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High-tech rich leave taxing problems behind

Silicon Valley millionaires find a sweet spot in Nevada tax codes, establishing legal residences in tony villages and golf communities before selling stock acquired through option grants.

Part of my responsibility as a single father is to supervise the education of my 12-year-old son, Vermel. This week that meant counseling his classmate and best friend, Jai Pegue, who was despondent after drawing the shortest of 50 straws in social studies class. The consequence: Jai Pegue had to write his state report on Nevada.

"Hey, chin up, kiddo--Nevada's a terrific state," I said. "For one thing, it's at the heart of the president's energy plan."

I thought of some other things that distinguished Nevada, but remembering Jai Pegue's tender age, I kept them to myself.

At that point Vermel broke in, reading aloud from the Sunday New York Times.

"'Pick almost any index of social well-being, and Nevada ranks at or near the very bottom of the 50 states, though it ranks near the top in personal wealth,'" Vermel read. "'Besides having the highest suicide rate (almost twice the national average), Nevada has the highest adult smoking rate and the highest death rate from smoking, the highest percentage of teenagers who are high-school dropouts, the highest teenage pregnancy rate and the highest rate of firearm deaths.'"

I thought the article must be overstating the case. After all, if Nevada were in such poor shape, why would so many Silicon Valley millionaires be moving there?

It might have something to do with the difference between the California and Nevada tax codes. On the advice of their tax advisers, people who made money on stock options from companies such as Exodus, Netscape, Oracle and Sun have been establishing their legal residences in tony villages and golf communities like Montreux, Incline Village, Caughlin Ranch and Arrow Creek before selling stock acquired through option grants.

"I'm there a lot," said one nouveau Nevadan who Netscaped to the Silver State, reached at work in the Bay Area. "I sold my house here. I basically live there."

Moving to Nevada for tax purposes is nothing new; the Swiss bank account set has been doing it for years (why do you think they named it Montreux?). But the recent influx of high-tech riche has sparked a wildfire of incubators and venture funds to stimulate high-tech development in the area.

Technology megabucks are floating like a smoke ring around Reno with such outfits as Sierra VisionLaunch and its Bristlecone Ventures (launched just this week), Sierra Angels, and the Tech Alliance.

"A lot of people from Silicon Valley have moved to this area," observed Fred Sibayan, co-founder of Exodus Communications, president of Sierra Vision Launch and resident of Montreux. "They moved here for the quality of living as well as the tax reasons. These people have a lot of expertise and a wealth of knowledge that they could expose to the young companies who are moving here."

Sibayan, a native Californian who collected a Purple Heart in Vietnam and a degree from San Jose State University before co-founding Exodus, moved to Nevada the year Exodus went public and his stock options turned into a bull's-eye target for the California taxman.

Silicon Valley refugees stand to escape more than just California taxes by moving one state east. Add to taxes rolling blackouts, million-dollar one-bedroom condos, the 101 commute, and the general level of stress frazzling the state between San Jose and the Golden Gate Bridge.

Nevadans, according to Sibayan, are more laid back than Californians.

"It's a different quality of life," said the Exodus alum. "It's the sanity factor. And we're very close to the Bay Area--only 40 minutes away by plane."

One thing high-tech execs can't escape by moving to Nevada is a serious education problem.

"We're working very closely with the education system, with the University of Nevada, Reno, to bring them up to a standard when we're talking about IT," said Sibayan, who sits on the board of advisers for that university's school of engineering. "The objective is to bring the level of academia up to par with the rest of the country and what's going on with technology."

Meanwhile, Sibayan's gated community makes no bones about the attraction it holds for Californians. "There are a lot of dot-com people who have settled here," said Montreux's marketing director, who estimates that fully half the residents are from California. "We've got a good list. They come here because of the tax reasons. And it's truly gorgeous."

Certified public accountants are ominously divided on the mechanics of moving to Nevada to avoid California tax on stock sales.

"It would still show as being generated in California," said a representative for the Nevada Society of CPAs, who polled several members of her organization. "As far as we are concerned in Nevada, we would consider that foreign income, and you would have to file state income taxes in California."

But Bob Sommers, self-styled tax prophet to the high-tech stars, defended the advice he is giving his California clients.

"If the stock option is treated as compensation earned or accrued while the taxpayer resided in California, the income will be taxable in California," Sommers wrote the Rumor Mill. "Once the compensation element has been taxed and the employee holds stock, a later sale of the stock will not be taxed in California if the employee establishes a bona fide residence in another state."

Meanwhile, Nevada tax advisers say business is bringing in incoming Californians, but the state may be feeling some of the recent downturn.

"We're located in Incline Village, and we've been playing this gig for 20 years here," said George Ashley, president of Ashley Quinn. "There was a real peak not too long ago. But it's somewhat slowed down in terms of the high-tech types." Help me get to a Nevada golfing community soon. Send me your rumors