PFIC… What was that again? — A double-edged sword

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Conolly_SINKEX-300x272

My recent posting about MER Telemanagement Solutions, an Israel based technology company whose equity, MTSL, is traded on Nasdaq, resulted in some questions from readers of the blog.

In the posting (read it here,) which broadly speaking discussed MER Telemanagement Solutions’ quarterly earnings announcement in which the company announced (1) a new high in cash (and cash equivalents) on hand almost exclusively on the strength of a very profitable contract with Simple Mobile, a West-coast based MVNO whose managed services contract with MER Telemanagement Solutions had generated a guaranteed $300 thousand in revenues and cash every month throughout MER Telemanagement Solutions’ fiscal 2013 year; and (2) the end of this revenue and cash stream, effective as of December 31st, 2013.

In my posting, I pointed out that the straightforward economic loss of the Simple Mobile contract coupled with tremendous expenses related to capturing and launching new customers to replace the loss of the contract could hit MER Telemanagement Solutions and MTSL in ways that had the potential for simply bleeding MER Telemanagement Solutions out:

Also, with the loss of the contract revenue and its high margin there is now, I believe, a substantial risk that the company will be considered a PFIC by the IRS of the United States with serious tax implications for common shareholders in the United States. As the company wrote in its 20-F filing for its 2012 fiscal year:

We may in the future be classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.

This comment caused a couple of comments and questions to arise, intensifying as the per share price of MTSL inexplicably started rising when it should, in fact, decrease, reflecting the potential for loss in the first quarter.

Sidenote: I say inexplicably, but that is not really so. In fact, the price was rising, I believe, as part of a deliberate pattern of stimulating buys intended to pull a number of loss positions out of the fire (due to a series of speculative run-ups and subsequent implosions in the per share price of MTSL over the last year the majority, if not all, of the true free float of MTSL is seriously under water.) However, we will let this lie for now as it has only a tangential connection with the issue of PFIC, which is the point of this posting.

Let me attempt to address these question here (spoiler alert: A PFIC classification of MER Telemanagement Solutions may be really bad news for current United States based holders of MTSL shares and may adversely and seriously impact the per share price of MTSL.)

PFIC is shorthand for Passive Foreign Investment Company, an oddity in the United States tax code that was introduced because the United States Congress was concerned that persons investing in passive assets indirectly — through a foreign investment company — could gain a tax advantages relative to persons investing in the same assets directly.

The resulting law attempts to eliminate this problem, but, unfortunately, also have the potential to impact genuine foreign operating companies, for instance companies that are earning substantial passive income (such as a company that has a large war-chest, generating income.)

The way the law is written it attempts to identify a PFIC by way of two criteria. Either 75% of its gross income is passive income or more than 50% of its assets generate passive income.

I am grossly simplifying here, but if you read my previous postings, I am sure that you can see that there is a real possibility of MER Telemanagement Solutions being categorized as PFIC given its cash position (the result of cash gushing out of Simple Mobile for three years) and its off-the-cliff drop in revenues and income.

For MER Telemanagement Solutions itself the classification as a PFIC will really have very limited direct implications, but for United States based shareholders in MER Telemanagement Solutions it gets complicated and dirty very quickly.

First, any gain recognized by the shareholders becomes subject to ordinary income rates, rather than capital gains rates (a vast difference) and — hold on to your pants here — the gain is subject to a non-deductible interest charge over the holding period for the shares.

And it doesn’t end there. In special cases the income tax rate assessed will not be the United States based shareholder’s “normal” tax rate, but, rather, the highest marginal income tax rate in the United States.

It may be worth saying this again: Rather than paying between 15% and 20% in gain tax, United States based shareholders will be paying between 30% and 40% and they will be paying interest on the gain (deemed interest, in fact!)

Second, there is a paper burden here that is well beyond the casual investors, traders, and speculators (I, unfortunately, do not believe that casual investors, traders, and speculators are plagued by detailed knowledge of the environment that they are operating in, which, of course is why they a-l-w-a-y-s lose money in the market.) Essentially, he or she must make a baffling election between mark-to-market or qualified electing fund treatment, both of which are just as confusing as they sound and require certain detailed disclosures by the PFIC (good luck in getting a company to provide disclosure beyond what it has provided in its filings with the SEC.)

How bad is PFIC classification for a United States based shareholder? Well, I think it is very bad. In fact, I think the acronym PFIC was chosen by some fiendish soul in United States Congress with a twisted sense of humor because it also is the acronym for Progressive Familial Intrahepatic Cholestasis, a very nasty liver disease, to signify precisely how bad it is.

I said before that for MER Telemanagement Solutions itself the classification as a PFIC will have very limited direct implications. Likewise, the classification will not have any direct implications for MTSL shareholders that are not based in the United States. However, the operative word here is direct.

A classification as an PFIC is adverse and will make any sensible investor think twice before he or she invests in MER Telemanagement Solutions by way of MTSL, and, so, we have an indirect effect on both MER Telemanagement Solutions and its non-United States based shareholders in that the price per share of MTSL will drop — perhaps a lot!

The irony should not escape us here. The successful looting of Simple Mobile and accumulation of loads of cash may very well be a textbook case of a Pyrrhic victory.

Yes, that’s also a beaut of a double-whammy. First, a drop because of the changes in the fundamentals and, second, a further drop because of a perverted tax treatment.

Now, over time, the PFIC issue will, of course, go away, since, in all probability, MER Telemanagement Solutions will start bleeding, rapidly eating away of the cash (and cash equivalent) asset that is the underlying problem. But, as a solution there is not much comfort to be had here, I think.

Perhaps this is why the company was talking about M&A alternatives in its earnings report? Well, this is certainly going to be interesting!

