Tuesday, March 2, 2010

I suppose this was bound to happen.

Robert Cruickshank,* writing for something called the California Progress Report (featuring a 'Navigation' widget with one link: 'Donate'), has a problem with Frank and Jamie's tax dealings. In discussing how California might make up its dramatic budget shortfall, he writes:

*Not 'Crookshanks', but wouldn't that be delightful?
Maybe one place to start is by looking at how the rich evade their tax obligations. Last week the LA Times's Michael Hiltzik showed that Frank and Jamie McCourt paid no federal or state income tax between 2004 and 2009. 
Many wealthy Californians and large corporations have similarly evaded taxes.
There's a lot there for investigative journalists to pore over. For example, California Watch could examine how much money some of California's largest corporate landowners have cost the state by using shell companies to get around property tax reassessments at sale, unfairly extending Prop 13 protections. Or they could examine how many other California CEOs follow Meg Whitman's lead and use offshore tax shelters. There is much more money the state loses through these means than the paltry $486 million over 3 years cited in the California Watch article.
But instead they seem to be focusing on attacking public workers. It's a sad reflection of the fact that in today's California, workers are seen as an acceptable punching bag, but corporations and the wealthy aren't.
I'm happy to see that, but for an odd article here and there, people haven't been to quick to demonize the McCourts for the tax issue. Cruickshank, here, has a nasty habit of using the work "evade" and its variants, which I think is unfairly pejorative. In addition to being legal, using loss carryforwards is a common, accepted practice. Joe Kristan at Going Concern explains:
Imagine of a world without loss carryforwards (I think you can!). You start a business and you lose $2 million in Year 1. In Year 2 things turn around and you make back $1 million. Without loss carryforwards, as a 35%-rate taxpayer you would pay $350,000 in Year two, even though the business is still $1 million in the hole. That’s an effective rate of >infinity%.
Perhaps Mr. McCourt is prosperous in spite of his loss carryforwards. Maybe his real estate has held its value, unlike everybody else’s. Maybe he’s even running personal expenses through his business (though Leona Helmsley learned that the IRS looks for that). But even a Los Angeles real estate empire can suddenly come crashing down.
Remember that maybe, just maybe, Mr. McCourt’s soon-to-be-ex-wife has a vested interest in making him look prosperous, and in making losses look like a mark of wealth. She might like some of that.
The commonwealth of Massachusetts is already auditing McCourt tax returns from several years ago, and all this notoriety might indeed attract a California or federal audit. If it does, running personal expenses through the various business enterprises is likely to be a much, much bigger deal than using loss carryforwards to offset income. 
It's frustrating to come to grips with the fact that the McCourts have taken $108 million out of the Dodgers which hasn't been subject to taxes. And it's certainly true that if we were to take an "if we weren't already doing it this way, how would we do it?" approach, we'd likely decide to go with something completely different. But the law is the law, and what the McCourts were doing could have been completely kosher. 

1 comment:

  1. Koenig's analogy is wrong. The tax rate should be for corporate tax rather than income, and if a business with a capital loss for one year and a big gain another year, should not being pay the flat 34%-35% corporate tax rate. One reason the Tax code is such a mess is the amount of deductions, and if a business/small business qualifies.

    I am probably not as critical of the McCourts not paying income tax on loans and credit lines that fund their lifestyle... They are paying huge property taxes on the residential properties, the Dodgers are paying their corporate taxes, and the Dodgers are helping the State with sales taxes. Even though I take the McCourts' charitable givings with a grain of salt, the donations can go along way in helping out in the community.

    I don't see the McCourts taking out $108 million of money from the Dodgers, as much as using the Dodgers as collateral to get some huge loans with they used as ready cash. The McCourts have to pay it back once the Dodgers are sold. They may be better off to sell the Dodgers at a lost for Capital Loss purposes.

    I am much more critical of the McCourts' business plan, which is very risky, and puts them and the Dodgers at the whim of the banks, the current economic climate, and puts some stifling loan payments on the Dodgers organization and the McCourts. They seemed to also not have much assets that hasnt' been used as collateral for credit lines and loans.