Advertisement

YOUR TAXES : IT CAME FROM WASHINGTON : Loopholes, Special Provisions and a Few Sacred Cows : The IRS may give you a break, especially if you buy a down-on-its-luck airline or a football team.

<i> Times Staff Writer </i>

If you’re unhappy at the prospect of paying your federal taxes this year, it probably won’t give you much comfort to hear about the sweet deal the wealthy Sullivans of Boston will be getting.

Congress gave William H. Sullivan Jr., eldest son Charles W., and other family members a special tax break on their sale of the New England Patriots football team, which they completed last October. The Sullivans were the first owners of the franchise but in recent years had piled up more than $50 million in debts on the team and other enterprises.

Since 1985, they had been talking to some 20 potential buyers about the team but had failed to nail down a deal, causing some anxiety that their financial problems might disrupt the Patriots’ activities.

To the rescue came Congress, by writing into the tax code a special provision allowing the Sullivans’ company to write off those accumulated losses if they reached a deal. Exactly which congressmen pushed for the break is veiled in obscurity--as is often the case--but the intent was evidently to give the family an extra incentive to turn the Patriots over to a more financially stable owner.

Advertisement

The loophole is expected to mean millions of dollars for the family, which sold the team to Victor Kiam, chairman of the Remington shaver company, for $85 million.

The Sullivans’ special deal is one of the loopholes that continues to make some taxpayers more equal than others under the “reformed” federal tax code, though hundreds of other breaks were eliminated.

Some were written in to see that corporations and individuals didn’t suffer unfairly when Congress changed the rules of the game in 1986. Others provide special benefits for broader groups of taxpayers--and often, despite their patent unfairness, enjoy wide popular support.

Two other individuals who got special deals under the so-called transitional tax rules were Kansas oil billionaires Charles and David Koch, owners of the private Koch Industries conglomerate.

Advertisement

The tax code writers allowed the brothers’ company to use accelerated depreciation and an investment tax credit for their planned expansion of a big Minneapolis oil refinery, though such benefits were curtailed for most other businesses in 1986.

Congress took the view that the break was fair, because the company had begun the expansion believing that the old tax rules would not change.

Also a beneficiary was Texas Air Corp., owner of Continental, Eastern and People Express air carriers. Congress said Texas Air could continue to reduce its taxes by applying losses Eastern racked up before it was purchased by Texas Air.

The tax code writers decided that this was fair because the company had bought the struggling line expecting to be able to use the so-called tax loss carryforward. They estimated the value of the writeoff at $47 million.

As Congress wrote these special deals into the new code, it preserved other quirks from the old code that benefit those clever enough to know how to use them.

The code’s rules on inheritance continue to allow many well-off people to pass on much of their riches free of taxation from one generation to the next.

The break comes in rules that have to do with the way inherited property is valued. The rules say that, for tax purposes, the value of the property to the new owner is fixed at the time it is inherited, rather than at the time the former owner acquired it.

Consider an example. A father wants to pass on a block of stock that he bought for $10,000 20 years ago and is now worth $100,000.

Advertisement

If the son inherited it at the $10,000 value, he would be required to pay taxes on a $90,000 profit if he sold it. But since it is valued at $100,000, he can sell it and pay no tax on it, said Sidney Kess, a tax accountant with Peat Marwick Main & Co. in New York.

“To me, this looks like a loophole, plain and simple,” Kess said.

The father’s estate will pay tax on the stock, but only if the value of the estate exceeds $600,000. Only a small percentage of estates are worth more than that amount, said Kess, who also noted that any asset passed on to a spouse escapes all taxation.

Congress repealed and quickly reinstated this law in the late 1970s, after howls of protest. Now legislators are considering dumping it again.

In a recent report, the Congressional Budget Office wrote that plugging this hole could “reduce opportunities for wealthy families to avoid tax permanently on an important source of income.”

Another dodge, the so-called tax-free exchange, has helped make many wealthy real estate people lots richer.

This rule allows the individual or corporate owner of a piece of real estate to swap it for any equivalently valued property without paying tax on the transaction.

An investor might buy a run-down building for $50,000, fix it up and swap it for a building valued at $100,000. The investor might continue to add value to his portfolio of properties with similar tax-free transactions.

Advertisement

By “trading up” in such a way, the investor avoids taxes he’d pay if he sold one property to raise money to buy another.

Part of the beauty of these deals is that the tax rules are “very liberal in what you can swap,” Kess said. “You can swap not only buildings for buildings, but for business or farm equipment.”

But if such less known rules of the code can be unfair, so can the provisions that are well known and have great popular support.

The home equity loan, one of the code’s most sacred cows, “raises a whole host of equity questions,” says Joseph Minarik, a tax expert at the Joint Economic Committee of Congress.

For instance: The taxpayer who finances his car through an auto company now can now deduct only 20% of the interest, a figure that falls to zero in 1991. But if he takes a home equity loan to finance his auto purchase, he can deduct the full amount.

Tax purists also still frown over the airlines’ “frequent flyer” programs, which they say allow companies to pass benefits to employees--mostly high-ranking employees--free of tax. These days, the airlines might be just as happy to see the authorities start taxing the programs, because it might discourage use of the program and cut the airlines’ expensive obligations.

But it appears that the programs’ status will remain unchanged, since the Internal Revenue Service feels enforcement would be simply too big a job, said Eliot Rosen, editor of the nonprofit tax publication Tax Notes in Washington. “Here’s an example of a benefit people are getting without a special congressional action,” he said.


Advertisement