Wednesday, October 6, 2010

"A Follow-Up"

I tell ya, it was exhilarating.

It’s what I always hoped my blog would become: Advocates of opposing points of view, squaring off in the arena, known to 35 “followers” as Earl Pomerantz: Just Thinking.

Fireworks. On my blog.

Okay, not “Grand Finale Extravaganza” fireworks, where they pull out all the stops. and the skies explode with color and delight. Not really close to that. It was more like one firework, and an opposing firework.


Controversy. Or if you’re reading this in England, controversy.

Stemming from, on its surface at least, the driest and dullest of subjects:

The United States Tax Code.

Which hardly anybody has read, including, in all likelihood, the Congresspeople who voted for it.

The topic “umbrella” was a three-parter, entitled, “The Best Intentions.” The tax issue was the first installment, which was followed, as the “three-parter” designation requires, by two others, the final chapter arriving yesterday.

I offer this as a follow-up to “Installment Number One.”

I received two comments on “The Best Intentions.” They were both from “Anonymous”, though, that designation being available to all, I could not, at first, determine whether they came from one “Anonymous” commenting twice, or two different “Anonymouses”.

Or is it ”Anonymice”?

Subsequent readings suggest it was the same “Anonymous”, their second comment serving as a correction of their first. I could be wrong about that. It could be two “Anonymice.” It which case, it’s still fireworks.

If it’s one “Anonymous”, however, then, technically, it’s not fireworks. It’s just one commenter’s revising their original comment. Call it “firework.”

It’s all right. It’s a start.

Irregardless – which is a word that doesn’t exist but that never stopped me before – my original position, I believe, is sustained. That position, I will reiterate shortly.

But first, I shall re-print “Anonymous’s” original comment:

The $108 million “income” cited by Jamie in divorce papers was debt, not income. You don’t pay taxes on loan proceeds. They didn’t “make” the money, they borrowed it. But I guess Earl thinks they should pay income taxes on it anyway just on general principles.

A little snarky, but I can handle it. Here now, as they used to say on Weekend Update, is “Comment Number Two”:

Correction: The $108 mil was tax losses, not income, though Jamie portrayed them as such. But the point remains. McCourt is borrowing against assets and future Dodger income streams to generate current cash. And as loan proceeds, those sums aren’t taxable as income.

Yeah. The more I re-read it, the more it sounds like a single “Anonymous”, correcting themselves on a detail. Or maybe there’s a disagreement on that detail, Jamie (and her crack legal team) contending one thing, and her soon-to-be or maybe already ex (and his crack legal team), another.

I made clear in my post my virtual ignorance of what I was opining about, but a disclaimer of this nature does not justify ignorance. It merely acknowledges it. That’s really not good enough. Though it’s a lesser transgression, I believe, than claiming you’re an expert on a certain subject when you’re not. Examples abound. Insert your own.

My intention was to present an example of the good intentions of the tax code gone disturbingly awry:

The McCourts are really rich people. The own the Dodgers.

And they don’t pay any income taxes.

I don’t know how you feel about that, but, to me, that doesn’t seem fair.

For fifteen years, I owned a one forty-second share of the South Bend Silver Hawks.

I paid income taxes.

What did I do wrong? Did I have the wrong accountant? Did I make the mistake of paying cash, instead of borrowing the money? Did I buy the wrong team?

I’m not rich enough to buy the Dodgers. I wanted to be an owner, so I bought a one forty-second share in the “A-Ball” (low minor league) Silverhawks instead. It was the best I could do.

As you can imagine, the asking price of a one forty-second stake in the South Bend Silver Hawks was lower than the asking price for the Dodgers. Considerably lower. So low, in fact, that I had enough in the bank to write a check for the entire amount.

Was my mistake having too much money in the bank? I thought we were supposed to save. I thought it was good for the economy. Though that may be a red herring. People don’t go into real estate because it’s good for the economy. They go into real estate to become extremely wealthy, and be in a position to buy a baseball team that doesn’t play its games against the Lansing Lug Nuts.

Apparently, if you’re not rich enough to buy the Dodgers for cash, you can borrow the money. Or can you? Could I go into a bank, borrowing, as “Anonymous’s” second comment reports,

“against assets and future Dodger income streams

and get a loan big enough to acquire the Dodgers? Could you? If we can, come on!

Let’s buy the Yankees! Forget the Yankees. Let’s buy the Leafs!

