As it is the case for all postings in this blog, my standard disclaimers apply for this posting. However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice. Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.
…. And, if you find yourself enjoying this posting, consider supporting the blog through a donation. For your convenience, PayPal links are provided to the right and at the end of the posting.
Having read my earlier postings about a programmatic approach to investment by way of MNDO (start here,) the equity of Mind CTI, and my earlier postings about the potential folly of dividend speculation (start here,) a reader of this blog suggested to me that selling ones position of MNDO immediately before the ex-dividend date would be an appropriate strategy, capitalizing on the — and I quote — “stupidity” of the dividend speculators.
Although the notion of capitalizing on the greed and ignorance of dividend speculators does appeal to me, I do not believe the reader’s approach to be long-term viable.
The issue is one of tax, liquidity, transaction expenses, and timing.
Assuming a cyclic behavior consisting of sell-before-ex-dividend-date followed by buy-after-price-drop, which, of course, implies a holding period of less than 12 months, the investor would be subject to taxation on a short term basis, which for me, for instance, effectively would result in a Federal income tax hit climbing towards 40%, supplemented by a state and local tax bordering on 10%, for a total tax bordering on 50%.
Had I, for instance, acquired $100 thousand worth of shares in 2013 at an average price per share of $1.75, amounting to approximately 55 thousand shares, and sold these at today’s rate ($2.30 per share,) my pre-tax yield would be $125 thousand, or so (accounting for transaction expenses and supply/demand pricing issues,) for a net pre-tax gain of $25,000 and a post-tax gain of $12,500.
Naturally, this approach raises demand for liquidity and is impacted by transaction issues and expenses — and, importantly, it is characterized by a per share price risk and the broad assumption that the price will not go up immediately after the ex-dividend date adjustment. Moreover, the ugly pairing of requirement for superb timing (the cause of death of many a trader) and risk comes into play — in particular since it is ultimately impossible to know, for sure that: (1) an initial position can be secured, (2) that the initial position can be sold at a the required premium, (3) that a later position can be secured, and (4) that a dividend will actually occur.
A 12.5% gain on a six to nine months investment is, of course, not shabby when compared to the average 0% interest that your local bank savings account carries, but it does not in any way perform substantially better in the long run than does the pure dividend play, which with more than 55,000 shares, no transaction costs, and, critically, no per share price risk, handily and consistently delivers more than $12,000 after taxes, assuming a dividend taxation of 15%, and produces more shares — and thus more dividends — year after year.
Now, it would, of course, be possible to argue that applying this strategy for a position held in an tax-advantageous retirement vehicle such as an IRA might work (it would certainly negate some of the tax issues,) but, generally, tax-advantageous retirement vehicle are best suited for long term hold strategies and the use of these vehicles for other investment strategies is something that should be thought through very carefully.
As usual, if you found this posting useful or entertaining — or if it saved you time, you can express your appreciation through donation via PayPal right now. For this type of posting a one-off donation of $10 is suggested — however, any donation is, of course, appreciated.
As it is the case for all postings in this blog, my standard disclaimers apply for this posting. However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice. Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.
Why I am buying a lot of UNTK — right now
This posting discusses UNTK, the equity of Unitek Global Services, and, in particular, explains why I have recently been increasing my investment in Unitek Global Services based on certain information that I gleaned from the company’s recent 10K restatement filing for its 2011 fiscal year and for the interim periods ended March 31st, 2012, June 30th, 2012 and September 29th, 2012.
By way of background, I have gone through several rounds of investments in Unitek Global Services over the last year, and I have laid out my rationale for each of these rounds in a number of postings, and, so, I will not detail my pre-10K rationale for investing in Unitek Global Services, but, rather, refer the reader to my postings, perhaps starting with this one. Alternatively, if you are somewhat lazy (you shouldn’t be, but odds are that you are,) you can read a recent summary by another blogger, Red, blogging on the red corner blog (here.)
Overall, my earlier investments in Unitek Global Services have been predicated on the market’s consistent and repeated overreactions to negative (but, ultimately, insignificant) news coming out of Unitek Global Services, primarily originating with a relatively minor revenue recognition and accounting fraud that the company uncovered in its Pinnacle division, and my assumption has been that these overreactions would allow for several opportunities for twofers around UNTK.
