In anticipation of watching Netflix’s Murder Among the Mormons,[fn1] I started rereading Victims: The LDS Church and the Mark Hofmann Case.[fn2]
And right at the end of chapter two something leapt out at me: in addition to searching for (and forging) rare documents, Hofmann engaged in tax planning! Chapter two discusses Hofmann’s attempts to sell the Anthon Transcript to the church. Initially he asked for a set of six Mormon gold pieces in exchange. Why the gold pieces rather than cash? In part, he said, because he wanted a “tax-free exchange” (Turley, 38). (Note that, after negotiation, the church gave him one five-dollar gold coin plus some historic Mormon notes and a first edition of the Book of Mormon missing its title page.)
Now if you’ve read much of my blogging, you know these three words leapt out at me, a virtual technicolor attention grabber. So what was Hofmann trying to do?
Here’s the short version: as a general rule under U.S. tax law, if you sell property for more than you bought it for,[fn3] you pay taxes on your gain. So, for instance, if I buy a saxophone for $1,000 and later sell it for $1,500, I have a $500 gain.
But let’s say I take that same saxophone and, instead of selling it for $1,500 cash, I trade it for a guitar with a value of $1,500? I don’t have any cash, but I still have a $500 gain. And I’m still going to have to pay taxes on that $500 gain.
But the tax law includes a lot of exceptions. One is an exception for a “like-kind exchange” of property for other property. What that means is, if my saxophone is qualifying property and I trade it for another saxophone worth $1,500, I don’t have to recognize and pay taxes on my gain.[fn4] So that’s what Hofmann wanted to do—he wanted to trade like-kind property so that he didn’t have to immediately recognize a gain.
So would it work? Well, today it wouldn’t. As part of the 2017 Tax Cuts and Jobs Act, Congress limited the like-kind exchange rule to real property. Since historic documents aren’t real property, the like-kind exchange rules don’t currently apply.
Back in the 80s they did, though. So could Hofmann do his trade tax-free?
That’s a really good question. To qualify as a tax-free like-kind exchange, property has to be held for business or investment purposes, not for personal purposes. I suspect Hofmann would have met this requirement: while he appeared passionate about historic documents, he really didn’t seem like a collector. He bought documents with the intention of selling them; presumably he planned to sell the gold coin, notes, and Book of Mormon. (If he displayed them in his house or otherwise did things that made him look more like a collector than an investor, that would have counted against this test.)
But here we run into real problems. See, the Treasury regulations explained how to determine whether depreciable personal property was like-kind: if the two types of property were members of the same General Asset Class or Product Class, they were like-kind. (Don’t worry about what GAC or PC are—they were listed in the regulations.)
But historic documents are not depreciable property and therefore were not members of any General Asset or Product Class. For non-depreciable personal property, the regulations say the like-kind exchange rules applied “only if the exchanged properties are of a like kind.” That’s right: the regulations literally use “like kind” to define whether property is like-kind property! So not super-helpful.
That said, I think saying that a historic document and a historic gold coin are like-kind is, at best, aggressive. (“Aggressive” is how tax attorneys say “I’m skeptical that this actually works.) And while the notes and Book of Mormon are both at least written documents, they both function significantly differently from a transcript with a historic signature. I don’t think it’s out of the question that they could have been like-kind property for these purposes, but I think it’s far from a slam dunk.
The problem, of course, is that there was basically no law on whether art and collectibles could be like-kind property and, if they could, what property qualified as like-kind. So while I think that if Hofmann characterized it as such he was at best pushing legal boundaries, I can’t be certain of it.
And how about the church’s treatment of the transaction? Well, as a tax-exempt organization, the church would be entirely indifferent as to whether the transaction qualified as a like-kind exchange or not. Either way, the church wouldn’t owe taxes on its gains.
[fn1] I’m currently about 10 minutes into Episode 1, so I can’t say anything intelligent about the documentary.
[fn2] Imagine my surprise when, years and years ago, my wife and I were exploring a used bookstore in Brooklyn and we came across a book about the Mark Hofmann forgeries and murders! A roommate at BYU had owned Salamander and I’d read it during my undergrad so I was at least a little familiar with the story at the time.
[fn3] Tax nerdery alert: technically, if you sell it for more than your adjusted basis, which is generally the amount you paid for it with certain adjustments. But honestly, the handful of people who are reading a Mormon blogpost about the Hofmann forgeries who really care about basis already know about it and understand it. For everybody else, I don’t want the details gumming up the big picture.
[fn4] It doesn’t mean the gain goes away: for tax purposes, I’m treated as if I had bought the new saxophone for $1,000 so, if I sell it later for $1,600, I have a $600 gain, not a $100 gain.