Problem
The Case Situation:
Bill Gates is one of the wealthiest individuals in the United States, with a current net worth estimated to be 121 billion dollars. (Hayes, 2022). The majority of his net worth was derived from his ownership in Microsoft Corporation. He owns approximately 1.3 percent of its shares currently valued at 20 billion dollars. Since his departure from Microsoft management in 2014, he has diversified his investments to include other investments in other companies, real estate holdings and collectables, among other things. (Hayes, 2022).
Much of Bill Gates' stockholdings are held in Cascade Investments, LLC, a wholly owned investment company. Its estimated current value is 35 billion dollars. (Hayes, 2022). He also has significant real estate holdings, including his Xanadu home in the Seattle area valued at 131 million dollars, a Wellington Florida horse ranch valued at 8.7 million dollars, and the Grand Bogue Caye Island near Belize, valued at 25 million dollars. (Hayes, 2022).
Mr. Gates has invested in collectables, too, such as a Leonardo Davinci manuscript called Codex Leicester, valued at 31 million dollars and several paintings, including Andrew Wyeth's "Distant Thunder" valued at 7 million dollars and Frederick Childe Hassam's "Room of Flowers" worth 20 million dollars. (Hayes, 2022).
Assume Mr. Gates' portfolio of investments experiences the following results in 2023:
a) His tradeable Microsoft stock appreciates by 10 percent from its 2022 value of 20 billion dollars, based upon 2023-year end New York Stock exchange values.
b) The non-tradeable Davinci manuscript has not been revalued since 2022, when it carried a 31-million-dollar value. However, under the Greenbook's guidelines, page 35, it will be revalued using the five-year Treasury interest rate plus two percent. The current five-year
c) Treasury rate is 3.26, resulting in an appreciation rate of 5.26 percent.
d) Mr. Gates' 2023 regular tax liability is $240,000,000 (based on a 40% tax rate given 600 million dollars of regular taxable income).
Task
Address the following questions:
i. What will the proposed tax on unrealized gains apply to?
ii. How is the proposed tax on unrealized gains calculated?
iii. Assuming Bill Gates' Microsoft stock increases by 10 percent and his Davinci manuscript increases by 5.26 percent in 2023, will he be liable for the unrealized gain tax? If so, how much?