So far I have been entirely correct in my assessment of the market’s overreactions and the associated opportunities, and I have been able to profit from the predictability of the market. However, up until the date of the recently released 10K filing, my assumption has been that any gains would be relatively slow, and not explosive, with the practical limit being twofers.
With the 10K filing my assumption has changed, and I now see an opportunity for far higher gains in a very short time and with very little warning.
This opportunity is the subject of this posting. Before you proceed to reading about the opportunity, however, I want to repeat the disclaimer that I laid out in the above and emphasize that the operative word is opportunity, implying chance, guess, and risk. So, before you read on, you need to recognize that: (1) whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever, and (2) that based on the 10K filing and my past experience I have formed an opinion about UNTK and Unitek Global Services, which has caused me to invest, but this decision is based on guesses and assumptions, which may be 100% wrong and, in fact, every dollar that I have invested and will invest in Unitek Global Services is at risk, including the risk of a complete loss.
It is estimated that at Stunde Null, the time of the capitulation of the Nazi government on May 8th, 1945, Berlin contained 75 million tons of rubble or 39 cubic yards of rubble for every inhabitant in the city.
The survival of the population of Berlin, estimated to be 2.8 million people, during the immediate post-war period, battling diseases and hunger, and, later on, battling an exceptionally cold winter, is a testament to German tenacity and Russian practicality.
The Russian military occupied all of Berlin at the time of surrender and would not hand the American, British and French sectors to the American and British Forces before July of 1945. To manage the acute logistical and humanitarian crisis that it had on its hands, the Russian occupying force instituted a rationing system linked to a rubble-clearing compensation scheme, which solved the problems of logistics and humanitarian help with one stroke, but also created an extensive underground economy based on Hamstern, the act of recovering goods from the rubble and traveling into the countryside in order to exchange these possessions for food. Mostly, the goods from the rubble would be small items, such as watches, rugs, and pillows, but, once in a while, the rubble work would turn up extremely valuable objects.
I was reminded of Hamstern when I recently read the newly published 10K restatement filing from Unitek Global Services.
On the surface, the 10K filing was loaded with rubble related to the restatement necessitated by the recently uncovered fraud, clearly indicative of the fact that the company, in the midst of securities litigation, is being extremely cautious about how it presents information. However, if you were able to move a few layer of brick, you would uncover several pleasant surprises, including nice top-line growth, nice operational performance, a nicely controlled litigation picture, and — surprisingly — a restatement that was much smaller that I, for one, had expected.
So, here, for the record, is an excerpt from the company’s earnings release discussing the 10K filing:
Revenues increased 24.5% to $437.6 million for the year ended December 31, 2012, from $351.5 million in 2011. This increase in revenues was primarily from organic revenue growth in the Company’s wireless business, growth in the cable portion of the Fulfillment segment from market share gains and the acquisitions completed in 2012, as well as the asset acquisition of Skylink Ltd. in September 2012.
Revenues from the Company’s Fulfillment segment increased 6.5% in 2012, to $305.3 million, from $286.7 million in 2011. Revenues from the Company’s Engineering and Construction segment totaled $132.3 million in 2012, an increase of 104.4% from $64.7 million in 2011.
Adjusted EBITDA increased 22.6% to $39.6 million for the year ended December 31, 2012, compared to $32.3 million for 2011. The year-over-year increase in adjusted EBITDA was primarily related to higher revenue and margins in the Company’s Engineering and Construction segment, partially offset by increased selling, general and administrative expenses related to a full year impact of the Pinnacle acquisition, which occurred in April 2011.
The Company also recorded a non-cash impairment charge of $14.9 million in the fourth quarter of 2012 related to the goodwill of its wireless reporting unit (including Pinnacle) in connection with its annual impairment testing.
Loss from continuing operations was ($39.5) million, or $(2.18) per diluted share in 2012, compared with $(7.3) million, or $(0.46) per diluted share in 2011.
Net loss for 2012 was $(77.7) million, or $(4.28) per diluted share, compared with $(9.1) million, or $(0.57) per diluted share in 2011. The increase in net loss and loss from continuing operations in 2012 was primarily related to the $14.9 million goodwill impairment charge, the impairment charges from discontinued operations of $35.2 million related to the Company’s wireline assets which were sold in 2012, an expense related to contingent consideration of $10.1 million compared to income of $8.5 million in 2011, and restructuring charges totaling $8.0 million.
