Charles Ruchelman Comments on Recent Income Tax Leak

"Buy Borrow. Die.” That expression was coined by law professor Edward McCaffery to describe a simple method by which the very rich can escape paying very high taxes while amassing astonishing wealth and living as they like.

A leak of massive amounts of income tax data of thousands of the wealthiest Americans showed that that’s exactly what the richest of them do.

This was announced in a series of articles by the nonprofit news outlet ProPublica. An anonymous source provided this IRS data to ProPublica, which said that it has no idea who sent it to them. The source claimed it was sending the data because of ProPublica’s previous reporting on tax policy and enforcement by the IRS, though without knowing the identity of the leaker (or hacker), there is no way to know their real motives, as ProPublica admitted.

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Charles Ruchelman, a prominent tax attorney at the firm of Caplin & Drysdale and a former tax attorney for the tax division of the Justice Department and the IRS, also told AMI that a wealth tax would create real problems for the IRS.

“A wealth tax is very difficult to administer because valuing assets is not an exact science. The IRS does not want to get bogged down in valuation disputes. It’s time-consuming, subject to dispute, and a waste of IRS resources. And applying a wealth tax can create situations that force a taxpayer to liquidate assets in order to pay tax. That can create an artificial reason to sell stock and depress the overall price of the shares.”

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Mr. Ruchelman said that changing the law to increase taxes on wealth or unrealized gains, including for heirs, could cause other problems for people who aren’t massive billionaires like the ones in the ProPublica article.

“This is the concern of the family that has to sell their farm in order to pay an estate tax based on valuation rather than passing the farm on to the next generation. It’s the same concern with small business owners who have wealth tied up in property and equipment and who do not have liquid assets to pay the estate tax.”

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Mr. Ruchelman said: “Tax practitioners understand that the Internal Revenue Code contains many laws that incentivize behavior. Policy wonks call this ‘social engineering through the tax code.’“

For example, a low capital-gains rate is intended to encourage investment. An example of this is a 1031 exchange, where there is no tax applied to an exchange of similar real estate. This has encouraged real estate transactions and property development.

“Similarly, borrowing is not a taxable event because there is a liability that matches the cash flow. So the cash flow and liability net to zero. There is no net income. Of course, the loan has to be ‘real,’ and the IRS has tools to attack fictitious loans in the related party context through concepts such as ‘disguised dividends’ and the ‘economic substance’ doctrine.”

For the full article, please visit AMI Magazine's website (subscription required).