Capital Gains vs. Estate Tax - Ralph Should Sell Now

[BringBackFergy]

This is kind of a nerd thread (no x's and o's here) but I'd be interested in hearing from a CPA or accountant on the preferable method for tax savings as it relates to Ralph's estate plan.

 

I handle very simple estates in my practice and Ralph's estate will be uber-complex. But the following rules should still apply:

 

1) Ralph bought the team for $50,000 or so. That is his "cost basis". He has invested other funds into the team by way of stadium improvements (not sure how much he paid and how much the taxpayers picked up), other team/business expenses. If we were to say he has spent another $5 million on team improvements, his adjusted cost basis is $5,050,000. If he sells the team this year for $800 Million, he has a capital gain of approximately $795 Million. In 2012, the long term capital gains tax rate is 15% (I believe) so he'd pay approximately $120 million in taxes just on the sale of the investment/business.

 

2) If Ralph holds onto the $675 Million (795-120 taxes=$675 million) and dies with this amount of cash in the bank, the federal estate tax exemption is going to fall back to $1 Million (unless he has a wife in which case he can transfer the whole estate to his wife on death tax free). He can also set up Credit Shelter Trusts, etc. to defer the payment of estate tax until the death of his wife. But let's just say his executor wants to pay the whole tax while administering Ralph's estate rather than set up a QTIP election for deferred estate tax. They would combine Ralph's other assets with the $675 Million (say he has another $100 Million in assets) so he has a taxable estate of $775 Million. If they apply the estate tax rate of say 50%, he pays $387 million in taxes, his family walks away with the balance of $387 Million.

 

3)In the final example, if Ralph doesn't sell the team, upon the date of his death, his estate (and beneficiaries) take the stepped up basis in the asset. That means his estate will not have a cost basis of $50,000 (or $5,050,000) but their cost basis will be the fair market value of the team on the date of death. Therefore, even though the asset itself worth $800 Million will be considered an asset of the estate, the estate will not have to pay capital gains tax on it if it is sold for $800 Million (on the next day after his death). If the estate sells the team for $900 Million one month after death, let's say, they will have to pay tax on the $100 Million dollar gain.

 

Using the same numbers as above, if Ralph doesn't sell the team and keeps it as part of his estate, the $800 Million team plus his other assets of $100 Million is a gross estate of $900 Million. If you apply a 50% tax rate, the estate pays $450 Million and the family walks away with $450 Million.

 

So, it seems the easy answer is selling the team now is tax prohibitive because he would pay a total of $507 Million in taxes (Capital gains plus estate tax) as opposed to leaving it in his estate for an estate tax of $450 Million.

 

Question for CPA/Accountants/Finance Guys/Attorneys: Isn't it better to sell the team now (pay the capital gains tax rate of 15%) before the capital gains tax increases significantly and the estate tax rate increases even more so as we appear to be heading toward a financial crisis. I think Ralph and his family (and their estate planners) are overthinking this. The safe bet is to sell the team now (2012) before tax rates go haywire in the next four years.

Edited November 26, 2012 by BringBackFergy

[Dean Cain]

Fergy, the top marginal tax rates will be going upward. We've known this for sometime. I'd wager Ralph has had a plan in place for some time now.

 

From what I've read, Ralph has indicated his family will not be, nor wants, to own & operate the Bills. As the NFL allows up to 30 owners own shares of a franchise & requires one majority shareholder to control 30%, known as the owners equity rule, I would be surprised that Ralph hasn't already sold a fractional interest in the Bills to help pay this tax. In fact, in our highly private world it is likely Ralph has already transferred a portion of our team. Because the Bills are a private corporation they are not required to disclose any private transactions.

[BringBackFergy]

Fergy, the top marginal tax rates will be going upward. We've known this for sometime. I'd wager Ralph has had a plan in place for some time now.

 

From what I've read, Ralph has indicated his family will not be, nor wants, to own & operate the Bills. As the NFL allows up to 30 owners own shares of a franchise & requires one majority shareholder to control 30%, known as the owners equity rule, I would be surprised that Ralph hasn't already sold a fractional interest in the Bills to help pay this tax. In fact, in our highly private world it is likely Ralph has already transferred a portion of our team. Because the Bills are a private corporation they are not required to disclose any private transactions.

 

Is it possible that he already did sell the team (privately) on an installment basis. I guess he would do this to take advantage of tax rates right now (as opposed to those we will see next year). Perhaps the installment note sets forth the sale price for 2012 tax purposes (or even 2011, 2010) but won't be announced publicly until his death?? That might be a slick way to have the buyer in place and still take advantage of tax rates currently. I was unaware of the 30% rule. Makes sense to have one majority shareholder who has the financial status to pull this off.

 

The press keeps saying how Ralph's family will have to sell the team to pay the estate tax on the sale of the team....that's why I think it is best to sell the team NOW (to take advantage of the tax rates before they go upward with increased velocity). I agree...either have something in place before year end or, hopefully, as you say, the contract and installment payments have already begun.

