Mixed Effort From Bloomberg on a Hedge Fund Tycoon’s Taxes

Bloomberg is good to examine how hedge-fund kingpin Eddie Lampert, No. 316 on Forbes richest in the world list, may be machinating to avoid the new higher taxes on so-called carried interest on $829 million worth of stock.

But it’s another one of those slog-through-it Bloomberg stories that needs better editing for clarity’s sake. The wire so often has the reporting goods but is weighed down by weak editing.

This one’s hard to follow. And the lede is imprecise (emphasis mine):

Billionaire Edward Lampert may have found a way to shield himself from millions of dollars in taxes under legislation that would raise levies on profits at private- equity firms.

That implies that the new law itself is opening a Lampert loophole, but as far as I can tell from the rest of the story, it’s the opposite.

For instance, these explainer paragraphs (which should have been up high rather than Nos. 21 and 22):

Under current tax rules, distributions of marketable securities by an investment fund such as ESL Partners to its general partner don’t generate a tax bill, according to Fowler. The general partner can then transfer the Sears, AutoZone and AutoNation stock to its managing members, in this case Lambert and Crowley, who would pay taxes at the capital gains rate if they sold the shares at a profit.

As of Jan. 1, a similar distribution would be taxed as ordinary income under the pending legislation, a step that Congress is taking to prevent private-equity funds from avoiding the higher rate by transferring appreciated securities to individuals, Fowler said.

Lampert isn’t going to tell you that he’s doing something to avoid taxes, so any story about it is necessarily going to contain an element of speculation. That’s why this is okay:

“This may not be the sole reason Lampert did what he did, but it’s entirely probable that it is one reason,” said Stanley Blend, chairman of the law firm Oppenheimer, Blend, Harrison & Tate Inc. in San Antonio and the former head of the tax section at the American Bar Association. “I’m sure that trying to beat the effective date of Section 710 entered into his thought pattern.”

Better to have this wishy-washy stuff than nothing at all.

But this significant, thesis-weakening information is buried in the very last paragraph of the story.

Depending on the method ESL Partners used to allocate carried-interest profits, Lampert may have already paid the levies imposed on such gains, limiting the tax-related benefits from the distribution he received, Fleischer said.

If it’s entirely possible that Lampert has already paid the taxes, then that information should be up high in the piece. You can still do this piece—again these things necessarily involve some speculation, and I think it’s highly likely that these transactions are being done to avoid taxes—but you can’t bury the stuff that could exhonerate the guy in the spotlight.

Meantime, The Economist’s Ryan Avent has a good, outraged take:

As far as I can tell, this is entirely within the law. But I don’t think it’s improper to declare it obscene. Shameful, even. With a fortune of that size, additional wealth is about little more than score-keeping. You can afford to be a grown-up and pay the same taxes as everyone else.

It sounds horribly populist to say so, but the fact that this kind of behaviour is lauded in the financial press when it ought to be scorned is a real problem. It’s a problem in that it reveals big money men to be as brazen in their behaviour as they were before the crash. But it’s also an indicator that something remains broken in America’s attitude toward wealth.

I don’t think Bloomberg was lauding this at all.

And there’s that business-press reaction to anything that smacks of “populism.” Good that Avent overcomes it. But I don’t think it’s populism whatsoever to say that this kind of behavior by a billionaire is shameful. Lampert got taxed on a significant portion of his income at rates lower than those his secretaries pay (to borrow a useful Buffettism).

Rather than be thankful for that bit of temporarily insane largesse from the American public, he’s kicking dirt in their faces. No need to feel bashful about condemning that.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.