Friday, October 17, 2014

Connecticut Tax Shelters

I know that this year’s race for Governor of Connecticut is largely of local importance but it does have some relevance to what is going on not only in the USA but overseas. One of the big issues in this year’s campaign is the wealth of the Republican candidate, Tom Foley, a businessman who has apparently made a fortune by buying, renovating and selling companies. Dannell Malloy, the incumbent Democratic Governor, likes to portray himself as a man of the people who has made it the hard way. He even brags about overcoming a learning disability,

At the beginning of their most recent debate Foley offered a moratorium on personal attacks but the Governor refused. He and his advisors have made Foley’s multi-millionaire status the major issue in the campaign. Foley is portrayed as a wealthy aristocrat totally out of touch with ordinary people.

Career politicians like Malloy like to portray wealthy businessmen who seek to enter the political arena as modern versions of Scrooge McDuck, the wealthy uncle of famed Disney comic character Donald Duck. In yesterday’s debate Malloy tried to distinguish himself from Foley.

“I don’t own a $10 million house, a $5 million yacht, a $1 million plane, and not pay taxes in the state of Connecticut.”

I guess Foley can be forgiven for his home, his yacht, and his plane. After all, he doesn’t hoard all his money in his cavernous basement like Scrooge McDuck. Who can blame him for exchanging 5 million dollars, mere pieces of paper, for a yacht that will probably maintain its value better than the dollars? Connecticut has a large coastline and many people in the state own boats including Governor Malloy.

More seriously, information from his recently released tax returns showed that Foley paid no Federal Income tax in two of the last four years. As a result, in those years he also paid no state income tax. Apparently, Foley’s income comes from the Subchapter S Corporation he heads. This type of corporation is the kind that many small, privately owned businesses set up primarily to limit their personal liability. It has no real tax advantages since all the profit from a Subchapter S corporation must flow through to the owner and be taxed on his personal tax return.

In two of the last four years Foley paid no income tax because capital gains of more than $2 million dollars were more than offset by capital losses from his business. Offsetting gains with losses is standard legal practice. The Government insists that gamblers pay taxes on their winnings but does allow them to deduct their losses. In the same way, if you sell shares in ABC company for a gain this year, you can offset that gain by selling shares in XYZ company if they had a loss.

Significantly, the CT Post recently reported that since Malloy had become Governor of Connecticut, he has avoided paying taxes on the income he receives from renting his home in Stamford, the city right next door to Foley’s Greenwich. Malloy’s election four year’s ago presented him with a golden opportunity. He could live in the Governor’s Mansion in Hartford and thereby rent his home in the well-to-do Shippan section of Stamford for $5000 per month.

As rental property the home in Stamford gets all sorts of tax breaks that the Governor obviously took advantage of. For example, major repairs, improvements and maintenance costs on the house would be considered a business expense that could help offset the rental income for tax purposes. Actually, the rental income would pay for the improvements. These costs as well as other deductions to landlords offset all the Governor’s rental income for tax purposes. Ordinary homeowners cannot deduct the cost of repairs or improvements since they are not a business expense.

So, it turns out that the Governor has a million dollar home, a boat or two, but no private plane. He may be a small time operator compared to Foley, but like Democratic politicians all over the country who complain about the wealth of others, he is not about sharing the pie but more about getting a larger and larger share. Connecticut Senator  Blumenthal is one of the richest men in the country. Long term Congresswoman Rosa DeLauro is one of the richest women. Why aren’t they out of touch with ordinary people?


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