[Sisyphean Bills]

This is kind of a nerd thread (no x's and o's here) but I'd be interested in hearing from a CPA or accountant on the preferable method for tax savings as it relates to Ralph's estate plan.

 

I handle very simple estates in my practice and Ralph's estate will be uber-complex. But the following rules should still apply:

 

1) Ralph bought the team for $50,000 or so. That is his "cost basis". He has invested other funds into the team by way of stadium improvements (not sure how much he paid and how much the taxpayers picked up), other team/business expenses. If we were to say he has spent another $5 million on team improvements, his adjusted cost basis is $5,050,000. If he sells the team this year for $800 Million, he has a capital gain of approximately $795 Million. In 2012, the long term capital gains tax rate is 15% (I believe) so he'd pay approximately $120 million in taxes just on the sale of the investment/business.

 

2) If Ralph holds onto the $675 Million (795-120 taxes=$675 million) and dies with this amount of cash in the bank, the federal estate tax exemption is going to fall back to $1 Million (unless he has a wife in which case he can transfer the whole estate to his wife on death tax free). He can also set up Credit Shelter Trusts, etc. to defer the payment of estate tax until the death of his wife. But let's just say his executor wants to pay the whole tax while administering Ralph's estate rather than set up a QTIP election for deferred estate tax. They would combine Ralph's other assets with the $675 Million (say he has another $100 Million in assets) so he has a taxable estate of $775 Million. If they apply the estate tax rate of say 50%, he pays $387 million in taxes, his family walks away with the balance of $387 Million.

 

3)In the final example, if Ralph doesn't sell the team, upon the date of his death, his estate (and beneficiaries) take the stepped up basis in the asset. That means his estate will not have a cost basis of $50,000 (or $5,050,000) but their cost basis will be the fair market value of the team on the date of death. Therefore, even though the asset itself worth $800 Million will be considered an asset of the estate, the estate will not have to pay capital gains tax on it if it is sold for $800 Million (on the next day after his death). If the estate sells the team for $900 Million one month after death, let's say, they will have to pay tax on the $100 Million dollar gain.

 

Using the same numbers as above, if Ralph doesn't sell the team and keeps it as part of his estate, the $800 Million team plus his other assets of $100 Million is a gross estate of $900 Million. If you apply a 50% tax rate, the estate pays $450 Million and the family walks away with $450 Million.

 

So, it seems the easy answer is selling the team now is tax prohibitive because he would pay a total of $507 Million in taxes (Capital gains plus estate tax) as opposed to leaving it in his estate for an estate tax of $450 Million.

 

Question for CPA/Accountants/Finance Guys/Attorneys: Isn't it better to sell the team now (pay the capital gains tax rate of 15%) before the capital gains tax increases significantly and the estate tax rate increases even more so as we appear to be heading toward a financial crisis. I think Ralph and his family (and their estate planners) are overthinking this. The safe bet is to sell the team now (2012) before tax rates go haywire in the next four years.

 

There is no question selling it before he dies would be an epic financial blunder. He has already stated publicly that it's not going to happen, so the argument is inert and moot. I believe Ralph's wife is in good health, and there will be no inheritance tax and the stepped up cost basis will allow her to sell the team with minimal capital gains as well. In the meantime, he and a few family members draw a nice salary as executives of the team. Simply put: he's not going to sell the team now.

[mitchmurraydowntown]

Not going to happen.

[Mr. WEO]

I would be surprised that Ralph hasn't already sold a fractional interest in the Bills to help pay this tax. In fact, in our highly private world it is likely Ralph has already transferred a portion of our team. Because the Bills are a private corporation they are not required to disclose any private transactions.

Is it possible that he already did sell the team (privately) on an installment basis. I guess he would do this to take advantage of tax rates right now (as opposed to those we will see next year). Perhaps the installment note sets forth the sale price for 2012 tax purposes (or even 2011, 2010) but won't be announced publicly until his death?? That might be a slick way to have the buyer in place and still take advantage of tax rates currently. I was unaware of the 30% rule. Makes sense to have one majority shareholder who has the financial status to pull this off.

 

 

Any sale would have to be voted on by the other owners. I can't believe a vote on even a portion of an NFL team could be kept out of the press.

[PromoTheRobot]

My friend has a theory on Ralph, that he has already borrowed all the equity out of the team so as to avoid taxes. He says when it comes time to sell, we could learn that the team is all paper held by banks. We'll see.

 

PTR

[BringBackFergy]

Any sale would have to be voted on by the other owners. I can't believe a vote on even a portion of an NFL team could be kept out of the press.

 

What if it was on a Option basis (put/call or whatever you want to call it)?? That is to say, the team hasn't been sold, but on a certain triggering event, the price and ownership structure is all set to go.

 

My friend has a theory on Ralph, that he has already borrowed all the equity out of the team so as to avoid taxes. He says when it comes time to sell, we could learn that the team is all paper held by banks. We'll see.

 

PTR

 

Great theory. Let's hope M&T Bank owns a share of that pie.