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An honorable man? — 1 down, 18 to go

In two recent postings (here and here), I expressed my complete surprise over the fact that pork — and lots of it — had entered into the American Taxpayer Relief Act of 2012 — probably the last place where pork should have appeared if elected senators and representatives had any decency or respect for the United States voters and tax payers. The pork included tax relief and credits a variety of special interest groups and multi-billion corporations, including the entertainment industry and Nascar.

The bill — and most of the pork — originated with Mr. Max Baucus’ Committee on Finance in the late summer of 2012 and was approved by 19 of the committee’s members, with only 5 members voting against, and the amount of pork was widely recognized throughout the legislative process that eventually culminated in late December of 2012.

I was so incredulous about the fact that elected politicians and lobby organizations in an incredible act of arrogance had loaded the bill with pork, that I suggested that the 19 senators would consider political seppuku if they had even an iota of honor.

For the record — and lest we forget who thought it was acceptable to increase the tax burden on working families while granting tax credits to multi-billion dollar companies and interest groups — the committee members that voted for the veritable pork-barrel were Rockefeller, Conrad, Bingaman, Kerry, Wyden, Schumer, Stabenow, Cantwell, Nelson (by proxy), Menendez, Carper, Cardin, Hatch, Grassley, Snowe, Crapo, Roberts (by proxy), Thune, and Chairman Baucus.

Jay Rockefeller

Jay Rockefeller

As it happens Rockefeller announced on January 11th, 2013, approximately one week after my posting, that he would be retiring from the United States Senate. In his official press-release conveying the news, he noted that “[h]is announcement comes as he nears 50 years of public service in West Virginia and 30 years in the Senate.”

As I have written about in the past, I no longer have illusions of grandeur and a belief that my pen — or the pen of others — have the power to cause change, but — regardless — there it was: Something akin to political seppuku by one of the individuals who had voted for the bill.

I am pleased about this resignation, and when I read about it the phrase good riddance came to mind. Having spent an incredible 30 years in the Senate, whatever achievements Mr. Rockefeller made over the years (and, for the record, there are many) were to my mind eradicated entirely when he voted aye to a bill, which — among other things — transferred $70 million of the tax payers’ money to the motor sport industry at a point in time where the scrutiny of such behavior was at its highest.

Had Mr. Rockefeller at least committed an act of seppuku in a proper manner, apologizing first in public for his part in the porking of the American Taxpayer Relief Act of 2012 and immediately thereafter resigning (he will — it appears — be hanging around for an additional two years,) I would perhaps have been able to view him in a different light — perhaps even admiring him for being an honorable — albeit flawed — man. As it happens, he did not and he is not.

Besides its silence on the porking, I noted one thing about Mr. Rockefeller’s press-release, namely his 30 year service, amounting to five terms, starting in 1984, when he defeated Mr. John Raese in the elections. In fact, when I consider these five terms and Mr. Baucus’ continous, ad nauseum re-election since 1974, it really becomes clear to me that what the United States needs more than anything else is term limits in the House of Representatives and in the Senate — if nothing else then because it would limit the damage that a politician could inflict on the country, and so, perhaps a better name would be damage limit.

Not surprising, perhaps, the web-sites of Mr. Rockefeller and Baucus tell remarkable stories of success, sacrifice, dedication, vitality, and sustained unselfish public service.

Lest we forget, Mr. Rockefeller was born in 1937 and Mr. Baucus was born in 1941, making them 75 and 71 years old — hardly spring chickens, and they have spent virtually their entire life inside the political machine.

With respect to public service it may be worth remembering that Mr. Rockefeller was the Chairman of the Senate Intelligence Committee during the infamous Bush/Cheney years and voted to suspend habeas corpus provisions for anyone deemed — in the unilateral view of the Executive Branch of the United States government — to be an “unlawful combatant,” and gave a retroactive, nine-year immunity to any official who authorized, ordered, or committed acts of torture and abuse. Pretty scary stuff and hardly the stuff of legends. Moreover, when Mr. Rockefeller retires, he will be entitled to retirement annuity amounting to something near 80% of his annual salary ($174,000 as of 2009,) yielding a nice income of $139,200 per year, plus, of course, first-rate medical benefits… Not bad when you consider that the median annual household income among his constituents is $38,029 (ranked as 48th in the United States.)

Perhaps, in particular given his personal wealth (somewhere in the range of $63,082,021 to $142,330,003 in 2011 according to his recent filing of a United States Senate Financial Disclosure form,) Mr. Rockefeller will chose to not accept the retirement pay and other benefits that he is entitled to?

By the way, if you read the disclosure forms, don’t worry that the stated income in 2011 for Mr. Rockefeller was $0. Obviously it was not (it excludes, for instance, his salary from the United States Senate,) and even if it was, his wife, Sharon Percy Rockefeller, a PepsiCo board member since 1984 and a the CEO and President of WETA, a, not-for-profit PBS station in Washington, D.C. area, since 1989, would be able to help out. While the filing lists Ms. Rockefeller’s income from PepsiCo and WETA and coyly refers to each as being more than $1,000, in fact, according to Forbes, the 2011 compensation from WETA was $398,689, and according to a PepsiCo proxy the 2011 income from Pepsico was $270,000, for total 2011 compensation of at least $668,689.

In case you were wondering what Ms. Rockefeller does to deserve an annual payment of $270,000 from PepsiCo and what qualification she brings to bear, the PepsiCo proxies for 2011 and 2012 can be helpful.

Ms. Rockefeller sits on the Nominating and Corporate Governance Committee, which met six times in 2011 and the Compensation Committee, which met 6 times in 2011. The Board of Directors met six times and conducted one shareholder meeting in 2011, and, so, in aggregate Ms. Rockefeller was called upon to participate in 19 meetings in 2011 (whether it was via telephone or in person we do not know, and, likewise, we do not know what her attendance record was,) for a per-meeting compensation of $14,210.52. Assuming that the average meeting lasted three hours, her hourly compensation was $4,736.84.

