STRATEGY CUTS INVESTORS' TAX : WALL STREET USES LOOPHOLES TO AVOID CAPITAL-GAINS COSTS.

Byline: Diana B. Henriques and Floyd Norris The New York Times

Last spring, Wall Street bankers made an irresistible sales pitch to Eli Broad, the billionaire home builder and co-founder of the booming SunAmerica insurance empire.

For a fee, they would help him lock in $194 million in profits on some of his SunAmerica stock and free up cash to pay family debts - best of all, without having to sell the stock and give up all future profits on his shares. He would therefore not owe a penny of the estimated $54 million in taxes he would face if he sold the shares.

Broad accepted. ``We have our cake,'' he said recently with a chuckle, ``and are eating it too.''

Seventy-five years after it was enacted, the federal tax on profits from the sale of stock, land or other assets - known as the capital-gains tax - is becoming largely academic to the nation's wealthiest taxpayers. They, like Broad, can take advantage of a growing arsenal of Wall Street techniques to delay or entirely avoid taxes on their investment gains.

These strategies give taxpayers these breaks:

Owners of a private business can sell it to their employees without paying capital-gains taxes, as long as they put the proceeds in certain investments - investments that Wall Street is eager to provide.

Real-estate owners can swap properties without the capital-gains tax required when a sale is made, allowing them to diversify their holdings and raise cash for other purposes.

Large shareholders can use any of several exotic Wall Street strategies to raise cash and lock in their stock-market profits without actually selling their shares, which would create a tax bill.

``The simple fact is that anyone sitting on a big pot of money today probably isn't paying capital-gains taxes,'' said David Bradford, an economist at Princeton University and a critic of the current income-tax system. ``The people who will get stuck paying capital-gains taxes will be the ordinary investors who own mutual funds.''

Businesses: Selling a Company With No Tax Bill

James Hunt, a successful entrepreneur in Kankakee, Ill., pocketed about $45 million in profit when he sold his employee-leasing business, TTC Illinois Inc., to his employees in July 1995. How big was his capital-gains tax? Exactly zero, thanks to an obscure provision of the tax code called Section 1042, enacted in 1984.

The Section 1042 tax break is straightforward: The owner of a private business who sells at least 30 percent, and as much as 100 percent, of that business to an employee stock-ownership plan, or ESOP, owes no capital-gains taxes on the proceeds, as long as he reinvests the gains in other domestic corporate securities and does not sell those securities during his lifetime.

In 1989 Congress added one more string: The seller must have owned the business for at least three years.

Real Estate: Old Loopholes, New and Improved

John J. Cali, his younger brother, Angelo, and their old friend, Edward Leshowitz, are the senior statesmen of Cali Realty Corp., a commercial real-estate empire valued at more than $1 billion.

They are also the beneficiaries of a new ownership arrangement that gave them many of the advantages of selling their stake in that empire without exposing them to the capital-gains tax. This arrangement is called an umbrella partnership real-estate investment trust, known simply as an upreit.

By swapping one property for another of at least equal value, developers can endlessly defer the capital-gains taxes they would have owed if they had simply sold the first property and bought the second. The only catch is that the swapped property must be ``property held for investment or used in the course of a trade or business,'' not personal property or a family home.

The Swap Fund: a Tax Break Back From the Dead

Also booming is a tax gimmick called a swap fund.

Known also as an exchange fund or a diversification fund, a swap fund uses partnership tax breaks to help wealthy investors diversify their assets without paying capital-gains taxes.

The theory is simple: Partners can swap property tax-free into a partnership in exchange for partnership shares. So could they not also swap securities tax-free into a partnership, so that each contributing investor could own shares in a diversified portfolio without creating a tax bill?

In the last two years private swap funds from a number of major Wall Street institutions have squeezed through that loophole.

The Beat Goes On: Latest Techniques Draw a Big Crowd

On Tuesday morning more than 200 people jammed a banquet room at the Yale Club in New York to hear specialists from Bankers Trust discuss the latest techniques for raising cash and diversifying assets without incurring capital-gains taxes.

Strategies differ, the banker told the crowd, but each allows wealthy taxpayers to achieve that coveted objective: the deferral of capital-gains taxes, optimally for as long as it takes to avoid those taxes entirely.

``You can have your cake,'' he said with a smile, ``and eat it, too.''

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Photo

Photo: The Cali family - left to right, Angelo, John R., Brant and John J. - used Wall Street strategies to avoid capital-gains taxes.

The New York Times