>From the New York Times Magazine on Sunday. Economically, Mike B)
December 21, 2003 ENCOUNTER The Loophole Artist By DAVID CAY JOHNSTON Few Americans have heard of Jonathan Blattmachr, a partner at Milbank, Tweed, Hadley & McCloy. But among the 16,000 or so lawyers in America who specialize in trusts and estates, which is to say in the passing of wealth from one generation to the next, he enjoys the status of a Hollywood star. In these circles, his first name alone prompts recognition. Men (and a few women) of great wealth confide in Blattmachr. The Rockefellers are among those who seek his counsel. Because his specialty is maintaining wealth across time, he needs to know more than just the size and shape of his clients' fortunes. His work requires knowing whether a marriage is an enduring bond of love or a commercial relationship, or whether heirs can be trusted with fortunes or only allowed a stream of income. He knows of prodigal sons and promising granddaughters, of executives at family-owned businesses who will not learn for years that the brass ring was never going to be theirs. Sometimes men of great wealth whisper secrets they would never share with their wives. He knows how much a mistress costs or whether, if health fails, a spouse can be trusted with the power to pull the plug. His clients reveal these things to Blattmachr because he can help them maintain their wealth now and for their children. He can chart clandestine routes through the maze of the tax code, making a man who appears as a Midas to his bankers look like a pauper to the tax man. Blattmachr helps the superrich keep their riches -- at the expense of everyone else. Sometimes the price is paid in higher taxes. More often it's paid in cuts in services or by borrowing from the next generation of taxpayers. He's not ashamed of this. His methods are perfectly legal. In fact, he sees himself not as someone who exploits the system for the benefit of the few but as the guy who keeps the system honest for everyone. For his job to have meaning -- and to score intellectually, which is his main source of satisfaction -- the tax system has to have integrity. It can't be corrupt or too easily foiled. Just as there is no honor in getting a criminal acquitted when the judge can be bought, there is no honor in finding a tax loophole when the code yields too easily to manipulation. His cat-and-mouse game is to work the loopholes in the system until the government finds them and draws them closed. And when he sees something in the code he considers egregious, he speaks up, as he did when he objected to the repeal of the estate tax. The repeal would ''shift the tax burden from the wealthy to everyone else,'' Blattmachr said one morning in one of his two offices, this one a sunny Park Avenue aerie from which he can look down on the great wealth machine that is Manhattan. Given that shifting the tax burden one wealthy person at a time is Blattmachr's full-time occupation, a cynic might think that his opposition to the estate-tax repeal was just self-interest. But Blattmachr will have plenty of work, estate tax or not. There are always trusts to be designed and capital gains taxes to be cleverly avoided. The superrich will always be looking for ways to shelter their money. Blattmachr's objection to the repeal -- which, in the end, was restricted to just one year, 2010 -- is more complicated. It reflects his capacity to push and pull the rules to his clients' advantage, while still yearning for an ideal, principled law. Blattmachr's practice exists because America has two tax systems, separate and unequal. One is for wage earners, and most of us know firsthand that that system works effectively. The other is for the wealthy, who control much of what the I.R.S. knows about their finances and who in recent years have paid a shrinking share of their incomes to sustain the civilization that makes their riches possible. Few of us also know that this means that the 400 Americans who reported the biggest incomes in 2000 paid just 22.3 cents out of each dollar in federal income taxes. That is about the rate paid by a single person making $125,000. Wealth is more concentrated in America than at any time since 1929. Tax specialists like Blattmachr have done their part, but the tax code itself -- written and approved by Congress -- also stacks the deck. Consider just a few examples. Hidden in a 1985 law was a subsidy for cushy executive transportation. Senior executives aren't charged for personal trips on company jets, but they must pay income tax on the value of the flight, which is counted as income, just like salary and bonus. The value of the flight, however, is not based on actual costs but on a formula required by Congress, one that discounts the value so deeply that it makes personal use of a company jet more attractive than any other form of pay. It allows a C.E.O. to travel in a corporate jet coast to coast for $260. But the company gets to take a tax deduction on the jet, thus removing funds from the federal treasury. The cost to taxpayers for that coast-to-coast flight is thus at least $3,500. Or consider how billions of dollars in investment partnership profits go untaxed every year because neither Congress nor the I.R.S. requires the partnerships to answer one simple question: does this partnership have a domestic tax-exempt partner? If that question were asked, and the answers recorded, the I.R.S. could easily track down a commonly used tax dodge. It would take about $100,000 a year to make the change to the partnership tax form and enter the data in I.R.S. computers. The potential recovery in tax dollars would be in the tens of billions annually. But neither Congress nor the I.R.S. has allocated the money to change the question. Blattmachr's genius is in seeing the whole and these holes in the whole. He then sells this genius to his clients. One of his early insights was that it is entirely and legally possible for the superrich to reap unlimited stock profits without paying a cent of capital gains tax. The rich can do this by manipulating charitable trusts. These trusts are a common enough device used by generous people who own an asset, usually stock, that has appreciated in value. Instead of selling the stock, paying capital gains taxes, and then investing the after-tax proceeds, a person can instead donate the stock to a charitable trust that he controls. The trust can sell the assets tax-free and invest the untaxed proceeds. The income from that investment -- typically 6 percent annually -- is paid to the donor for life. When the donor dies, what remains in the trust goes to charity. Blattmachr took this clever gimmick and