Professor Richard Kaplan, an internationally recognized expert on U.S. tax policy, spoke with the Illinois News Bureau about the legality of tax avoidance by the ultrawealthy. An excerpt from the interview follows:
Based on the reporting, did the ultrawealthy do anything illegal to avoid taxes?
Probably not. All sorts of assets – stocks, bonds, real estate, Bitcoin – fluctuate in value, some days up, other days down, but the U.S. Supreme Court in the Eisner v. Macomber case of 1920 determined that mere fluctuations in an asset’s value do not constitute income. When the asset is sold or exchanged, the gain or loss at that point is said to be “realized” and subject to taxation, but not until then.
Those rules apply to everyone, but the ultrawealthy have the ability to obtain vast sums of cash from their assets without selling them. They can simply borrow and use those appreciated assets as collateral. The U.S. Supreme Court in the famous 1947 Crane v. Commissioner case declared that borrowed funds do not constitute income because they must be repaid and therefore do not represent an increase in wealth. The same principle applies to ordinary people who borrow against their home equity, or who borrow to buy a car or pay for college costs.
Bottom line: Unsold assets and borrowed money do not generate taxable income.
As far as I can tell, the only person who did anything illegal is the person who leaked the tax documents used in the news story.
Read the full interview at news.illinois.edu.