Fast Eddie’s play
Billionaire hedge fund mogul Eddie Lampert has outsmarted lawmakers and come up with a way around a planned tax hike on earnings for hedge funds and private equity firms — saving himself about $64 million.
The 47-year old financial whiz side-stepped the likely higher tax bill by having his Greenwich, Conn., hedge fund firm, ESL Partners, distribute roughly $837 million in stock to him personally last week — a move that will allow him to pay the lower capital gains tax rate compared to the higher regular income tax rate had the fund distributed cash.
The tax savings is based on a blended higher tax rate of 25 percent. Lampert’s savings could be greater should the blended tax rate be higher. By owning the stock personally, the billionaire will get to pay just 15 percent on profits.
Congress is expected to take up the higher tax rate as soon as this week — and experts think the increase could be in the 25 percent to 30 percent range.
Of course, Lampert’s hedge fund firm may have made the distribution for a number of reasons and his spokesman Steve Lipin declined to comment. Still, the pros say it sure looks like a snub at lawmakers’ plans to raise his tax bill.
“If you do it before the legislation then it won’t be taxed at the higher rate,” said Micah Bloomfield, a tax lawyer with Stroock & Stroock & Lavan. “Personally, I don’t think there’s anything wrong with it.”
Street insiders expect a parade of financial titans to follow Lampert’s lead, which could throw a wrench in lawmakers’ plans to plug the deficit with additional tax revenue.
At one point, lawmakers predicted the higher tax rate on hedge funds and private equity firms could translate into $17.7 billion in added revenue over 11 years.
“Everybody will do it [get around the bigger tax bite] this year,” scoffed one hedge fund executive who asked not to be identified.
A recent version of the bill calls for half of private equity and hedge fund investment earnings to be taxed at ordinary income starting next year — and to move up to 75 percent starting in 2013. Currently, the highest income tax rate is 35 percent, but it could go as high as 39.6 percent next year.
Assuming the ordinary income rate stays at 35 percent, the average tax next year will be 25 percent. By locking in the 15 percent rate, Lampert could save $63.7 million by taking ownership of the shares in the three stocks his fund owns — Sears, AutoNation and AutoZone.
The tax savings assumes the 2.7 million AutoZone shares distributed to Lampert last week were among those his firm purchased 10 years ago for roughly $28 a share. At that price, Lampert would earn a whopping $444 million in profit on the deal if he sold today at $188.89 a share.
At a 25 percent tax rate, Lampert would fork over $111.2 million of that to Uncle Sam. At 15 percent, the bill is $66.7 million. There are comparable savings for the Sears and AutoNation stakes.
Yesterday, Senate Democrats introduced yet another bill. This one would soften the hit on firms and raise just $14 billion over the next decade. The Senate version would tax so-called “carried interest,” or compensation from investment earnings, at 65 percent starting in 2013, versus the 75 percent proposed by the House bill.