These are, of course, big numbers, so it is probably prudent to explain that very large portions of the numbers are made up of charges related to the sale of one of the company’s divisions in 2012.
This transaction, which was linked to the near-simultaneous acquisition of another, more profitable business unit, is expected to be a good thing, materially adding to the bottom line on the overall business going forward. Also,it is worth noting that a large charge was related to company performing its regular, annual impairment test in the fourth quarter of 2012. As the 10K filing says:
During the third quarter of 2012, we committed to a plan to sell the net assets of our wireline telecommunications business unit (the “Wireline Group”) which resulted in the performance of interim tests of impairment. As a result of those tests, we impaired property and equipment by $2.2 million and goodwill by $33.0 million.
We performed our most recent annual goodwill impairment test as of September 30, 2012, the first day of our fourth fiscal quarter. When we performed our annual goodwill impairment test, we determined that the fair value of the wireless reporting unit exceeded the carrying value. Accordingly, we performed the second step in the analysis and determined that the carrying amount of our goodwill exceeded its implied fair value, and we recognized an impairment loss in an amount equal to that excess. In the fourth quarter of 2012, the carrying value of goodwill for the wireless reporting unit exceeded its implied fair value and we recorded a non-cash, pre-tax impairment charge of $14.9 million.
So business as usual and — critically — losses related mainly to what I call funny money.
Funny money are non-cash income or expenses, an oddity born out of a somewhat broken accounting system that allows for non-tangible items, such as goodwill and customer relationships, to be considered assets and liabilities with peculiar effects on net earnings when they, at some point in the company’s life-cycle, are corrected — as they inevitably must be — through adjustments to earnings.
Don’t get me wrong. Funny money do matter. However, they do not matter for the fundamentals of the business, which, frankly, is dominated by cash collection, the benefits of tangible assets, and the inherent risks in tangible liabilities. Rather, they matter for the way that the make the — generally ill-informed and uneducated — market participants react when they are adjusted.
Here, for instance, $33 million in goodwill may have moved, but $33 million dollars in cash were not lost by the company, which, of course, is clear to anyone who cares to read the company’s cash flow statement.
Unfortunately, however, as no-one cares to read anything except headlines, the market equates a $33 million goodwill adjustment to a $33 million loss of cash, causing an unsubstantiated depression of the per share price for the company’s equity.
We will talk more about funny money and their effect on the earnings later. For now, on the point of the 10K filing, it is simply worth noting that the net loss for fiscal year 2012 may have been in excess of $75 million, but these were mostly funny money of little or no interest to value or fundamentals investors who routinely eliminate non-tangible assets and liabilities from their value calculations.
When all this is said, the important thing about the 10K filing, is not, in fact, the magnitude of the net loss for the year, but, rather, the diminutive size of the restatement, as detailed in the 10K filing:
The aggregate impact of the Pinnacle revenue and related adjustments for the year ended December 31, 2011 decreased revenues and cost of revenues by $7.2 million and $1.4 million, respectively … These revenue and related adjustments also (decreased) increased accounts receivable, net, inventories, accounts payable and other liabilities at December 31, 2011 by $(7.2) million, $0.5 million, $(1.2) million, and $0.2 million, respectively…
It is worth noting that the adjustment’s decrease of revenues by $7.2 million is completely out of balance with the market’s reaction to the company’s announcement of the discovery of relatively minor accounting fraud in one of its many division, which wiped out between $50 and $65 million in market capitalization.
Remember this next time someone tells you that the market is always right.
So, in summary: Significant funny money loss, very limited restatement, and colossal over-reaction by the market.
However, it is not what is on or immediately below the surface that concerns us…. Rather it is what you can find if you dig into the rubble.
Digging further down in the rubble, here is the extremely valuable item that I found, which immediately prompted me to buy more UNTK:
As of December 31, 2012, we have net operating loss carryforwards of approximately $86.6 million for federal income tax purposes, prior to consideration of valuation allowances, which begin to expire in 2014. Based on our history of operating losses and our forecasts for future periods, we have determined that it is more likely than not that the federal and state net operating loss carryforwards and other temporary differences will not be realized. Accordingly, we established valuation allowances against the related deferred tax assets of $79.7 million as of December 31, 2012. If we ultimately are able to utilize these deferred tax assets to offset taxable income in future periods, we could recognize a significant income tax benefit that could improve our results of operations by a material amount.