In terms of Ms. Rockefeller’s qualifications, the 2011 PepsiCo proxy is notable in its frankness, stating that Ms. Rockefeller brings to PepsiCo her “… keen knowledge of and contacts with the government…” — a Freudian slip, which was promptly corrected in the 2012 proxy, which instead states that Ms. Rockefeller brings to PepsiCo her “… keen knowledge of government and public policy matters…” Needless to say the difference between having government contacts (including, of course, her husband, Mr. Rockefeller, a member of the influential United States Senate Finance Committee) and knowledge of government public policy matters is material.

I, for one, say good riddance.

I hope Mr. Baucus — together with the 17 other committee members who voted for the porking — will follow Mr. Rockefeller out the door, preferably swiftly and silently. Upon exiting, Mr. Baucus could perhaps, in a proper act of seppuku, reflect on — and apologize for — his strong ties to lobbyists, including Jack Abraham, his ties to the health insurance and pharmaceutical industries, his lack of residence in Montana, his home state, and his remarkable situation with Ms. Melodee Hanes. As laid out on Wikipedia:

Baucus has been criticized for his ties to the health insurance and pharmaceutical industries, and has been one of the largest beneficiaries in the Senate of campaign contributions from these industries. From 2003 to 2008, Baucus received $3,973,485 from the health sector, including $852,813 from pharmaceutical companies, $851,141 from health professionals, $784,185 from the insurance industry and $465,750 from HMOs/health services, according to the Center for Responsive Politics. A 2006 study by Public Citizen found that between 1999 and 2005 Baucus, along with former Senate majority leader Bill Frist, took in the most special-interest money of any senator.

and

Only three senators have more former staffers working as lobbyists on K Street, at least two dozen in Baucus’s case. Several of Baucus’s ex-staffers, including former chief of staff David Castagnetti, are now working for the pharmaceutical and health insurance industries. Castagnetti co-founded the lobbying firm of Mehlman Vogel Castagnetti, which represents “America’s Health Insurance Plans Inc.”, the national trade group of health insurance companies, the Medicare Cost Contractors Alliance, as well as Amgen, AstraZeneca PLC and Merck & Co. Another former chief of staff, Jeff Forbes, went on to open his own lobbying shop and to represent the Pharmaceutical Research and Manufacturers of America and the Advanced Medical Technology Association, among other groups.

and

In December 2005, following the public corruption probe of lobbyist Jack Abramoff — who was later convicted of fraud and corruption — Baucus returned $18,892 in contributions that his office found to be connected to Abramoff. Included in the returned donations was an estimated $1,892 that was never reported for Baucus’s use of Abramoff’s sky box at a professional sports stadium and concert venue in downtown Washington in 2001.

and

Baucus has come under fire from critics calling him a beltway insider who no longer really lives in Montana and only occasionally comes to visit. Until 1991, Baucus owned a house in Missoula, where he practiced law for three years before running for Congress in 1974. He didn’t own a home again in Montana until February 2002, when he bought half of his mother’s house from the Sieben Ranch Company, the ranch started by Baucus’s great-grandfather in 1897. The ranch company, and Baucus’s mother, still own the other half of the house. Baucus lives in Washington, D.C.’s Capitol Hill district. As of November 2007, the Missoulian newspaper reported he owned no other property in Montana.

In April 2009, The Associated Press reported that Baucus and his second wife, the former Wanda Minge, are divorcing after 25 years of marriage and have “parted ways amicably and with mutual respect.” Starting in 2008, Senator Baucus has been romantically linked with his state office director, Melodee Hanes, whom he later nominated to the vacant position of U.S. Attorney in Montana. Hanes then withdrew her nomination before the conflict of interest was discovered, because according to Baucus they wanted to be together in Washington, D.C. Both the Senator and Ms. Hanes had ended their marriages within the previous year. Senator Baucus claims he was separated from his wife before he began seeing Ms. Hanes.

Here, too, I say good riddance.


Rinse once… repeat

Yesterday I wrote with incredulousness about the way that pork and tax loopholes had somehow entered into the American Taxpayer Relief Act of 2012. I was incredulous, of course, because the entire raison d’être for the act was monumental struggle around raising of taxes, reduction of spending, and closing of loopholes.

Raising of taxes we got. Some if you are a working stiff (the act did not extend the expiring social security payroll tax cut, so an estimated 160 million workers will see the tax on their paychecks rise to 6.2% — up from 4.2% — an increase of $1,000 per year if your yearly salary is $50,000.) Lots of it if you are a high income earner — and either not a corporation or not passing some grotesque amount of cash to either charity or your offspring.

Closing of tax loopholes or reduction of spending we got none of. In fact the thing that defines the act seems to be added spending of …. sit tight for this people … more than $70 billion dollars (the estimates vary with most analysts pointing to $74 billion and $76 billion as being the final number,) much of which goes to … again, sit tight … General Electric (a near-zero tax payer) and Citi, Goldman Sachs and Morgan Stanley (the architects and main beneficiaries of the economic ragnarök that has ravaged the United States economy since 2008 and companies that are all hugely profitable.)

Interestingly, this amount, +$70 billion, consumes a large amount of the estimated gain made from letting the social security payroll tax cut expire ($115 billion to $125 billion in 2013 according to an article by Todd Wallack in the Boston Globe,) and so, effectively, this aggregated spending really consists of a huge transfer of wealth from the approximately 75% of United States tax payers to multi-billion dollar corporations who does not need it.

