Meanwhile, Behind the Curtain…
While the rest of us were busy stoking the initiative to tax hedge fund managers’ earnings as earnings, not capital gains—and feeling like we might actually be getting somewhere—these fund managers were busy pulling off an amazing tax coup.
As described by David Cay Johnston this AM in the New York Times, partners in the Blackstone Group, the formerly private hedge fund that just went public, will not simply avoid paying taxes on the billions they raised on the sale. They’ll get about $200 million back.You read that right. According to Johston’s analysis and that of various experts—and bless all their analytic hearts—the Blackstone gang will net $198 million from taxes on the deal.
It’s a tricky loophole, and there’s a nice diagram in the article that’s worth studying, but the key to the deal is something accountants call “good will.” That’s an intangible asset, like the value of a brand name, which is reflected in the price of that brand, but whose value goes well beyond the physical assets. If the Nike company sold itself to the Ekin company, part of the price would reflect the very valuable Nike brand name. But Ekin can’t cash in on that “good will,” so they’re allowed to deduct it from the sale price.
But in this case, the Blackstone partners remain in the fund, so as Johnston put it, they “sold the good will from their left pocket to their right.”
They then pay a 15% tax rate on the capital gains they made from the sale, a perfectly legit move. But in their next move, they claim good will deductions at 35%. That’s the smelly part…very smelly.
Anyway, you do the math and their tax bill on the sale comes to $553 million, their “good will” deductions amount to $751 million, and the difference—what the partners get back from the IRS at the end of the day—is just under $200 million.
As one of the tax analysts who broke this story, Lee Sheppard, noted, these folks “are in control of their own taxation,” and our current debates about what rate they should pay on their compensation “misses the big picture.”
I don’t mean to get misty eyed here, but Sheppard, Johnston, and the others who plumb the fine print to uncover a story like this—to get behind the Byzantine curtain of the tax code and reveal this chicanery—are true patriots.
Now, what’s the right word for the super-rich people who engage in these deals? How do you describe gazillionaires who craft deals like this, not simply to keep their dollars from flowing to the Treasury to pay their share of the nation’s tax bill, but actually get hundreds of millions back?
As TPM is a family website, I won’t go there. I will only hope that after Congress raises the compensation tax rate from 15 to 35 percent—and this story should put some spine into any reps who are wavering on that point—they turn their attention to plugging this loophole.
Future Republican Party Campaign Donors
Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran
July 13, 2007 7:11 AM | Reply | Permalink
Greed zombies beyond any shame. A perfect example of the effect of large masses of money on nearby space. A moral black hole.
July 13, 2007 7:21 AM | Reply | Permalink
Sort of flies in the face of Sawicky's #5 ......
Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran
July 13, 2007 7:34 AM | Reply | Permalink
Anyone who has read the Tax Code and the regs. shouldn't be particular surprised. Not only is it largely indecipherable by anyone who is not an expert but it is filled with provisions that only benefit particular individuals or corporations. There are other sections that benefit individual industries. This is all about Congress, not Blackstone, and the American people who like their deductions and otherwise ignore what is done with the Code.
Steve Forbes isn't wrong when he calls the tax code a disgrace. Unfortunately his solution is ridiculous. Income needs to be defined simply and broadly, deductions elimated and tax rates sharply reduced on a graduated basis with more low income people knocked off the taxrolls all together.
There should also be some thought to eliminating corporate inome tax and shift to a vat. This will removed all the deductions like for "goodwill" which is an accounting definition, and put the cost of goods where it belongs in the price of products and services.
Daniel A. Greenbaum
July 13, 2007 8:22 AM | Reply | Permalink
As this story illustrates in a dramatic fashion the concept of what constitutes the "worth" of a corporation is seriously out of date. When "good will" was just the premium paid for the reputation of an industrial firm it was a minor issue.
Many modern firms have little in the way of tangible assets. A firm like Nike makes nothing, has no factories and probably doesn't even own its warehouses. Everything is contracted out. The same is true of Blackstone, they have no physical plant, aside from a few office fixtures.
The idea that good will gets special treatment needs to be reconsidered.
--- Policies not Politics
Daily Landscape
July 13, 2007 3:13 PM | Reply | Permalink
MORE ON THE PULLING BACK CURTAIN THEME
"Now, what’s the right word for the super-rich people who engage in these deals? How do you describe gazillionaires who craft deals like this, not simply to keep their dollars from flowing to the Treasury to pay their share of the nation’s tax bill, but actually get hundreds of millions back?"
Some stream of consciousness remarks:
What about the role of foundations in our newfangled economy? Does Bill and Melinda(sp?) and Warren slicing off most of their fortunes and putting it in a dubious foundation help them more, tax-wise, or "us"? Is this the ultimate face-saving move of the conman - throwing a bone or two back to make us believe that they're actually really good and trustworthy folks?
How do these foundations work, tax-wise and otherwise? Are they good for America and the world or not?
As long as I'm getting long-winded...check out:
http://en.wikipedia.org/wiki/Templeton_FoundationTempleton Foundation, despites its efforts to distance itself, was linked financially to Anschutz's anti-science (ID) "Discovery Institute" (http://en.wikipedia.org/wiki/Discovery_Institute)
There seems to be a common denominator here, and it doesn't seem to be the importance of religion: Templeton is (was) involved in a hedge fund ("private equity company"?) that purchased the Aladdin casino out of bankruptcy. They are also the folks that parlayed a $5M down payment into $4B-$5billion sale of cellular bandwidth they "won" at auction using a bankrupt communications co. shell.
Anschutz probably came out of his Qwest "nightmare" the richer for it, and apparently Qwest survived as well, despite being fined $250M by the SEC. (This reminds me of the approx. sum that Ameriquest was fined for their no-so-religious practices). Anshutz is or was apparently involved in gambling as well, in England (ref. the "supercasino").
Templeton's Discovery Institute recently awarded their 2007 prize (always just a little higher than the nobel prize) to a Canadian political philosopher who writes mountains in support of religion and even invokes Wittgenstein (who the heck can argue with that?)
So, is there really a war between the godfearing and the godless at the top of the food chain currently? Or is it really a war between the very wealthy and the friction that less wealthy intelligent people create?
This religious baloney is tainted. Drop it.
*******************************************
Becks and Posh as running mates for '08!
(Did Anshutz get his $250M back and use it to bring Beckham to Los Angeles?)
July 14, 2007 10:06 PM | Reply | Permalink
A fascinating sidebar to this tax scam is that one of the main beneficiaries is Peter Peterson. If the name is not familiar, Peter Peterson was the founder of the Concord Coalition and is one of the leading crusaders for cutting Social Security and Medicare.
While the NYT article doesn't give individual breakdowns, Peterson's share of this scam would almost certainly run into the tens of millions of dollars and quite possibly exceed $100 million. As Mr. Peterson has said publicly on many occasions, he doesn't need his Social Security check. That's probably true.
July 15, 2007 8:28 AM | Reply | Permalink
It's been pointed out that the investment with the highest return, dwarfing all financial instruments, is to buy a Congressman or three.
July 15, 2007 8:34 AM | Reply | Permalink