There’s something missing here. What’s missing is, I don’t have the “assets.” Which I assume involves more than just the “future Dodger income streams.” Because if that’s all “assets” involves, that’s a circle.

Without the “future Dodger income streams”, there is no loan. But it’s the loan gives you access to the “future Dodger income streams.”

You can’t do that, can you? And then write the loan off as “debt”, so you don’t pay any income taxes? It must have something to do with those other “assets.” But what if they were acquired through loans as well? More debt? And even more tax protection? Who knows? Maybe they can get a refund.

That, it seems to me, is what the tax code has evolved into. The super-rich can construct investment scenarios that will exempt them from paying income taxes, and regular people can’t, so we have to.

And it’s entirely legal!

By providing the rationale behind such maneuvering, “Anonymous” has put a professional veneer on my point. So thank you, “Anonymous.”

Not quite fireworks. But enjoyable nonetheless.


Blitzen said...

It seems to me that Anonymous was saying they don't have to pay income tax on the loan, which is probably true; I haven't read the tax code either. But what about the money they earned to pay back that loan, by selling real estate? Do they NEVER pay income tax on that either? If that's the case, there is something wrong with the tax code.

YEKIMI said...

Maybe it was only one Anonymous but he has split he could be arguing with himself.

Joe said...

I can't believe I am weighing on this, the son, husband, brother-in-law and cousin to tax accountants, I must.

There is a REASON why the tax code weighs more than a bad marriage. All those eleventy gazillion pages didn't get there by accident. They are there to provide EXACTLY the sorts of tax advantages we're reading about.

This is why you read of certain Senators from State X docking their yacht in State Y and thus avoid paying State X's taxes.

Tax policy changes really don't affect the truly wealthy, they can manage to hire Big Four tax accountants and white-show tax lawyers to make sure that regardless of whether the top tax rate is X% or Y% they don't pay.

Is it just me, Earl, or are you getting more and more edgy and controversial. First, stoning and now taxes? Madness, I tell you.

Anonymous said...

Weird, Earl, what you describe sounds eerily like... a mortgage. I sure hope I won't ever pay taxes on the money I borrowed at the bank for my house, which I was able to secure thanks to the asset... the house. I also recently applied for a mortgage for a 3-apartments building. Guess what? The bank took into account "future income stream", also known as rent revenue, into account for the amount I could borrow.

I'll pay taxes on the rent, I'll pay taxes on profits when sell my house. I expect the McCourt will have to do the same.

Barry said...

So... assumably these folks took out a whopping loan to purchase the Dodgers. Ok, since people don't purchase baseball teams just for the heck of it (well, maybe some do) they have to be expecting, eventually, to make some money from their investment. After the purchase, income on their investment is going to start coming in. Ticket sales, vendor and concessions, royalties for use of logos, TV contracts, etc. Whatever ways a pro sports team makes money to pay its players and other expenses also pay off its owners and other investors.

So at some point, there will be income coming in. That income has to be taxed, right? Part of that income must be used to pay off the loan, sure, but people gotta eat so they're using the income to live off of (in addition to any other income from other sources, like real estate).

There's your income, not from the loan itself, but the cash generated by the investment the loan capital created. So why isn't that income taxed??

Tom Michael said...

Here's the one that gets me. It happened to my favorite discount store, Dollar General (a company that apparently doesn't have stores in California, but has more total individual stores nationwide than WalMart does). They sell general items from groceries to clothing, and are in a lot of small towns, especially in the South.

Another company bought Dollar General. They borrowed A LOT of money to do it. Did they pay the money back?

NO! They took all that debt, and transferred it to Dollar General's books.

Then, they spun-off Dollar General as a public company, conning stock investors into buying it - all perfectly legal. They took the pure profit, and didn't have to pay the money they borrowed back, because now Dollar General owes it.

And many analysts now say Dollar General, an otherwise popular store that sells things at low prices, is likely to go bankrupt. Because they have too much debt.

That debt is the debt the people who bought them borrowed to buy them. (A convoluted sentence, but accurate, as well as alliterative.) But the people who bought them no longer owe the money, Dollar General does.

I don't own stock in Dollar General, and may never buy stock again - because this is how corporations can operate in America today.

If Dollar General goes bankrupt, a lot of jobs will be lost, and a lot of small rural communities who depend on these stores will lose them.

Do people who claim unregulated markets are fair and efficient really know what they're talking about?