Smoke and Mirrors

6360162863_eca0010ac8_oI read today an article by Alana Semuels in the Los Angeles Times, which stated that “for some consumers the sheer relief that some sort of deal was reached in Congress alleviates some of the anxiety that had been building in the final weeks of the year,” and cited engineer Kevin Leeds, 57, who, referring to his $100,000 a year salary, said that “he doesn’t mind paying a little more in taxes as long as the country begins to reduce its deficit.” I wonder if Mr. Leeds would repeat this statement if he knew that the his $2,000 a year, or so, tax increase would be shipped directly to Goldman Sachs as part of a tax exempt financing package to ensure that they can build a new shiny headquarter in downtown Manhattan or to General Electric so they can continue off-shoring their profit to avoid taxes?

When I wrote the posting yesterday I harped on the fact that the act was cleverly obfuscated, limiting the United States taxpayer’s ability to understand its impact — a critical part of avoiding accountability.

Another critical part of avoiding accountability is to avoid leaving traces back to the originators of provisions, and overnight it occurred to me that this part, the anonymity, may be more important than obfuscation in avoiding accountability, for, whereas obfuscation prevents a United States tax payer from understanding the scope of a law, anonymity prevents a United States voter from holding politicians accountable for the law.

Amazingly, it appears to be impossible to identify, finger, if you will, the politicians who squeeze in provisions in a law. Clearly, however, the nexus of much of the pork can be found in the original bill crafted by Mr. Max Baucus’ Committee on Finance in the late summer of 2012. In an article in the Washington Examiner, Timothy P. Carney has attempted to describe how this bill was overwhelmed with pork from the outset:

“Here’s what happened: In late July, Finance Chairman Max Baucus announced the committee would soon convene to craft a bill extending many expiring tax credits. This attracted lobbyists like a raw steak attracts wolves.

Former Sens. John Breaux, D-La., and Trent Lott, R-Miss., a pair of rainmaker lobbyists, pleaded for extensions on behalf of a powerful lineup of clients.

General Electric and Citigroup, for instance, hired Breaux and Lott to extend a tax provision that allows multinational corporations to defer U.S. taxes by moving profits into offshore financial subsidiaries. This provision — known as the “active financing exception” — is the main tool GE uses to avoid nearly all U.S. corporate income tax.

Liquor giant Diageo also retained Breaux and Lott to win extensions on two provisions benefitting rum-making in Puerto Rico.

The K Street firm Capitol Tax Partners, led by Treasury Department alumni from the Clinton administration, represented an even more impressive list of tax clients, who paid CTP more than $1.68 million in the third quarter.

Besides financial clients like Citi, Goldman Sachs and Morgan Stanley, CTP represented green energy companies like GE and the American Wind Energy Association. These companies won extension and expansion of the production tax credit for wind energy.

Hollywood hired CTP, too: The Motion Picture Association of America won an extension on tax credits for film production.

After packing 50 tax credit extensions into the bill, the committee voted 19 to 5 to pass it.”

So, now we know that the majority of the pork was not sneaked into the act at the last minute (a common approach,) but rather put into the nexus bill in the Summer of 2012, which shows, I guess, that lobbyists are very adapt at figuring out which bill to put their money into. As Mr. Carney puts it:

“So, this wasn’t a case of lobbyists sneaking provisions into a huge package at the last minute. That probably wouldn’t have been possible, many lobbyists told me Wednesday, because the workload in the past two weeks was too large and the political stakes were too high.

One lobbyist who worked on the bill over the summer said he would never ask a member “Hey, can you do this for a client, when their political lives are on the line.”

“The legislators and the staff go underground when things get so intense,” another Hill staffer-turned-lobbyist told me. “Nobody has time for a meeting. Nobody wants to talk about what’s going on. … The key is to plant the seed months in advance.”

GE, Goldman Sachs, Diageo — they planted their seeds over the summer. They’ll enjoy the fruit in the new year.”

Fingering the seppuku candidates

Senate Finance Committee Members from the 111th Congress.

Senate Finance Committee Members from the 111th Congress.

However, we also now are able to, at least on a high level, identify the seppuku candidates as being the 19 members of the Committee on Finance who voted for the bill. Of course we will have to add to this list the lead politicians who did not have the political courage — or wherewithal — to during the months of negotiations eliminate the 50, or so, pieces of pork from the original bill, and every single member of the Congress who voted for the law, knowing full well that it was loaded with — for the United States tax payers and voters — totally unacceptable pork.

Here is the link to the website of the United States Senate Committee on Finance. And here is a link to the Committee on Finance’s discussion of the net cost of this pork-ridden bill — $143 billion in year 2013 alone of which an astonishing $28.3 billion is directly attributable to what is euphemistically known as “Business Tax Extenders”, but probably is better categorized as “Pork” — which, in an astonishing act of insensitivity, was published on September 11th, 2012.

The committee’s voting record is not immediately available. To locate it one has to guess as to the date that the proposed bill was approved by the committee and then review the corresponding Executive Session Transcripts section. Guessing at August 2nd, 2012 leads us to a 171 page transcript, much of it reflecting self-congratulatory back-slapping by the committee members and lots of laughter, which I guess is understandable considering the rewards you must be expecting when you transfer $28.3 billion of the United States tax payers’ money to corporations and special interest groups in just one year.

Mr. Baucus

Mr. Baucus

Mr. Coburn

Mr. Coburn

The transcript is worth a read and probably should be mandatory reading for every voter in the United States. However, with 171 pages it is rather long-winded and some incentive may be needed, so let’s look at a small subset, which may sharpen a readers’ appetite. In our selected subset Mr. Tom Coburn, the United States Senator from Oklahoma, gets into a civilized argument with the Mr. Baucus related to the, for Mr. Baucus, not-so-obvious need for transparency about the allocation of $36.7 billion of tax payer money to corporation (through Business Tax Extenders) from 2013 through 2017:

“Senator Coburn: Mr. Chairman?

