The Tax Questions Blog

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Question: Can Hank Paulson avoid tax on $600MM unrealized capital gain upon becoming a government employee?

A tax expert told me the following:
"Hank Paulson, the incoming Secretary of the Treasury, with a personal fortune of USD 700,000,000 has the right to benefit from a brand new tax exemption available only to those in government which is the right to sell all of his USD 700,000,000 of holdings and swap them into index funds or treasury bonds, and pay zero, that's right, zero tax on his USD 600,000,000 of profits.

I take it the gist of it is:
- New rule exempts government employees from tax on any capital gains realized upon the sale of treasuries.
- Paulson has $700MM of Goldman stock, with $100MM basis.
- Paulson could trade his Goldman stock for Treasury securities, and that exchange of securities would be a non-taxable event, so the basis of the treasuries would be $100MM.
- Paulson could then sell the Treasuries for $700MM, but as a federal employee be exempted from tax on the $600MM gain.

Is this analysis correct?

Answer: I read a news article on the subject. Since you piqued my interest, I looked it up.

Section 1043 of the Internal Revenue Code was enacted in 1989. It allows executive branch employees to defer - not avoid - tax on gains realized when they are forced to sell their holdings due to conflict of interest rules. The proceeds must be reinvested in Treasury securities or approved mutual funds.

The basis of the reinvestment property is adjusted so that the deferred gain will be taxed when that property is disposed of.

I am not aware of any rule that would allow that gain to be untaxed because he is a federal employee.

Investing Online For Dummies $13.09 Expert online investing advice that you can take to the bank!Want to take firm control of your investments and reach your financial goals, but baffled by the dizzying array of online tools? Start with this bestselling guide. Investing Online For Dummies, 8th Edition will help you build your portfolio with the latest financial management information, tools, and resources available. This top-notch, ...

Control Your Retirement Destiny: Achieving Financial Security Before the Big Transition $19.16 "It is a rare pleasure to read a book on personal finance with which I agree completely. Dana Anspach has produced one. I am usually turned off by the chapter on investing, which is typically false and misleading. Investing should always start from the safest strategy to achieve one's goals. Dana Anspach gets it right and expresses it in entertaining prose that anyone can understand and enjoy....

Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series) $46.50 "A rare blend of a well-organized, comprehensive guide to portfolio management and a deep, cutting-edge treatment of the key topics by distinguished authors who have all practiced what they preach. The subtitle, A Dynamic Process, points to the fresh, modern ideas that sparkle throughout this new edition. Just reading Peter Bernstein's thoughtful Foreword can move you forward in your thinking abou...

Global High Income Fund Inc. - Reports Earnings

NEW YORK----Global High Income Fund Inc. , a non-diversified, closed-end management investment company seeking high current income and secondarily, capital appreciation through investments primarily in debt securities of emerging market debt issuers, today announced its performance for the fiscal fourth quarter ended and fiscal year-to-date ended October 31, 2009.

Related posts

• Sorry, no related posts at this time.