To everyone who claims that our wealthiest citizens pay more than their fair share of income taxes and we should cut them a break because they’re the ones who, you know, create jobs in our economy, I have four words for you:
Frank and Jamie McCourt.
The McCourts, who own the Los Angeles Dodgers (so she says; he says he’s the owner and she’s not), jointly pocketed income totaling $108 million from 2004 through 2009, according to documents Jamie McCourt recently filed in the couple’s divorce case in Los Angeles County Superior Court.
On that sum, they paid zero federal and state income tax. Jamie suggests that some tax breaks will apply this year too.
This reminds me of the old line about how true scandal lies not in what’s illegal, but what’s legal. It’s certainly an edifying window into the lengths some people will go to avoid paying taxes.
The court papers indicate that the McCourts deliberately structured their business at least partially to allow them to live tax-free.
Frank McCourt’s lawyer, Marc Seltzer, didn’t directly dispute Jamie’s characterizations of the couple’s tax planning or the details of their finances. He did, however, call her document filings “selective” and complained by e-mail that she made public “information which most people would respect as private.”
According to Jamie, the McCourts employed two mechanisms to live tax-free. One was to claim enormous tax losses from their business, which was mostly commercial real estate before they bought the Dodgers. These could be carried forward, offsetting income year after year until they were finally netted out. Jamie’s documents say that in 2008 the net loss carry-forward from previous years was $109 million -- in other words, the McCourts could have earned that much without paying a penny of income tax.
A year later, the loss carry-forward had increased to $135 million, which makes it sound as if 2008 was one horrible year. Yet according to another document Jamie filed in court, one of Frank’s partnerships paid him $23 million that year.
Did the McCourts really lose $135 million in the years before 2009? Probably not in the sense that you or I suffer a loss when a dollar bill slips through a hole in our jeans, or even when we sell that stock our brother-in-law described as “a slam dunk” for less than we paid for it.
“They’re tax losses. I don’t mean real losses,” Jamie’s lawyer, Bert Fields, told me.
Fields, who assured me that everything the McCourts have done is legitimate, tax-wise, wasn’t entirely clear on how the losses were generated. But Jamie’s accountant states in a court document that some is due to depreciation, which is a way of accounting for wear and tear on a property.
Depreciation is a non-cash expense that can be applied against cash income, reducing your income taxes or creating a loss to show the tax man, even though you’re making money. It’s common in real estate, though it can also be applied to things like a sports team’s player contracts. Depreciation is technically a tax deferral, not an exemption, but the reckoning can be years off.
In any case, one would also think that if the McCourts’ business were truly suffering operating losses of such magnitude, eventually it would no longer have the proverbial urn to fill. It’s unclear whether this is so -- the document dump includes a 2007 e-mail from an officer of the McCourt Group, one of the family’s major holding companies, observing that the group “has squat for assets” and needs “start up capital and cash flow” -- but that’s just one subsidiary.
Another McCourt maneuver involves financing and refinancing their assets. The tax rules allow real estate owners to refinance properties with rising values and take out cash tax-free. (Many homeowners engaged in similar “cash out” refis during the housing boom). Land developers can transfer tax credits from property to property, like an NFL team booting a fumbled ball toward the goal line, until time runs out or the market crashes.
The McCourts have also borrowed against future business income -- in 2007 they took out a $140-million loan against future Dodger ticket sales, of which $20 million went to fund their lifestyles, tax-free. Of course, when the loan comes due, the piper will have to be paid, but interest on the loan will be tax-deductible for the Dodgers, Jamie’s lawyers say.
It’s proper to acknowledge that tax breaks like these can have a legitimate purpose. The idea is that they encourage certain investments, such as real estate development, that may energize the economy and create jobs.
Is that what’s happening here? The tax benefits reaped by the McCourts helped turbocharge their lifestyle. There are eight houses, including four in Holmby Hills and Malibu. The McCourts treated their family and business checkbooks as “largely one and the same,” according to an e-mail from a McCourt executive Jamie filed in court. (Oddly, the e-mail ascribes to her the philosophy of “why have a family business but to support the family lifestyle.”) This paid for meals in the best restaurants, floral arrangements for home and office from the finest florists, country club dues, personal travel on the Dodgers plane, Jamie’s makeup “for Dodger events” ($386 a month).
The point is not to begrudge the McCourts these luxuries. The point is to question why we as taxpayers should subsidize them. Jamie asserts that, although the state of Massachusetts is auditing the couple’s personal returns for 2006 (they used to be based in the Bay State), neither California nor the Internal Revenue Service is doing so. This raises another question: Why not?
Can we as taxpayers be confident we aren’t paying more than our fair share? Jamie alleges that for the purposes of the divorce, Frank has manipulated the business accounts to make himself look $670 million poorer than he is. Delivering fake numbers to the IRS is a rather different matter from delivering them to your spouse in a divorce action, but the McCourts structured their business as a stew with a lot of complicated ingredients, which makes it hard to verify that all the tax breaks are fully warranted.
People who practice tax avoidance on this scale don’t often emerge with their images unsullied. When a Senate committee revealed in 1933 that J.P. Morgan Jr. and his partners had paid no income taxes for 1930, 1931 and 1932, their reputation for probity was shattered; the uproar helped the New Deal bring Wall Street under regulation. Leona Helmsley’s 1989 conviction for tax evasion wrecked her elegant image forever (I am not suggesting the McCourts broke the law, as she did). But she did bequeath us the credo of the wealthy non-taxpayer.
“Only the little people pay taxes,” she reportedly told a maid. The lesson of the McCourts is slightly different: The little people pay taxes for the big people.
Michael Hiltzik’s column appears Sundays and Wednesdays.
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