Here is the financial summary from the 10K.
Get it? If not, think funny money, but, this time, think of it as a potentially positive effect on the per share price.
Actually, I am being unfair, since I have the advantage of having seen this particular play once before and, therefore, know what to look for.
A stroll down Memory Lane — Joe’s Jeans
From 2007 through 2009 Joe’ Jeans, a U.S. based fashion company, had seen its equity, JOEZ, decline materially, bottoming out at $0.25, or so, per share in early 2009.
I will not get into the details of why the per share price tanked or why JOEZ has been a bad investment for almost a decade, as this is not germane to this posting.
What is germane, however, is that the Joe’s Jeans towards the end of 2009 pulled the proverbial rabbit out of an accounting hat, utilizing an obscure tax rule that allowed for the release of its valuation allowance. As the company wrote in its 10K filing for the 2009 fiscal year:
A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Periodically, management reassesses the need for a valuation allowance. Realization of deferred income tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. Based on Joe’s assessment of these items during the fourth quarter of fiscal 2009, Joe’s determined that it was more likely than not that the deferred tax assets would be fully utilized. Accordingly, the valuation allowance of $20,291,000 as of November 30, 2008 was released and recorded as a credit to income tax benefit during fiscal 2009.
On the income statement, more than 75% of these $20.3 million went towards net income, causing the company to register net income of 24.5 million in its fiscal year 2009, compared to $4.9 million in fiscal year 2008 and $2.5 million in fiscal year 2007.
Expecting this one-off events to be repeatable (it is not) and expecting following quarters to show net income in the tens of millions or dollars (they did not,) the market, which appears to be unable to read filings, went crazy, lifting the per share price to almost $3 before the quarters were reported in 2010, causing a per share price collapse in April of 2010.
How the management of Joe’s Jeans justified the release of the valuation allowance is almost as unclear as what tangible benefits they achieved (we can speculate, but it is going to be really hard to make such speculations actually stick, so there is not much point in doing so.)
Here, it may be worth referring to Intermediate Accounting, Mr. Donald E. Kieso’s excellent textbook:
The decision as to whether a valuation allowance is needed should be based on the weight of all available evidence. The real question is whether or not there will be sufficient taxable income in future years for the anticipated tax benefit to be realized. The benefit of future deductible amounts can be realized only if future income is at least equal to the deferred deductions. After all, a deduction reduces taxes only if it reduces taxable income.
All evidence—both positive and negative—should be considered. For instance, operating losses in recent years or anticipated circumstances that would adversely affect future operations would constitute negative evidence. On the other hand, a strong history of profitable operations or sizable, existing contracts would constitute positive evidence of sufficient taxable income to be able to realize the deferred tax asset.
Managerial actions that could be taken to reduce or eliminate a valuation allowance when deferred tax assets are not otherwise expected to be realized must be considered. These tax-planning strategies include any prudent and feasible actions management might take to realize a tax benefit while it is available.
This having been said, it should be clear that the decision as to whether or not a valuation allowance is used, as well as how large the allowance should be, rests squarely on managerial judgment. Because that decision directly impacts the amount of income tax expense and therefore reported income, it has obvious implications for earnings quality assessment from an analyst’s perspective.
Let me translate that: Caveat emptor — A company can pretty much do what it want here, so there is some serious potential for earnings management.
Of course, eventually one has to pay the piper. And, so, moving forward after 2009, Joe’s Jeans became liable for taxes and that liability had to be satisfied with real hard cash.
Effectively, therefore, the trade-off for a significant on-going loss of cash after 2009 was a short-term bump in the per share price. Granted, it was a significant bump, but, still, it was a bump. From a value investor’s perspective it made very little sense.
Value investors may lament this irrational behavior, but value investors are, of course, not what drives the market, so I guess that, since, for a short time, investors, traders, and the market were happy, and, so, and since the short term satisfaction of the interests of those groups apparently is the main objective of publicly traded corporations today, then, certainly, the management team of Joe’s Jeans did the right thing.
Regardless of the rationality — or lack thereof — the fact remains that the sudden appearance of the rabbit caused an explosive growth in the per share price of JOEZ.