The Chairman: Senator Coburn?

Senator Coburn: Which begs the point. … So we want transparency as long as it is appropriated. But when it comes to the spending that we do through the tax code, we are not so sure. … Senator Burr made a great example. It is not your 24 average American that is going to buy that high dollar appliance. It is the well to do, well connected. So we are giving tax credits of $650 million to subsidize the purchase of the well to do to buy a very advanced piece of equipment. So the whole point is, and this does not include individuals, the whole point is transparency is hard. But because something is hard is not an excuse not to do it.

The Chairman: There is a significant difference between appropriations, with respect to transparency and the tax policy with respect to transparency.

Senator Coburn: I understand there is a difference of opinion, but we have a great example just in terms of the electric motorcycle. Why should not the American people know what company is going to get Senator Wyden’s electric motorcycle credit? Why should they not know that? If they can know where we are spending money everywhere else, why should they not know that? There is not a good reason not to be transparent. I would agree that there is some difficulty. This could be refined. ..

The Chairman: I would like to move along here, unless Senators — go ahead. Senator Kerry?

Senator Kerry: I just wanted to ask you, Mr. Chairman, what your plan is —

The Chairman: Keep moving along. We are going to finish this bill.”

Nice try Mr. Coburn. You got ground into the dirt, but nice try. By the way, Senator Wyden is the United States Senator from Oregon, a member of the committee, who earlier in the transcript noted — with some pride — that he has “one of these extraordinarily promising technologies, these electric vehicle technologies, in my home State, where it is paying off.” $650 million is, I guess, not a bad bounty!

Personally, excerpts like the above, gives me goosebumps, and makes me think of the transcripts from the Wannsee conference and its bureaucratic doublespeak. But perhaps I am just over-reacting.

Trawling through to page 165, we are able to finally find the vote for the $205 billion, heavily pork-loaded bill. In summary, of the members present 17 voted aye and 3 voted nay. The final tally, including proxies, was 19 ayes and 5 nays.

Here are the nays: Kyl (by proxy), Enzi (by proxy), Cornyn, Coburn, and Burr

And here is the much longer list of ayes: Rockefeller, Conrad, Bingaman, Kerry, Wyden (no surprise here!), Schumer, Stabenow, Cantwell, Nelson (by proxy), Menendez, Carper, Cardin, Hatch, Grassley, Snowe, Crapo, Roberts (by proxy), Thune, and Chairman Baucus

Perhaps, lists like these should be a reference-points for voters, so that voting happened on the basis of facts and were actually dangerous to politicians, rather than being pro-forma rubber-stamps (90% of Senators and Congress-persons are re-elected.)

The discussion about transparency is interesting. Why, precisely, should voters and tax payers not be allowed to know what senators push language into bills and what companies benefit from such language?

Just asking….

Obfuscation at its finest

Incidentally, one January 1st, 2013, the committee proudly announced the bill’s acceptance as law. In the process of doing so, the committee released updated revenue impact information (found here,) which did not improve the situation, with the negative impact of the Business Tax Extenders, i.e. pork, on tax revenues rising to $63 billion in 2013.

This leap from $28.3 billion to $63 billion during the period between September, 2012, and January, 2013, is remarkable and probably worthy of old-fashioned investigative journalism if such a thing still exists. As a starting point a new Business Tax Extender has appeared at an estimated cost of $5 billion over ten years. This $5 billion piece of pork, named Bonus Depreciation, is described in flowing, but unintelligible prose as follows:

“Under current law, businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. For 2008 through 2010, Congress allowed businesses to take an additional depreciation deduction allowance equal to 50 percent of the cost of the depreciable property. The TRUIRJCA expanded this provision to allow 100 percent bonus depreciation for investments placed in service after September 8, 2010 and before 2012 and 50 percent bonus depreciation for investments placed in service during 2012. This provision would extend the current 50 percent expensing provision for qualifying property purchased and placed in service before January 1, 2014 (before January 1, 2015 for certain longer-lived and transportation assets) and also allow taxpayers to elect to accelerate some AMT credits in lieu of bonus depreciation. This provision also decouples bonus deprecation from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less that are placed in service in 2013. For regulated utilities, the provision clarifies that it is a violation of the normalization rules to assume a bonus depreciation benefit for ratemaking purposes when a utility has elected not to take bonus depreciation.”

Shakespeare himself could not have crafted something like this…

By the way, I found myself wondering why the tax loopholes were time-limited, but then I realized that I was being daft. Continuing to extend a benefit, rather than issuing a once-and-for-all perpetual benefit, have the advantage of providing for continual quid pro quo, which is just good business.

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Fiscal Cliff and NASCAR?

2162669929_5e05896d5a_oSo, today is January 2nd, 2013, and Wall Street is celebrating the last minute (actually last minute plus a day, or so, but, hey!, who is tracking tardiness when it is our politicians that are tardy) compromise resolving — temporarily, at least — the so-called fiscal cliff.

The American Taxpayer Relief Act of 2012 (H.R. 8) was passed by the United States Congress on January 1st, 2013, and is expected to be signed into law by President Barack Obama today. It primarily addresses the expiration of the Tax Relief, Unemployment Insurance Re-authorization, and Job Creation Act of 2010, considered by politician as a big-deal or third-rail.

While Wall Street is celebrating, the new act is viewed by many as just another kicking-the-can-down-the-street measure.

Time will show, I guess. Personally, I mostly find it amazing that this country’s leadership for a period of 17 month did nothing in spite of being fully aware of the dead-line, which was absolute, and the the potential cost of non-action.

Looking at the details of the bill should, I think, make anyone take notice, for, as it unfortunately always appear to be the case, it seems to be deliberately obfuscated, making is near impossible for a layperson (i.e. a voter) to understand from the text of the passed act what actually happens.

