Trading Tax Free

[BlueHorseshoe]

Stumbled across this article in the NY Times:

http://www.nytimes.com/2003/04/01/business/01INSU.html

"Help for Bad Times Now Helps Rich
By DAVID CAY JOHNSTON

Fifty years ago Congress, trying to help farmers and others having a hard time getting insurance, allowed the creation of tiny, tax-exempt insurance companies. Now, some of those taking advantage of the program do not make their living off the soil.

One is Peter R. Kellogg, a billionaire Wall Street investor who has used the insurance exemption to escape more than $100 million in taxes on investments in four years. Eighty-five hospitals in New York State have avoided $27.5 million in taxes over five years. Alfa Mutual Fire Insurance in Montgomery, Ala., saved $58 million on federal corporate income taxes over three years ..."


This practice really pisses me off but will forgo the ranting.

 

[Simba]

Hey,
perhaps we traders should each start our own insurance company, to legally shelter our trading income. According to the article you mentioned above, this is how it's done:

A business owner creates an insurance company, often in Bermuda or another tax haven where there are few regulations, but under rules subjecting it to American tax law. The owner then applies to the I.R.S. to have the company taxed under Section 501(c)(15) of the tax code, which makes it exempt from taxes so long as it takes in less than $350,000 of premiums.

The owner then insures his own businesses and, sometimes, solicits some business from others, in many cases collecting only a few thousand dollars in total premiums.

It is the second and third steps that make the deal attractive, especially to someone with an asset that has soared in value.

Say the owner has stock worth $100 million that, if sold, would cause a $20 million capital gains tax, leaving him with $80 million. By contributing the stock to his insurance company, as a reserve against claims, and having his company sell the stock he avoids the capital gains tax because the insurance company is tax exempt.

The $100 million is then used to buy a diversified portfolio of stocks and bonds, eliminating the risk from being highly concentrated in one stock. The dividends, interest and any future capital gains on this money are tax-free so long as the money stays with the insurance company.

If this $100 million grows to $150 million and the owner then decides to close the insurance company, he could take the money back and owe taxes only on the $50 million gain.

Ms. MacNab laughed at the thought that anyone doing this would even pay those taxes, however. "The I.R.S. would never notice" if the taxes were not paid, she said.
[QUOTE from www.nytimes.com, April 1, 2003, Business]

Who will be the first ET member to try this?
Any ET members that have done this?

Good luck.

 

[doctoroe]

You can always trade your IRA. No shorting, no margin and usually only selling and buying calls. But no taxes on that money until you are old and gray and ready to take it out. Many direct access brokers take IRA accounts too. What's not to like?

 

[jessie]

If you want to trade short and leveraged, you can trade futures and options on futures in your IRA without restriction. Futures margins are not considered "loaned" money, they are a performance bond, so they are exempt from the no-margin rules in an IRA. There are lots of trust companies that will work with you to do this, and most futures brokers are familiar with the process.
Jessie