So what does it mean
[Neo sees a black cat walk by them, and then a
similar black cat walk by them just like the first one]
Neo: Whoa. Déjà vu.
[Everyone freezes right in their tracks]
Trinity: What did you just say?
Neo: Nothing. Just had a little déjà vu.
Trinity: What did you see?
Cypher: What happened?
Neo: A black cat went past us, and then another that looked just like it.
Trinity: How much like it? Was it the same cat?
Neo: It might have been. I’m not sure.
Morpheus: Switch! Apoc!
Neo: What is it?
Trinity: A déjà vu is usually a glitch in the Matrix.
It happens when they change something.
— The Matrix
It would appear that Unitek Global Services could wave its hand over the accounting hat and produce a rabbit similar to that which was conjured up by Joe’s Jeans, but just bigger…. much bigger.
In fact, the rabbit could be huge, weighing in at 21,775 tons if payable in pennies (one million dollars in pennies weigh approximately 275.6 tons (don’t ask.))
Here is the thing, though: With the tax asset beginning to expire in 2014 and faced with a substantial debt burden Unitek Global Services would, I suspect, be correct in locking in the benefits of this perfectly legal accounting maneuver now. The reason for this is quite simple: Any deferred tax assets not used up within the statutory period, are lost in a slow (and, for Unitek Global Services’ purposes, useless) drip-drip manner.
Moreover, and this is a bit more technical, §382 of the Internal Revenue Code may severely impact upon the value of deferred tax assets in the event of future sale of the company or in the event that the company undertakes a future equity issue. In fact, the asset class may be destroyed through such events.
And then there is, of course, the pragmatic view that the key to getting out of the debt burden is the issuance of new shares in a cash for paper swap — a deal which is only attractive if the per share price can be restored to its former glory or, better yet, to a price level higher than anything seen in the last couple of yet — and, so, a release (and a resulting market stampede) may come in handy.
Yes, we are — again! — talking about funny money. But this time the funny money are actually to our benefit, and although the calculus may seem sinister, counting on the market participants not understanding the mechanics that may lead to a significant leap in net income, the maneuver is legitimate, legal, and justified. Moreover, in my book, the maneuver has an element of poetic justice to it in that it is an exact mirror of the funny money and market (idiocy!) dynamics that destroyed the company’s market capitalization in the first place.
Clearly, res ipsa loquitur, the groundwork for a release of the valuation allowance has now been laid by Unitek Global Services and, equally clearly, reasonable justification can be made at almost any time in the future for exercising a release of the valuation allowance. As my mother like to say, the duck is in the oven and the kitchen timer is set.
Think of it as a shotgun being loaded and put on the living room table. Sooner or later someone is going to reach for it and carnage will ensue.
And if the management team needed an incentive, consider that the market’s perception of the impact of such release may be enormous. At, for instance, 20 million shares, a release of the full valuation allowance amounts to $3.95 per share… for an equity that is currently trading at $1.40, or so. That is an enormous value discrepancy.
In fact, the only question to my mind is one of timing. Now or next quarter or the quarter after that or next year? I don’t know, but, for sure, if the management team of Unitek Global Services triggers the release of the valuation allowance in full, it may move the per share price extremely quickly. And, so, if one thinks that this is a probable outcome, then one needs to buy now, before the shotgun goes off.
And, so, I am buying.
It is important to note that my decision to buy is based on my assumption that the company — sooner or later — will release the the valuation allowance, either partially or in full. However, there can be absolutely no assurance that this is the case, and even if it is the case, there is no way to know with certainty when a release will occur.
As such, my decision is speculative in nature and is suitable only for myself, reflecting my personal investment philosophy, which emphasizes reward on the basis of risk and which operates with a near indefinite time-horizon.
I also — once again — remind the reader of this blog’s disclaimers and that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.
OK, so I get a lot of questions about this. I mean, how can it be? How can you take a tax benefit and then magically turn it into net income because you decide that it is the right thing to do?
Two words: Accounting Self-regulation. As they say in the large CPA firms, it is a beautiful thing.
It really is your lobby dollars at work, of course.
Sounds to good to be true? For the skeptical among us, I will first refer to a somewhat pedestrian overview by Emil Lee, published on Motley Fool (here.)