Finding the actual, full text of the act is complicated in itself (try it!) and the language in the act is what I refer to as being incomplete and relative, consisting of phrases such as:

(1) in subparagraph (C), by striking “and” after the semicolon; (2) in subparagraph (D), by striking the period and inserting” ; and”; and (3) by inserting at the end the following: “(E) for fiscal year 2013, reducing the amount calculated under subparagraphs (A) through (D) by $24,000,000,000”.

I certainly don’t know what that means, but since it involves, it would seem, 24 billion dollars, it looks important enough that it should be written out in full and absolute so the United States voters can understand what their politicians just agreed to on their behalves.

Moreover the bill seems to have been stuffed with (equally obfuscated) special considerations that have nothing to do with this all-important measure to avoid the dreaded fiscal cliff, such as this little indecipherable titbit:

“… the National Defense Authorization Act for Fiscal Year 2013, is amended— (1) by striking “that” before “the Russian Federation” and inserting “whether”; and 2) by inserting “strategic” before “arms control obligations.”

I certainly would like to know what this means…

6781897522_39983bd201_o(1)The pork and special interest groups are, of course, well represented, dolling out benefits to algae producers (yes, you read correctly… algae,) rum producers, and Hollywood (yes, again you read correctly… Hollywood needs financial help to the tune of $315 million or so from 2013 through 2017, it would appear.)

My favorite obfuscated pork package in the act is clearly section 312, which seems to provide about $78 million in benefits to NASCAR tracks (euphemistically known as “motorsports entertainment complexes”):

“SEC. 312. EXTENSION OF 7-YEAR RECOVERY PERIOD FOR MOTORSPORTS ENTERTAINMENT COMPLEXES. IN GENERAL.— Subparagraph (D) of section 168(i)(15) is amended by striking “December 31, 2011” and inserting “December 31, 2013.”

Huh? Fiscal cliff avoidance? I think not.

To even begin to understand section 312, one has to dig through the Library of Congress, where — deep, deep down — a reference to section 168 is made. To find section 168 one has to be clear-minded enough to go to the Government Printing Office’s and look for it. I will save you three hours of digging and provide you with the link here.

If you manage to find the document “Family and Business Tax Cut Certainty Act of 2012,” filed, under authority of the order of the Senate of August 2nd, 2012 by Mr. Baucus from the Committee on Finance, and find, therein, a discussion of section 168, you will discover on page 48 the following neatly compacted text:

“12. 7-year recovery period for motorsports entertainment complexes (Sec. 212 of the bill and sec. 168 of the Code)

PRESENT LAW
A taxpayer generally must capitalize the cost of property used in a trade or business and recover such cost over time through annual deductions for depreciation or amortization. Tangible property generally is depreciated under the modified accelerated cost recovery system (“MACRS”), which determines depreciation by applying specific recovery periods, placed-in-service conventions, and depreciation methods to the cost of various types of depreciable property. The cost of nonresidential real property is recovered using the straight-line method of depreciation and a recovery period of 39 years. Nonresidential real property is subject to the mid-month placed-in-service convention. Under the mid-month convention, the depreciation allowance for the first year property is placed in service is based on the number of months the property was in service, and property placed in service at any time during a month is treated as having been placed in service in the middle of the month. Land improvements (such as roads and fences) are recovered over 15 years. An exception exists for the theme and amusement park industry, whose assets are assigned a recovery period of seven years. Additionally, a motorsports entertainment complex placed in service on or before December 31, 2011 is assigned a recovery period of seven years. For these purposes, a motorsports entertainment complex means a racing track facility which is permanently situated on land and which during the 36-month period following its placed-in-service date hosts a racing event. The term motorsports entertainment complex also includes ancillary facilities, land improvements (e.g., parking lots, sidewalks, fences), support facilities (e.g., food and beverage retailing, souvenir vending), and appurtenances associated with such facilities (e.g., ticket booths, grandstands).

REASONS FOR CHANGE
The Committee believes that extending the depreciation incentive will encourage economic development. Thus, the provision extends the seven-year recovery period for motorsports entertainment complex property.”

Moreover, courtesy of paragraph 11(a) of rule XXVI of the Standing Rules of the Senate, one can find on page 103 the estimated budget effects of section 168 from the year 2013 through the year 2017, which is $78 million.

Phew! So now we know. Someone, somewhere decided (1) that NASCAR, a hugely profitable, multi-billion dollar corporation, needed $78 million in tax cuts to “encourage economic development” and (2) that it would be appropriate for such encouragement to be slotted into what is arguably one of the most controversial bills of the decade, centered around a massive discussion of tax avoidance, tax loopholes, and austerity.

This takes panache, and makes me want to know who, exactly, pushed that piece of pork into the act. Although a part of me says Wow!, then, on balance, I think that this may be one of the time where public encouragement of Seppuku may be warranted.

Just saying….

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Olympic$ — Chasing the gold

The Olympics are on, and I am watching.   Well, perhaps more precisely, I am watching the parts of the Olympics that NBC have sanctioned, since, having soundly rejected cable-TV after for years having experienced Comcast’s relentless price increases and quality of service reductions (and their — acknowledged — corporate policy of price discrimination (see Timothy Lee’s excellent posting on Forbes here,)) I have been watching only over-the-airwaves TV for years.

NBC’s coverage of the Olympics is incredibly myopic and bordering on nationalistic, their commentators and interviewers make me want to tear my hair out (the standard question posed to the winner appeared to be —  I paraphrase and focus on questions for runners, but you will get the point — “What was your plan?” and inevitably the answer was “To run as fast as possible”… Duh! — ask a stupid question and what do you get?,) the rate of commercial assaults appear to have doubled, and Mr. Ryan Seacrest’s appearances make me want to tune out (and certainly mandated immediate depressing of the mute button.)