supersized it. He figured out a way to turn that nice little 6 percent annual income stream into a torrent -- 80 percent returns a year for two years. So on stock gains of $100 million, the owners would get back at least $96 million, as opposed to the mere $72 million they would have gotten if they had sold the stock outright and paid capital gains taxes. Then the trust would fold, and some charity would get the remaining $4 million. The government would get less than nothing since the gift to the charitable trust would create an income tax deduction. The technique was so aggressive that when other tax lawyers got their hands on the plan, one of them sent it to the Treasury Department in a plain brown envelope. Treasury responded by instituting new rules, blocking the way to the treasure. But Blattmachr quickly charted another route through those rules, drawing up a new map that allowed billions more dollars to escape capital gains taxes -- until the government blocked it, too. Blattmachr's treasure maps do more than just lighten the burden of taxes for his clients. Often his strategies allow money to pass without showing up anywhere in the official income statistics. Were these and similar transactions counted, then the incomes of the rich would appear to be much larger -- and the share of their incomes going to taxes much smaller. Blattmachr is a master at exploiting the opportunities. Always adept with numbers -- growing up he dreamed of becoming a mathematics professor -- Blattmachr distinguished himself at Columbia University law school with his easy grasp of complex theoretical concepts. ''Many lawyers . . . are often bewildered when trying to foresee what the full impact of implementing certain actions will be,'' Blattmachr once wrote. ''I have found that those who have studied mathematics can approach and master both the legal principles and their effect in a way which most others cannot.'' At Columbia in the late 60's, he set about studying Soviet law, certain he would find that it was unprincipled, written to advance the interests of the ruling elite. But he discovered his thesis was wrong. He concluded that ''on paper, Soviet law was very well drafted, grounded in sound principles.'' It was, he came to realize, the administration of Soviet law that was monstrous. He was fascinated to find that the U.S. tax code was something like the Soviet's opposite: an intensely political law that favors the ruling elite but is administered objectively. Its secrets and intricacies have fascinated him ever since, says Mitchell Gans, a Hofstra University law professor and Blattmachr's good friend. ''It's Saturday morning, and Jonathan and I have been reading, separately, the latest I.R.S. notice,'' Gans says. ''The phone rings, and Jonathan will say: 'Did you read that? It doesn't make sense. Why is this rule this way and that rule that way? What could they have meant by this?' And pretty soon, two hours have gone by.'' Blattmachr is always on the hunt, and Congress often makes his job easier. In 1997, Congress passed what its sponsors promoted as a tax cut for the middle class and especially for families with children. Buried in that law were many tax breaks for the rich, some subtle and some huge, notably a sharp reduction in the tax rate on long-term capital gains, the source of more than two-thirds of the incomes of the 400 richest Americans. But some loopholes are too big, even for his liking. He was the first to expose one such opportunity buried in the first tax-cut bill sponsored by President Bush. The loophole -- invisible to all but a very few whose brains could conceive the pick-up-sticks consequences of the proposed law changes -- would have allowed the very rich to avoid paying capital gains taxes at all and would have cost everyone else dearly. Thanks in large part to Blattmachr's sounding the alarm, the Senate did not change that part of the law. Blattmachr also has warned that proposals now in Congress to repeal, rather than reform, the alternative minimum tax would further shift the pile of pick-up sticks to the superrich. ''There are lots of things you would not even think about because of the alternative minimum tax,'' Blattmachr said in his Park Avenue office. ''But if you repeal it, then there are all sorts of things to start thinking about.'' And with that he began musing aloud about manipulating the rules on municipal bond interest, some of which can become taxable under the alternative tax. He is just one of thousands of lawyers and tax engineers who, with the alternative tax repealed, would put their minds to work helping the rich pay less. Since there is no free lunch and since the bill for government has to be paid, that means Blattmachr's clients simply leave part of their bill on your table. David Cay Johnston, who won a 2001 Pulitzer Prize for beat reporting, is a financial reporter for The New York Times. This article is adapted from his book ''Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich — And Cheat Everybody Else,'' which will be published next month by Portfolio. --- Michael Perelman <[EMAIL PROTECTED]> wrote: > The farm boom will also lower the deficit by maybe > $4 bill. because of > lower subsidies. > > The higher commodity prices may put pressure on the > Fed., but Greenspan > will not dare to raise interest rates before the > election. > > You never know where the cracks will appear, but I > suspect it will come in > the international markets. > > On Sat, Dec 20, 2003 at 11:35:19AM -0800, Eugene > Coyle wrote: > > MIchael asked about the economy. A rare subject > for this list. > > > > I had the feeling that the bump this fall from the > tax cut might end > > before carrying Bush to triumph. But the WSJ had > a story the other day > > that the farm economy is starting to boom. High > prices for cattle and > > grains. Leading to big purchases of tractors and > other heavy equipment, > > and building of houses, etc. That seems to be an > additional bump that > > may be enough to keep the expansion going for a > year. > > > > -- > Michael Perelman > Economics Department > California State University > Chico, CA 95929 > > Tel. 530-898-5321 > E-Mail [EMAIL PROTECTED] ===== **************************************************************** "Freedom is what we make of it. If we stand against repression, authority and illegitimate structures, we are expanding the domain of freedom and that's what freedom will be. That's what we create; there is nothing to define in words." -- Noam Chomsky http://profiles.yahoo.com/swillsqueal __________________________________ Do you Yahoo!? New Yahoo! Photos - easier uploading and sharing. http://photos.yahoo.com/