Yes, I know. Motley Fool ain’t exactly the ultimate source and the article by Mr. Lee is rather brief. So, let me refer you to Accounting for Deferred Tax Assets (9/29/00), a little gem by the Center for Financial Research and Analysis, Inc. (here,) an outfit focused on forensic accounting.
Read it. It is all good stuff. Here are some extracts:
When should a firm establish a tax valuation allowance?
The decision whether to establish a valuation allowance is highly subjective. SFAS No. 109 requires evaluation and adjustment of the tax valuation allowance at the end of each accounting period. Negative evidence of future profitability might include: (a) recent history of net losses; (b) NOL carryforwards expiring unused; (c) losses expected in future years; and (d) only a few years remaining in the carryforward period. Positive evidence could include, among other things: (a) appreciated asset values or (b) a sales backlog or existing contracts that are likely to be profitable. It is very difficult for an outsider to assess whether a change in the tax valuation allowance balance is appropriate or to identify the need for such an account.
What happens when a firm decides to reverse its tax valuation allowance account?
Reversal of the Deferred Tax Asset Valuation Allowance can provide a large one-time increase in reported net income. The entry to reverse an existing tax valuation allowance debits the tax valuation allowance and credits income tax expense. The credit to income tax expense provides a boost to net income equal to the amount of the reversal. This can make a significant one-time difference in reported profits.
There it is, the magic bullet: Significant one-time difference in reported profits.
Now, the one-time difference is, of course, assuming that all the credit is taken at once. As I once heard a spokesperson for a CPA firm say, the preferred approach is to smooth the benefit out over several periods, so as not to disrupt the financial statement too much.
Regardless of how many periods this accounting exercise is performed over, it is, of course, a funny money exercise (or funny money exercises, in the event that we are exposed to smoothing) and have little or no impact on cash-flow. Moreover, anyone who actually reads the filings will understand that this just an accounting exercise and does not reflect an improvement in the operations of the company.
But, most investors and traders (and, yes, analysts) do not read. And, so, we may see a dramatic move in the per share price.
As Accounting for Deferred Tax Assets puts it:
The Business Press may incorrectly report the effect of reversing the tax valuation allowance.
The business press sometimes understates the impact of reversing the tax valuation allowance. For example, Verity, Inc. eliminated its entire $18.9 million beginning-of-the-year tax valuation allowance on May 31, 2000, even though the firm generated additional deferred tax assets from NOL carryforwards and unused research and development tax credits. The firm reported the following in the press release announcing its fourth quarter and fiscal year earnings:
“Net income for the quarter was $14.2 million or $0.39 per diluted share. The financial results for the fourth fiscal quarter and fiscal year ended May 31, 2000 include an income tax benefit of $2.6 million as a result of the reversal of the income tax valuation allowance as required by accounting rules. ……… Net income for fiscal 2000 was $33.0 million or $0.95 per diluted share. Excluding the income tax benefit, net income for the fiscal year ended May 31, 2000 would have been $30.4 million, or $0.87 per diluted share.”
This statement implies that the elimination of the tax valuation asset added only $2.6 million to its net income. In reality, the elimination of the tax valuation account provided an $18.9 million “turn-around” in income tax expense and net income for the quarter and the year resulting in a $2.6 million “Net Tax Benefit” for the fourth quarter and a $2.2 million “Net Tax Benefit” for the year. Verity would have reported a “Net Tax Expense” of about $16.7 million if it had continued to provide a full valuation allowance for its beginning-of-the-year deferred tax assets and its fiscal 2000 net income would have been only about $14.1 million. The Press Release downplayed the importance of the entry and emphasized, instead, the “Net Tax Benefit” figure.
Oh, just in case you think that this little accounting pirouette is unusual, here is an excerpt from the opening of Accounting for Deferred Tax Assets, which, as you may recall, was published in 2000:
In a September 2000 report on Concord Camera Corp. (“LENS”), CFRA cited the reversal of the Deferred Tax Asset Valuation Allowance account as a major source of the Company’s increased earnings. Specifically, LENS eliminated its tax valuation allowance account in the June 2000 quarter, adding $6 million to net income and thereby increasing fiscal 2000 earnings per share by $0.25 – to $0.81 from $0.56. The firm was subsequently cited as the 20th fastest-growing company on Fortune Magazine’s list of “America’s 100 Fastest Growing Companies”. CFRA notes that other firms such as Gen Rad, IOMEGA, Verity, MTI, Great Atlantic and Pacific Tea Co., Laboratory Corp. of America have also reversed all or part of their tax valuation accounts in recent months.