Although the focus of this post is the Olympics, I cannot help noting that Mr. Seacrest’s rise to fame on the backend of mediocrity is astonishing and probably reflects better than any other individual occurrence (including, yes!, Paris Hilton’s and the Khardasians’ meteoric rises,) what is wrong with TV and radio today.   When I view Mr. Seacrest traveling around the world, interviewing and/or having lunch with Olympic athletes, it is clear to me that NBC through its retainer-style agreement with Mr. Seacrest has invited a 40 feet white shark inside its kiddie pool and apparently have forgotten to tell Mr. Matt Lauder and Mr. Bob Costas, who are happily splashing around in the deep end, to watch out for fins.  In fairness, as reported by Mr. Brian Stelter in the New York Times in April of 2012, there is some indications that Mr. Lauder did indeed get the memo, which means that he at least had the chance to inch closer to the ladder with a $25 million contract in-hand, leaving Mr. Costas to fend for himself.

The economic weight of the three combatants make this spectacle even more interesting, with Bob Costas annual earnings being, I think, in the $3 million range, dwarfed by Mr. Lauer’s $25 million paycheck and Mr. Seacrest’s annual earnings in excess of $50 million. Clearly, Mr. Seacrest’s final objective is Mr. Lauer’s Today empire and the associated $25 million paycheck, but he will likely perform a simple Anschluss of Mr. Costas’ Olympic territory in order to get there.

Here are some of the things about the 2012 Olympics that stood out to me:

Courtesy of Andrew Magill under creative commons

  • Amateur sport no more…  When one of the coaches of the Japanese male gymnastics team handed over a ward of $100 bills to officials, causing these officials to change Mr. Kochi Uchimura’s score in the men’s team gymnastics event, which had been adversely affected by what is best characterized as a tumble, and, in turn, secured the Silver medal for Japan, bumping Great Britain to the Bronze medal level and bumping Ukraine of the winners’ podium, things looked very strange indeed.    

    Clarification, however, was quickly provided, stating that the Japanese team had filed an appeal and citing rules that states that an appeal fee must be paid in order to file a protest.As it is frequently the case when bureaucracies vomit up on-the-spot explanations, the clarification raised more issues than it resolved.Evidently, the International Gymnastics Federation (FIG) and, by proxy, the International Olympics Committee (IOC) impose the fee so as to, as Mr. Chris Chase puts in on Yahoo Sports, “cut down on frivolous challenges and make the process more streamlined.”  Having dealt with bureaucracies all my life, I probably am biased, but I would categorize  this reasoning a being classic corporate-weasel speak (similar to the annual letter from my health care provider informing me that they are forced to increase my premium and reduce my benefits in order to serve me better.)   FIG and/or IOC clearly saw a way to make a little bit more revenue and, as would any good for-profit organization masquerading as an altruistic force while spending most of its time worrying about fees, dues, partnership opportunities and licensing, it pursued it relentlessly.

    That rules were put in place that milk an unfortunate situation (after all an appeal is the result of an error — or a perceived error — on behalf of the judges and/or referees) and, frankly, makes for really bad PR (but interesting TV!) is probably something that the IOC and FIG’s president will not lose any sleep over (I suspect that they will simply change the rules, requiring payment after the event, removing the blatant TV coverage of exchanges of crumpled up dollar bills,  thereby minimizing the PR issue,) and is hardly much of a surprise.  However, these idiotic rules take another little step towards blind discrimination against amateurs and smaller countries in the Olympics, which is unfortunate for the spirit of the Olympics, and, so, they ought to be the subject to outcry by the general public and athletes.

  • Marked sportsmanship – how to do it and how not to…  What the appeal-for-cash incident did do, however, was to provide the Great Britain and Ukraine teams a unique opportunity to show true sportsmanship.  Rather than themselves appeal the appeal (either directly to FIG or through the media,) and then raising a spectacle similar to the Hamm-incident at the 2004 Olympics (as you may recall Mr. Paul Hamm, the gymnast from the United States, won gold in the all-around competition only to, after the event — and after the medal award ceremony, be challenged by FIG to surrender his medal to South Korean bronze medalist Yang Tae Young,) both teams simply shook their heads and, then, shook hands with the Japanese team. Cheers for Great Britain and Ukraine for embodying sportsmanship.   And loud jeers for the Chinese team who took the gold medal in the event and whose athletes pulled out and flaunted big gold stars while their competitors were still on the floor.  And let us not forget to send out some boos to the U.S. female gymnastics team who, in an exhibition, of exceptionally bad taste (pun intended) bit down on their gold medals at a photo-op at the medal award ceremony.
  • Gaming the system…  In a little talked about incident, four teams in the women’s double badminton were disqualified for attempting to throw matches in sets that were mostly characterized by exceptionally clumsy attempts at — well — losing and corresponding boos from the audience.  The transgression was, in fact, so gross that Thorsten Berg, the referee, stopped two of the matches, warning the players that they risked disqualification.  The objective of the suddenly very poorly playing teams was, of course, to secure better positioning in the quarter-finals, and some of the players’ coaches actually defended the behavior making it clear that it was simply another facet of competition.
  • Income tax no more… Mr. Marco Rubio, a Republican Senator from Florida, introduced the Olympic Tax Elimination Act, which, broadly speaking, aims at eliminating the income tax on Olympics winnings.  In a nutshell, the U.S. Olympic Committee provides awards to winners, ranging from $10,000 to $25,000, and the actual awarded medals have values ranging from $5 to more than $500.  Under the U.S. tax-code these awards are taxable as income, and that is something that Mr. Rubio wants to change. Mr. Matthew Yglesias in his Slate column called the act “dumb,” “pointless,” and a “tax gimmick,” and pretty much savaged the idea, pointing out how the Olympics is big business, focused on endorsements where, frankly, $25,000 in income and an associated income tax will make little or no difference.

