Quit Your Whining

By all rights, "Tax Day" ought to be one of our favorite holidays, like "Christmas in April" without the carols, the hype, or the eggnog. That's because eighty percent of us get refunds, averaging $2,782 each in 2017. (When was the last time Santa Claus left three grand in your stocking?) Of course, that means 20% of us are writing checks to the IRS. And if you're among that 20%, we sympathize. We know it hurts. But we're confident it does't hurt nearly as much for you as it does for a "master of the Universe" named John Paulson.

Paulson started his first fund in 1994 with $2 million and one employee. He built a reputation for "event-driven" investing, betting on mergers, acquisitions, proxy fights, and similar opportunities. A decade ago, he made a fortune shorting the U.S. housing market (the same story that author Michale Lewis spotlighted in his book and movie, The Big Short). Paulson earned $15 billion on that trade. By 2011, he managed $38 billion in assets for some of the world's most sophisticated investors.

Naturally, much of that money found its way into Paulson's pocket. He charges a 2% management fee, which is standard for hedge funds. But he also takes 20% of his funds' profits, and that's where the real money is. In 2007, he took $4 billion for himself. In 2010 he outdid himself to take home another $5 billion.

Paulson isn't flashy. He generally avoids the press, and he's not looking to buy himself a Senate seat. But he does seem to enjoy his fortune. He splits his time between a 28,000 square-foot townhouse on Manhattan's East 86th Street, a $49 million Aspen ranch, and a $41.3 million Southampton estate. In 2015, he donated $400 million to put his name over the door at Harvard's school of engineering and applied science.

What does all that have to do with this year's tax bill? Up until 2008, hedge fund managers could defer tax on most gains by simply leaving their money in the fund. But in that year Congress changed the rules and gave them until this year to pay the tax on the gains they had accumulated before that date. So now, time is up. Just how much does he owe? He's looking at stroking a billion-dollar check to the IRS!

(Who are we kidding here? Paulson can't even write a check that size. The most the IRS will take in one draft is $99,999,999. Theoretically, he could write ten of them. But whose handwriting is small enough to fit "Ninety-nine million, nine-hundred ninety-nine thousand, nine hundred ninety-nine dollars and zero cents" on a check in the first place? He'll wire the feds the money and pour himself a really stiff drink.)

Auditors on Deck

Baseball is back, even as some teams are looking at early-season snow days. Little-leaguers across the land are donning gloves and getting ready to watch their favorite big-leaguers take to the field. Stats geeks are prepping spreadsheets to crunch numbers like WAR (Wins Above Replacement), BABIP (Batting Average on Balls in Play), and LWCT (Largest Wad of Chewing Tobacco). And the umpires at the IRS are watching a new pitch that Washington just threw across their plate, too.

Since 1921, code section 1031 has let you exchange property you've held for business or investment without paying tax on your gains. These "like-kind" exchanges usually involve real estate. They also include vehicles and equipment — if an up-and-coming CEO wants to swap his company's tired old Gulfstream IV for a newer, shinier model V, that's cool, too. The IRS has even ruled that "trades of player contracts owned by major league baseball clubs will be considered exchanges of like-kind property."

But last year's Tax Cuts and Jobs Act trimmed the roster on like-kind exchanges to real estate only. And that means some teams may already be behind in the count for taxes they owe on their trades!

Here's the challenge: how exactly do you value a baseball player's contract? The New York Times offered an example when they first reported the problem: last year, the Detroit Tigers sent right-handed starting pitcher Justin Verlander, four years into a six-year, $162 million contract, to the Houston Astros. The Astros sent back 20-year-old outfielder Daz Cameron (now playing for the Single-A Lakeland Flying Tigers), 19-year-old Venezuelan righty Franklin Perez (now playing for the AA Erie Sea Wolves), and 21-year-old catcher Jake Rogers (also playing for the Sea Wolves).

The veteran Verlander is clearly "worth" more. But he's 35, and he can't keep throwing heat forever. So how do you quantify his contract with a number the IRS will accept? Is it the $28 million/year he earns today? (Fun fact: that meant $136,000 per inning last season.) Or is it "some calculation of the total future value Mr. Verlander will bring to the team, minus the total future value it gave up in the prospects it traded away — and possibly adjusted for the amount the team will have to pay Mr. Verlander?"

