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Posts Tagged ‘tax exempt’

Disclosure:  This post is both broad and detailed so that interested analysts and journalists can gather key facts and form their own opinion.   Reviewing incredible schemes such as this orchestrated by Robert Mercer and Jim Simons often attract teams of analysts and reporters.  This post is original fact checked independent research available free on the internet.

In order to understand Robert Mercer’s brilliant financial engineering,  let’s begin our analysis using three outstanding local Portland beers.  They are Rogue Brewery’s Shakespeare Stout, Widmer’s Hefeweizen and Deschutes Breweries Fresh Squeezed IPA.

All three beers are distributed by Portland based Columbia Distributing, one of the nations largest beer distributors, which was purchased by the Jim Simons controlled investment fund Meritage in 2012.  Simons along with Robert Mercer is Co-CEO of the $100 billion Rentec hedge fund.

While Meritage CEO is listed as Nat Simons, Jim Simons son,  the elder Simons holds the controlling ownership position per SEC filings, owning more than 75 percent of the Meritage fund.

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This analysis will unravel the relationship between Rentec’s Medallion fund, its company retirement plan,  the Meritage private equity fund, which purchased Columbia Distributing in 2012, and numerous tax exempt foundations including those of Jim Simons, Nat Simons and Robert Mercer.

The key to understanding this financial engineering feat is analyzing the Medallion fund, which is managed by Renaissance Technologies.  This hedge fund is indeed the unifying thread.

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Doris is 85 and suffers from moisture build up in her eye, what some call wet eye.   She is on Medicare and gets treated with Eylea, a Regeneron product, every 4-5 weeks.  Each treatment costing $6,200.   That is more than $70,000 per year even though Doris never made more than $40,000 while working.   Her total out of pocket cost is $10.29 per treatment.

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Today Oregon PERS approved a $400 million investment in Stonepeak, a firm that invests in “infrastructure projects.”

In his presentation Stonepeak’s managing director Michael Dorrell noted their strategy is to invest in “essential infrastructure assets with an economic monopoly, much like an airport.”  This includes water, power plants, transportation and telecom with a focus “outside the auction process.”  They expect an annual return of 12 percent over 30 years.

One of their major projects he discussed is the largest desalination operation in the western hemisphere, in Southern California.  The key development partner is Poseidon Resources, “former GE guys.”  Dorrell noted they obtained the exclusive rights to such desalination projects.  They brought these rights over from their former employer Blackstone, who is entitled to 50 percent of the carried interest from this project. The expected return is 14 percent over 30 years and the City of San Diego could not do much about this high rate since Stonepeak has rights to the “only viable site near San Diego.”

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In late 2014 the tax exempt Oregon Historical Society sold the Sovereign Apartment building, after owning it more than 30 years.  The Society maintains an outstanding board of directors and this was clearly a difficult decision. As part of the sale the society negotiated a long-term lease for itself yet its 44 tenants were last month given six months to vacate.

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Disclosure:  This post is the first of several regarding the 2016 Presidential candidates.  One post will be done on each major candidate and the focus will be their primary financial backers and their respective foundations.  Bill Parish maintains no ties to any candidate nor does he have knowledge of any client owning positions in private equity or hedge fund partnerships.  Parish & Company only recommends publicly traded securities.

With Hillary Clinton likely to win the Democratic nomination, barring a major mistake, her most influential financial backers will be analyzed first.  They are Tony James of Blackstone and Jim Simons of Renaissance, the world’s largest private equity and hedge funds respectively.

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Michael Dell Hopes SEC and IRS Are Sleeping

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What continually makes the United States the place to be with respect to investment is the expectation that, when all is said and done, the rule of law generally prevails.   One need only visit  China, Japan and Russia to see that markets are generally manipulated by insiders.

The big story regarding Michael Dell’s proposed private equity led buyout has yet to be told and it is all about gaming SEC rules designed to promote fairness toward all equity investors, not just a few insiders, and more importantly also gaming key IRS rules.  A few key points:

1)  Tech firms like Dell aggressively compete regarding strategic acquisitions and nothing speaks louder than “cash” or shares assumed to have the potential to appreciate.  For most tech firms the largest source of cash is remarkably non-payment of taxes.  This is due to the large stock option generated tax deductions with no corresponding outlay of cash, deductions associated with restricted stock, etc.  These firms do not generally purchase shares on the open market to fulfill such commitments but rather simply print up new stock.

Put another way, if you can generate a billion dollars of tax deductions, you can effectively reduce your tax bill by 350 million, which is nothing short of cold hard cash in the bank, if you are profitable.  The biggest such deductions come from the issuance of stock or large write-downs of assets, for which there is no cash cost to the company.