Piling on more disclaimers
It is probably time for more disclosures at this point… I don’t know if the company intends to release the valuation allowance, but I assume so (as a shareholder, I certainly would encourage such release.) Likewise, I don’t know if the company intends to release the valuation allowance in chunks (I would not) or in one go. Furthermore, I don’t know whether there are special considerations that makes it impossible to release parts of or all of the valuation allowance and what impact such release would have on the finance covenants. Finally, I don’t know what the optimum timing is for such release, except, of course, that it involves working the release to happen some time before the expiry of the associated tax benefits (personally, I would release them this year and go for a near-immediate secondary offering on the back-end of any per share price appreciation, but that is just me.)
So, I believe, I think, I don’t know… You get the drift. We are in uncertainty country here. And with uncertainty comes risk. Moreover, given the nature of debt management and corporate governance, there are risks that are outside the scope of valuation allowances and associated allowances, including risk of complete loss.
What I do know, however, is this. The release of a substantial (double digit million dollars valuation allowance) is possible, can have an enormous impact on the earnings statement for the fiscal quarter and fiscal year, and could probably be justified.
I also know that I feel like Unitek Global Services just fired a shot across the bow. In fact, it feels like when Richard III in Act I confides his up and coming plans to the audience:
“I’ll marry Warwick’s youngest daughter.
What, though I kill’d her husband and her father?”
— Richard III
Finally, it is worth emphasizing that the probable reason why I am able to spot the opportunity is my prior run-in with releases of valuation allowances at Joe’s Jeans. When I learned about the maneuver by the Joe’s Jeans I knew with absolute certainty that I would one day encounter a similar maneuver and I, therefore, set out to learn as much as I could about it.
And, as always, the problem with learning a lot about something and actively scanning for occurrence of it, is, of course, that one runs the risk of suffering from an unshakable case of confirmation bias.
All this, of course, is not a problem for me and my investment thesis (read more about this thesis here,) which fully accepts total risk and aims to gain competitive advantage by embracing an infinite time-horizon, but certainly violates almost all convention for investment and trading management.
So, caveat emptor
An added bonus — or two
I would be remiss if I did not point out two additional nuggets in the 10K filing.
The first nugget is implied, in that my guiding assumption is that any publicly traded company, when given the opportunity to take a significant charge or make a significant adjustment, will throw in everything and the kitchen sink, possibly taking the opportunity to clear some of the skeletons out of the closet.
Therefore, I assume that Unitek Global Services’ books are now as good as they can get — short of pulling the valuation allowance, of course.
That is very valuable to the company’s investors.
The second nugget is explicit, and, so, I will simply quote the 10K filing:
During the quarter ended June 30, 2012, the entire contingent consideration liability to the sellers was settled by virtue of the transfer of the aggregate cash and equity consideration described above, which represented the maximum contingent consideration payable under the Asset Purchase Agreement. While the Company made the aforementioned earn-out payments with a fair value for accounting purposes of $27.8 million, based on the [r]estatement of the Company’s results of operations and the related EBITDA calculations, no earn-out was due or payable under the Asset Purchase Agreement. The difference between the restated contingent consideration liability of $23.3 million recorded as of March 31, 2012 and the fair value of the consideration transferred during the quarter ended June 30, 2012 of $25.3 million was recognized as additional expense related to contingent consideration in the consolidated statement of comprehensive income or loss. Despite the determination that no amount was actually payable based on the six month or one year results of Pinnacle, subsequent to the settlement of this liability in the quarter ended June 30, 2012, the Company no longer measured or recorded a contingent consideration liability related to the projected EBITDA for the twelve month period ending March 31, 2013, the third earn-out period.
The Company intends to seek repayment of the contingent consideration paid, and any amount recovered will be reflected in the consolidated statement of comprehensive income or loss at such time as the amount is determined and the gain has been realized.
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In a recent posting I wrote that one thing that has been highlighted by the pork in The American Taxpayer Relief Act of 2012 (H.R. 8,) is that term limits appears to be needed for the United States Senate and the United States House of Representatives. As you may know, these two bodies of the United States Congress has no term limits (or, as I put it in my previous postings, has no set danger limits,) and, today, in our era of incumbency, the two and six year election cycles appear to be largely rituals with no real meaning.
