written opinion from your lawyer saying it's kosher.

As long as he gives you the stock and you sell it at 0%, I think all you've done is be clever. If you give the proceeds right back to him, that screams "TAX EVASION!" to me. I'm with Ad Orientem on that.

Pointedstick wrote: As long as he gives you the stock and you sell it at 0%, I think all you've done is be clever. If you give the proceeds right back to him, that screams "TAX EVASION!" to me. I'm with Ad Orientem on that.

ditto.. i would do everything you can to avoid questionable transactions...

but the question did make me wonder? what if instead of giving cash back you (HYPOTHETICALLY) built an in-law house keeping it in your name, or gave him a spare room rent free, then put his bills in your name, and took over paying them? then the money from the stock would be acting kind of like an in-family annuity. It still may be way outside of legal (i have no idea ) but cash might not technically be changing hands.. 

BTW i am not recommending this .. just posing the question for more knowledgeable minds than mine to ponder...

It is legal up to the point you give the proceeds back to the old man.  Then it becomes a prohibited transanction.  Very similar to arm's length dealing rules in an IRA.  So its not quite tax evasion per se unless you avoid reporting or whatever is required for prohibited transanctions.

You could just loan it back to the old man with a promissary note and fair market value of interest.  So long as title stays in your hands.  And you document it and report it.  Then its avoidance and not evasion.

As long as he gives you the stock and you sell it at 0%, I think all you've done is be clever. If you give the proceeds right back to him, that screams "TAX EVASION!" to me. I'm with Ad Orientem on that.

Is the recipient not entitled to "gift" as well?  Obviously this would be a $14,000 (or $28,000 for a couple) round-trip that could be done only once per year.  I don't see the "TAX EVASION" element at all.  Also, I do not believe that gifts under the annual limit require any IRS/tax return reporting.

But now that I think about it, the recipient's basis of appreciated stock is probably the donor's basis.  So no joy.

WildAboutHarry wrote:

As long as he gives you the stock and you sell it at 0%, I think all you've done is be clever. If you give the proceeds right back to him, that screams "TAX EVASION!" to me. I'm with Ad Orientem on that.

Is the recipient not entitled to "gift" as well?  Obviously this would be a $14,000 (or $28,000 for a couple) round-trip that could be done only once per year.  I don't see the "TAX EVASION" element at all.  Also, I do not believe that gifts under the annual limit require any IRS/tax return reporting.

But now that I think about it, the recipient's basis of appreciated stock is probably the donor's basis.  So no joy.

I'd be willing to bet that the IRS would say that a gift is something that is given without the expectation of its being returned, so that wouldn't be a "real" gift. And we know that what we think isn't what counts in such matters.

So I wouldn't do it.

Oh my gosh, Greg's back! Glad to see you back!!

dualstow wrote: Oh my gosh, Greg's back! Glad to see you back!!

nice to be back dualstow. I forgot how awesome of stuff you guys write on here. So much good information to read for pleasure or for information.