And Detroit faces a different challenge. How do you assign a "net present value" to an unknown quantity like Perez who isn't even old enough to buy a drink? Any Bull Durham fan can tell you sometimes all it takes is the right coach to turn a prospect into a phenom. But how do you push him into playing his best ball without pushing him into Tommy John surgery? And what if his trip to "the show" lasts just 21 glorious days?

Finally, what about the human cost of all this activity? How do you put a price tag on a 10-year-old Pittsburgh fan's tears when you tell him his beloved Pirates have traded his hero Andrew McCutcheon to the hated San Francisco Giants for a rookie pitcher, a minor-league outfielder, and "$500,000 in international signing bonus allocation," whatever the heck that is?

The Tax Cuts and Jobs Act is full of hanging curveballs like the new like-kind exchange limits. That's why you can't just wait for April 15 to roll around and hope for a "cheese dog" across the plate. So call us when you're ready to take a swing at a plan, and see how much you can save. Don't forget we're here for your teammates, too!

The Best Investment in Today's Economy

The Best Investment in Today's Economy

Investing isn't easy these days. Bank savings accounts and money market funds earn next to nothing. Bond yields are at historic lows. The stock market is at a recent high, but full of volatility. And alternative investments like real estate and private equity can be illiquid or bring with them other drawbacks. 

If you're a corporate treasurer, you might consider investing in a Washington lobbyist. Back in 2009, three professors conducted a study revealing that companies who helped lobby for one particular tax break earned a staggering 22,000% return on every dollar they invested in lobbying! (For those of you who didn't major in accounting, that's $220 dollars coming back on every dollar going in.)

Back in 2004, when Congress was considering the American Jobs Creation Act, an ad-hoc group calling itself the Homeland Investment Coalition lobbied for it to include a "tax repatriation holiday." Multinational corporations often structure their operations to earn profits overseas, then leave those profits overseas to avoid U.S. tax. The repatriation holiday cut the regular tax rate on those profits from 35% to just 5.25%, which encouraged them to bring those profits back home. The stated goal, naturally, was for those companies to reinvest those profits and create new jobs. 

More than 800 companies ended up celebrating the "holiday." Together, they saved an estimated $100 billion in tax, which certainly sounds worth celebrating! Winners included pharmaceutical and technology companies (Pfizer, Johnson & Johnson, and Merck), technology companies (Hewlett Packard and IBM), and financial services (Citigroup, J.P. Morgan Chase, Morgan Stanley, and Merrill Lynch). Not all of those companies "invested" in lobbying for the law, but even those that did, won big. For example drugmaker Eli Lilly reported spending $8.5 million to lobby for the tax break in 2003 and 2004 -- and saving more than $2 billion in tax. Not a bad "ROI"! (The jury is still out on whether the law actually created any jobs -- many of its beneficiaries actually cut jobs after the tax break, and most of the money went to stock buybacks or dividends.) 

Of course, not every lobbying "investment" pays off. Sometimes lobbyists strike out. And successful lobbying is harder in today's hyper-partisan gridlocked Congress. But shrewd lobbying still pays off. The New York Times reported earlier this week that lobbyists representing Amgen, the world's largest biotechnology firm, completed a "Hail Mary" pass by tucking language into the recent "fiscal cliff" bill. The provision delays a set of Medicare price restraints on a category of drugs that that includes Amgen's own Sensipar. This legislative goodie is estimated to benefit drugmakers by $500 million over the next two years. And it comes just two weeks after Amgen pled guilty to marketing another one of its drugs illegally, agreeing to pay a record $762 million in fines and penalties! And while the new law isn't a tax provision, per se, it still illustrates the power of lobbying. 

Individual taxpayers like you and me can't lobby for millions in tax breaks. But we can take advantage of the hundreds of tax breaks that somebody else has already created. The key, of course, is research to find those breaks and planning to take advantage of them. That's why we focus so much effort on proactive planning.

 Consider this as the 2013 tax season approaches. Any competent tax preparer can put the "right" numbers in the "right" boxes on the "right" forms. But then, most of them pretty much call it a day. They really just help you record history. Our job is much broader and much more valuable. So call us when you're ready to start writing your own history! And remember, we're here for your family, friends, and colleagues, too