    The point is, of course, that, as a general rule, the medal winners in the Olympics are also mostly professional athletes and mostly winners of large endorsement deals, dwarfing the $25,500 dollars or so booty that a gold medal award carries with  it (the olympic athlete profession are mostly an instance of Nassim Taleb‘s Extremistan, with the few top — and, therefore, medal winning — athletes earning more than the rest of the athletes combined (to understand the distribution of Olympic athletes’ earning, read Mr. Kurt Badenhausen’s articles in Forbes, listing the 20 best paid Olympic athletes and highlighting Usain Bolt’s earnings of more than $20 million per year.)

    Given the absolute idiocy of the act, it is, of course, already picking up steam in the regulatory process, and so we can look forward to another unnecessary complication of the tax code, which, without a doubt, will be exploited to the maximum extent possible by the large tax consultancies on behalf of their professional athlete clients, and, I predict, result in tax credits for Olympic winners that will be way, way, way in excess of $25,500.

    By the way, I would love to know if the IOC’s earnings are taxable and if the IOC officials and their entourages are taxed on the substantial benefits that they receive while “executing” their duties (see below.)  I suspect, of course, that the IOC as a non-profit organization is non-taxable and that the benefits are not recorded as such and, therefore, are not taxable.

  • Perks of the job…  The composition of the motley and incredibly extensive NBC front-of-camera crew working the Olympics defy explanation, and in my view must be ascribed to perks rather than necessity.   Perhaps Mr. Costas said it best when he introduced Mr. Mike Fallon and quipped that “… if they’re on the NBC payroll, they’re working here,”  but Mr. John McEnroe certainly deserves an honorable mention.  When pulled into the hot-seat with Mr. Costas to comment on the women’s rhythmic gymnastic (as part of what I am sure is a lucrative contract with NBC,) and after having opened the dance by declaring his total ignorance of not only this particular sport, but almost any other sport that he had been asked to comment on during this Olympics, Mr. McEnroe, without skipping a beat, offered his expert opinion on the performance of the athletes.
  • For the love of the game? I think not…   Michael Joseph Gross wrote a terrific Vanity Fair article providing insights into the economics of the Olympics and highlighting how London won the rights to the 2012 Olympics — and, consequently — the right to spend $14.5 billion — a tab that Londoners have to shoulder.   I strongly recommend reading Mr. Gross’ article, and I do not want to take away from it in any way, but his itemization of the stipulations of the contracts between the IOC and London, which evidently took East London activist and researcher Paul Charman two years of Freedom of Information requests to bring to light, is too good to not highlight here:

    The full stipulations of the Olympic contract … contain tens of thousands of binding commitments. To comply with its terms, London must designate 250 miles of dedicated traffic lanes for the exclusive use of athletes and “the Olympic Family,” including I.O.C. members, honorary members, and “such other persons as may be designated by the IOC.” (These traffic lanes are sometimes called “Zil lanes,” alluding to the Soviet-era express lanes in Moscow reserved for the politburo’s favorite limousines.) Members of the Olympic Family must also have at their disposal at least 500 air-conditioned limousines with chauffeurs wearing uniforms and caps. London must set aside, and pay for, 40,000 hotel rooms, including 1,800 four- and five-star rooms for the I.O.C. and its associates, for the entire period of the Games. London must cede to the I.O.C. the rights to all intellectual property relating to the Games, including the international trademark on the phrase “London 2012.” Although mail service and the issuance of currency are among any nation’s sovereign rights, the contract requires the British government to obtain the I.O.C.’s “prior written approval” for virtually any symbolic commemoration of the Games, including Olympic-themed postage stamps, coins, and banknotes.

    Limousines (top of the line Mercs, Beemers, or Jags with privacy screens and Champagne bars, no doubt,) dedicated lanes, and luxury hotels for principals, friends, and mistresses?  Sounds more like a totalitarian regime than a for-good, not-for-profit sport organization to me.   I think it may very well be time for some serious oversight here.

Rounding this posting out, I want to just touch upon one of my pet peeves, namely the constant referring to athletes as being heroes. Although I recognize that there has been a general degradation in the accepted definition of the term “Hero,” away from the original Greek meaning of a warrior, protector, or defender, and although I accept Georg Wilhelm Friedrich Hegel’s contention that the definition of a hero is a function of the zeitgeist, I draw a line well before we reach the point of dumbing down the term to something as simple as a person noted for special achievement in his or her field, i.e. a synonym for celebrity. In my book one cannot achieve hero status unless one undertakes an act that centers around helping someone else in peril while exposing oneself to clear and present danger — and, importantly, not being forced or compelled to do so. There is a simple litmus test…. ask yourself if the person being considered for elevation to hero-status is indeed heroic in his or her acts and are performing these acts in the face of mortal danger.

Can you feel the weight of the word heroic? You should… it is like the tip of the spear of that which constitutes humanity. Alternative, ask yourself if the person’s acts compare favorable to, say, those of Mr. Raoul Wallenberg, or, more in the zeitgeist, perhaps, Mr. Abe Zelmanowitz who worked on the 27th floor of 1 World Trade Center, and on September 11th, 2001 refused evacuation, chosing instead to stay behind with a paraplegic colleague so as to comfort and protect him in what was unquestionably a life and death situation.

Are Mr. Michael Phelps and Mr. Ursain Bolt great Olympic Athletes? Without a doubt, yes. Are they heroes? Without a doubt, no. In my book, at least, they belong on the winners’ podium, but they have done nothing whatsoever that entitles them be on a hero pedestal with Mr. Zelmanowitz.

Wanna share your gold?

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