Business Valuation Schemes
Business valuation schemes use the estate tax rules to extract from the body politic. Once you understand the many humorous fictional entities that live among us, such as businesses and trusts (as discussed in Part 5), it is easy to see how business valuation schemes work.
What business valuation schemes are good at is pretending that assets are worth less than they are actually worth (similar to how the artificial IOUs worked between Owner and Trust in Part 5). Lying about the actual worth of assets is a simple way to avoid tax. For example, pretend that Worker 1 works for a year and earns $20,000. The tax rate is 10%, so he owes $2,000. However, if he lies to the rest of us, and says that he only earned $10,000, then he will only have to pay $1,000 in tax, and he has successfully stolen $1,000.
Now imagine that, instead of lying about his earnings for a year, Owner A has $12 million in the bank, and that there is a 50% estate tax, and a $2 million estate tax exemption. Owner A dies. $2m of his $12m is exempted from estate tax, leaving $10m subject to estate tax. At the 50% rate, that is a $5 million bill.
So, to solve this problem, Owner A lies about his net worth. He tells the IRS that he only has $7 million, rather than $12 million.
If he gets away with this lie (rather, if his heirs get away with it, since he is dead), he will be taxed $2.5 million instead of $5 million ($7m of acknowledged assets - $2m exemption = $5m subject to tax, x 50% rate = $2.5m). Thus, he will appropriate $2.5m from the rest of us.
Of course, he will not get away with this lie as it stands. Rather, he will need to rework the untruth into an acceptable form. The Internal Revenue Code is designed to be complicated, long and obtuse in order that only certain people--the wealthy, with their lawyers and financial advisers--can take advantage of it.
To lie successfully, Owner A must "sell" his assets to a business he owns. Just like the fictional trust, our society accepts that if Owner A writes down business rules on paper (sort of like writing the attributes of a monster in a dungeons & dragons game) then the business comes to life and exists, and can do things independent of its creator.
This is antilife; logos; godplay; ragnarism; mental sickness. Our society nurtures and loves these imaginary Frankenstein's monsters exactly because they do not exist: they are sick creations of fearful minds. For, reasonably, imaginary things cannot "own" or "do" or anything else. Imaginary things only have life among those who believe in them. So, "Jedi Knights" can exist to Star Wars fans, but if we write Jedi Knights into our legal code and allow them and their statutory lightsabers to "do" things, we have a problem.
Once Owner A has created Business B, and sold his $12m of assets to Business B, he is ready to prepare for the business valuation scheme and cheat us all out of $2.5m in taxes. He now "divides up" his imaginary Jedi-Knight business into pieces, and hands them out to his children and friends before he dies. So, out of Business B, he cuts 5 slices:
Business B Piece 1
Business B Piece 2
Business B Piece 3
Business B Piece 4
Business B Piece 5
Each of these slices of Business B is 1/5, or 20%, of the whole.
So, the logical conclusion would be that each part is worth 20% of the total. But that is not what the IRS says, and that is how Owner A steals from the tax base. He argues that 1/5 of Business B is not actually worth 1/5 of Business B. Because it is only 1/5, it is a minority interest. Maybe he put a restriction on it (as in the advanced trust schemes discussed in Part 5) for sale, so that it can only be sold to other family members. Thus, he can say it is worth even less, because it is not freely marketable. And so, using these excuses, he (and his heirs) can pretend that all the pieces of Business B are worth much less than they actually are.
So, each 1/5 piece gets valued at less than it is actually worth. When you add up all five of those values, the sum total is less than what Business B was worth to begin with--a lie you can achieve just by imagining such an entity as Business B, then imagining that you sell your things to it, then imagining that you divide it up like pie.
Of course, the only reason Owner A divided up the business this way was to perform the tax cheat. Once he dies, his heirs--the same people who would have gotten the business anyway--file an estate tax return listing the phony value for Business B. Then, they consolidate their shares in the family, and either sell them off at market value (i.e., the actual worth of the business), or they keep running the business themselves. And the value of the business has successfully done a skip and a jump right over the estate tax into the dynasty's next generation.