As the Center for Responsive Politics puts it:
Few things in life are more predictable than the chances of an incumbent member of the U.S. House of Representatives winning reelection. With wide name recognition, and usually an insurmountable advantage in campaign cash, House incumbents typically have little trouble holding onto their seats…
Senate races still overwhelmingly favor the incumbent, but not by as reliable a margin as House races. Big swings in the national mood can sometimes topple long time office-holders, as happened with the Reagan revolution in 1980. Even so, years like that are an exception.
Consider these graphs, also from the Center for Responsive Politics:
In view of the incredibly low approval rating of the United States Congress (according to a Gallup survey, the approval rating hit a new low, 10%, in August, 2012 — the lowest approval rating in Gallup-recorded history,) it is really hard to understand why incumbents appear to be able to coast through 30 years, or so, of membership.
With this low level of approval rating and its disconnect with reelection rates, the enormous amount of money that the Congress has discretionary power over, and the increasingly blatant lobbying directed towards these representatives by special interest groups, it appears that the lack of term limits is a problem.
Term Limit Failures
In the early 1990ies, following active debate across the United States, Congressional term limits were put on the ballot in 24 states, and voters in eight of these states approved the Congressional term limits by an average electoral margin of two to one. However, in May 1995, the United States Supreme Court ruled that states cannot impose term limits upon their Federal Representatives or Senators.
And, so, the popular vote was for naught.In 1995 Mr. Bill McCollum, a Representative, brought a constitutional amendment to the United States House of Representatives, proposing the limitation of United States Senate memberships to two six-year terms and the limitation of United States House of Representatives memberships to six two-year terms.
Perhaps not surprising given that you are asking the wolf to guard the sheeps, the votes in favor of this bill, allowing for — arguably extremely generous — 12 years of service, fell far short of the required two-thirds majority votes. Three other term limit amendment bills failed as well.
And, so, the electoral vote was for naught.
Let’s try again, shall we
It is a puzzling notion. If the vast majority of the population is, indeed, for term limits, why are they not enacted. It is, after all, the people’s decision. Is it not?
To test the proposition, I have today posted a petition on We, the People, the petition page of the White House — recently made infamous due to a petition targeting Piers Morgan of CNN, which was authored by radio host Alex Jones.
To me a 12 year term seem only marginally better than life, so my petition limits United States Senators to one term (six years) and United States Representatives to three terms (six years in total.) The full and complete text of the petition is found below.
You can now participate in the great American experiment by voting for the petition by following this link. In order for the petition to become public, i.e. viewable by anyone on the White House’ home page — other than through an explicit links (http://wh.gov/yNQa) — the petition must obtain 150 votes. The next milestone is that the petition must obtain 100,000 votes in 30 days, by February 21st, 2013 (a tall order, I think,) in order for it to be reviewed by the White House Administration.
P.S. I am assured that there will be no nacht und nebel style rounding up of individuals who sign the petition, so feel free to contribute to the experiment. If you or your loved ones do get sent to somewhere unpleasant, I am truly sorry! For the ultra-paranoid among us, I note that signing the petition does require registration, but the information collected in the registration process is rudimentary…..
P.P.S. I urge you to not despair if the petition does not reach the two milestones. My understanding is that there is not limit on how many times a petition can be put up, and, so, if you wish, we can simply put the petition up again if it fails to meet the milestones (for that matter, you can also put the petition up if you want)
The full petition text is:
“Impose term limits on the United States Senate and the House of Representatives
This petition requests a change to the United States Constitution, imposing strict term limits on the members of the United States Senate and the United States House of Representatives.
Members of the United States Senate should be limited to one (1) term in office and members of the United States House of Representatives should be limited to three (3) terms in office.
The current absence of term limits combined with the mounting costs of elections has created a system that is highly and dangerously oligarchic, rigid, easily corruptible, and stiffing of progressive legislative progress. To improve the system, term limits must be established.
There is overwhelming popular support for term limits. The United States Congress needs to operate in accordance with the wishes of the people”
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.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.
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.
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.
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.
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
I 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 candidatesHowever, 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.
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?
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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So, 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…
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)
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.
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