Allen sure has brilliant tax advisors!
Sarkie, you might be interested in this article from today's Seattle Times:
seattletimes.com
Posted at 01:05 p.m. PDT; Friday, October 8, 1999
CHARTER LOSSES MAY HELP ALLEN
by Miles Weiss
Bloomberg News
WASHINGTON - Paul Allen, the Microsoft co-founder whose stake in the software company made him one of the world's richest people, will get a fringe benefit from his current foray into the cable-TV business: millions of dollars in losses that could help cut his tax bills.
Charter Communications, the St. Louis company that Allen has built into the fourth-largest U.S. cable business, disclosed in a regulatory filing that the company is structured in a way that permits Allen essentially to borrow losses that normally would be attributed to the company.
The technique, which is legal and relatively common, lets Allen use those losses to defer millions of dollars in taxes the billionaire would otherwise owe on profitable transactions, such as frequent sales of millions of Microsoft shares, tax experts said.
"The losses are worth much more to Mr. Allen than they would be to the stockholders," said Donald Alexander, a former Internal Revenue Service commissioner who practices tax law at the law firm Akin, Gump, Strauss, Hauer & Feld.
The filing didn't specify how Allen would use the tax losses. His Microsoft stock sales, though, could incur huge tax bills because Allen's proceeds probably are almost pure profit.
As a Microsoft co-founder, Allen's cost basis for much of his stake should be lower than the 15-cents-a-share figure for investors who still hold stock from the company's IPO in March 1986. Microsoft shares have been trading in the low $90s recently.
Allen regularly sells Microsoft stock, raising more than $1.3 billion from stock sales this year alone, according to regulatory filings. That came after he reaped $3.6 billion from sales last year, according to insider data collected by the Washington Service.
Allen co-founded Microsoft with the software company's chairman, Bill Gates. With a net worth estimated at $40 billion, he ranked second behind Gates in Forbes magazine's most recent list of the richest people in the United States.
Allen's arrangement with Charter, which has filed for an initial public offering, won't hurt other investors because the company is organized in a way that wouldn't let individual shareholders benefit from those losses, experts said. In addition, when Charter does begin to make money, Allen will be responsible for some taxes that otherwise would be attributed to the company.
The cable business is a great tonic for someone who faces large capital-gains payments to the IRS. Cable companies, even though they generate a lot of cash, often record big paper losses to reflect the depreciation of huge infrastructure investments.
Charter, for example, last year recorded a $1.5 billion loss from continuing operations before extraordinary items and minority interests, a figure that has been adjusted to reflect the impact of pending acquisitions. On the same pro forma basis, its loss for the first six months of this year was $716 million. The company expects these losses to continue "for the foreseeable future," according to Charter's IPO filing with the Securities and Exchange Commission.
Charter conducts its cable operations through a limited liability company whose partners, under IRS rules, can use its losses to offset their taxable income and capital gains. Allen, through a pair of companies he controls, will own about 60 percent of the limited liability company's membership units.
The public will hold a 31 percent stake in the limited liability company through Charter, a corporation formed to sell shares to investors. The IRS, though, bars corporations from passing on losses for tax purposes to individual shareholders.
Allen has therefore entered into an arrangement in which the corporation's losses will instead be allocated to him through 2003, according to the SEC filing. While the document doesn't say how he'll use those losses, it does make clear that Allen will benefit when it comes time to pay the IRS.
"The effect of the special allocation discussed above is expected to be that Mr. Allen," and other partners at the limited liability company "will receive certain tax savings," Charter said in its SEC filing.
At the same time, when Charter begins to make money, the company will save money because Allen will pay taxes on profits that would normally be attributed to the corporation.
The result is a tax deferral of sorts for Allen, at no cost to his public shareholders, said Earl Hannum, a partner at the accounting firm KPMG.
"The whole purpose of a special allocation is to give the losses to someone who could use them," Hannum said.
Copyright ¸ 1999 The Seattle Times Company |