If one compares Dell to Apple and Google it doesn’t take long to see that Apple and Google have been veritable tax deduction making machines via the issuance of non-qualified stock options.  Consider the following analysis based upon each companies most recently released 10K reports.  Also consider that large exercises in options at Apple and Google in the last 5 years have generated staggering tax deductions while Dell has generated little.

One could even argue that the whole anti-trust action against Google was misdirected in that the focus should instead be on tax rules that have created a situation in which they are relatively immune to competition.  What tax paying publishing company could possible compete with a firm like Google that “coins” cash, to quote Henry Blodget,  in the form of non-payment of taxes.

Although Apple did not issue any options in 2012, it like Google and Dell, is aggressively issuing Restricted Stock to employees.  Again, there is no “cash” cost to this since it is simply new stock being printed up.  In the old days such stock would be purchased on the open market, resulting in a cash outlay,  yet now it is just printed up.  Consider the following:

Dell Apple Google
Stock Price 2/5/2013        13.5       457.8        765.7
Average Option Exercise Price 25.4 127.5 405.9
Potential Tax Deduction per Share -11.9 330.3 359.7
Options Outstanding 143M 6.5M 8.5M

The key point is that Dell is so underwater with its options that it can’t play the game any longer.  What they need to do is go private, take a massive write-down and revalue the shares lower to create lower strike prices.

Management can then issue two classes of options, not unlike what Bain Capital has done with respect to its own employees participation in deals.  One class will have a greatly reduced exercise price that will accordingly result in massive tax deductions when exercised in a subsequent IPO, when Dell is taken public again.

The beauty of this well worn scheme is that the amount expensed for the options is declared when granted, not when exercised.  This often results in a tax deduction upon exercise years later that are ten times as great as the expense recognized.

If Dell is taken private such deductions can then be allocated among Dell and other taxable private equity partners and result in effective tax rates of close to zero.  This is because many private equity firms have tax exempt limited partners who have no use for tax deductions, examples being public pensions and foundations.   Tax deductions are unusable for tax exempts.

Those private equity firms like Silver Lake, whose largest limited partners are tax exempt investors, including Calpers that owns 10 percent of Silver Lake outright, use well worn schemes to allocate these deductions away from tax exempts, contrary to IRS rules, in particular the “fractions rule.”  Remarkably, there is not only no discussion of this important rule but also no enforcement.

Other major tax exempt investors in Silver Lake include the New Jersey Public Pension System.   Is it not ironic that New Jersey Governor Chris Christie excoriated the Republican party leadership for its slow response in providing Hurricane Sandy relief while the State and other public pensions seek to profit at every turn from “buyout” funds?  Especially when these buyouts decimate the very tax base relied upon to support the public pension system.

In a perfect world Dell would  also take a massive writedown now, prior to the buyout, so that this important value could be captured and quantified, that is the future tax deduction resulting from the write down.  What Michael Dell wants to do is wait until after the buyout and pocket a larger share of any such deduction for himself.

Clear disclosure of all existing unused net operating losses able to be used in future years should also be prominently disclosed.

Overall, this is a brilliant plan and would be just another day at the office if this were Bejing, Moscow or Tokyo.   Let’s hope for the sake of long term shareholders that both the SEC and IRS give Mike a call and say,  “nice try.”

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The following letter was sent to SEC Chair Mary Schapiro and IRS Commissioner Doug Shulman on “tax day” with the hope they will jointly work at restoring the integrity of cash flow statements, without question the most important analytical tool for investment advisors like myself.  It is simply astonishing, given their material nature, that listed companies are not fully disclosing purchased and accumulated net operating losses nor the impact of complying with the “fractions rule” in the case of private equity partnerships.

 

Parish & Company
10260 S.W. Greenburg Rd., Suite 400
Portland, OR 97223
Tel:(503)643-6999 Fax:(503)293-3507
Email: bill@billparish.com

April 15, 2011

Mary Schapiro
Office of the Chairman
Securities and Exchange Commission
Mail Stop 1070
100 F Street NE
Washington, D.C. 20549

cc: Elise B. Walter – SEC Commissioner
Troy A. Parades – SEC Commissioner
Robert Khuzami – SEC Director
Doug Shulman – IRS Commissioner
Heather Maloy – IRS Commissioner Large Business Division
Walter Harris – IRS Director Financial Services
Elise Bean – Congressional Oversight Committee

Dear Chair Schapiro,

In 15 years as an investment advisor I have always done my best to support the SEC’s work, having led many key corporate governance related initiatives. Past Chairs Levitt, Pitt and Donaldson are all familiar with my work, which has also been reported in front page stories in leading publications including Bloomberg, the New York Times, Barrons and USA Today.

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