[dave mcbride]

I think the most convincing interpretation is the simplest one: that Wilson sees his ownership as keeping him alive, and that if sold them he'd die shortly thereafter. The Bills give him a reason to get up in the morning. Without them, he doesn't have one.

[peterpan]

My friend has a theory on Ralph, that he has already borrowed all the equity out of the team so as to avoid taxes. He says when it comes time to sell, we could learn that the team is all paper held by banks. We'll see.

 

PTR

 

thats how all the big wigs do it.

[Mr. WEO]

What if it was on a Option basis (put/call or whatever you want to call it)?? That is to say, the team hasn't been sold, but on a certain triggering event, the price and ownership structure is all set to go.

 

 

 

Great theory. Let's hope M&T Bank owns a share of that pie.

It wouldn't matter, there can be no sale until the league approves it. The league wouldn't have to honor any contingency deal an owner has made/promised to someone else.

I think the most convincing interpretation is the simplest one: that Wilson sees his ownership as keeping him alive, and that if sold them he'd die shortly thereafter. The Bills give him a reason to get up in the morning. Without them, he doesn't have one.

 

Geezus, really??

[BringBackFergy]

I think the most convincing interpretation is the simplest one: that Wilson sees his ownership as keeping him alive, and that if sold them he'd die shortly thereafter. The Bills give him a reason to get up in the morning. Without them, he doesn't have one.

 

If that was the case, wouldn't we see some form of "input" from him publicly like "What the &%$#! are you doing Chan???" As it stands, I'm not sure Ralph really lays awake at night thinking how to improve this team from an administrative standpoint. That being said, selling now (2012) could be his last charitable act as Owner. He should take the money and go buy a big ass Camper and come tailgate with us on Sundays.

[dave mcbride]

From what Gailey says, he has fre

If that was the case, wouldn't we see some form of "input" from him publicly like "What the &%$#! are you doing Chan???" As it stands, I'm not sure Ralph really lays awake at night thinking how to improve this team from an administrative standpoint. That being said, selling now (2012) could be his last charitable act as Owner. He should take the money and go buy a big ass Camper and come tailgate with us on Sundays.

 

From what Gailey says, he has frequent conversations with Wilson (weekly, I think). The old man is clearly still into it.

[BringBackFergy]

From what Gailey says, he has fre

 

 

From what Gailey says, he has frequent conversations with Wilson (weekly, I think). The old man is clearly still into it.

 

That's the sad part...Ralph is buying what Chan is selling. Aren't there laws against taking advantage of the elderly with telemarketing scams.

[Mr. WEO]

From what Gailey says, he has fre

 

 

From what Gailey says, he has frequent conversations with Wilson (weekly, I think). The old man is clearly still into it.

 

GAiley also said if we get to 7-7, we may be like the Giants and make the SB.

 

Why believe what Gailey says?

[jake24]

Being an owner of a football wouldn't you want to see your team win a Super Bowl. The whole goal is to bring home the hardware. I just think Wilson is so old and fragile that he doesn't really understand whats going on and his family can give 2 *****. Just sell the team Ralph and enjoy the rest of your life, you brought us a product now let someone else take over and and improve on what you brought here....

[ICanSleepWhenI'mDead]

What if it was on a Option basis (put/call or whatever you want to call it)?? That is to say, the team hasn't been sold, but on a certain triggering event, the price and ownership structure is all set to go.

BBF,

 

I won't burden this thread with the details by repeating them all here, but since we seem to share an interest in trying to figure out how a businessman like Ralph would arrange his NFL affairs, you might want to check out reply #s 183 and 186 in this thread:

 

http://forums.twobil...y/page__st__180

 

In particular, note the links to articles about how NFL owners in Baltimore and Miami transferred partial ownership in their franchises in conjunction with an option to buy the rest in the future.

 

It seems possible to me that Ralph could avoid the requirement to seek current NFL approval of an ownership transfer by granting an investor (whether from Toronto or elsewhere) a right of first refusal.

 

Some people here think that wouldn't work because the NFL might not approve the eventual sale to such an investor after Ralph passed. But it's no different than buying a house contingent upon it passing a future inspection. In both cases, you can structure the deal so that the potential buyer doesn't lose any money (if the house doesn't pass a future inspection or if the NFL doesn't approve the buyer in the future after Ralph passes).

 

Just my 2 rupees.

Edited November 26, 2012 by ICanSleepWhenI'mDead

[birdog1960]

 

Geezus, really??

yep, really. it's never been about winning to wilson. it's not even about football other than his bits of fun interfering in football decisions. it's about running a financially successful business. and the bills are still that. i think that does help him get up every morning. and having his name on a stadium helps too.

[mattsox]

This is kind of a nerd thread (no x's and o's here) but I'd be interested in hearing from a CPA or accountant on the preferable method for tax savings as it relates to Ralph's estate plan.

 

I handle very simple estates in my practice and Ralph's estate will be uber-complex. But the following rules should still apply:

 

1) Ralph bought the team for $50,000 or so. That is his "cost basis". He has invested other funds into the team by way of stadium improvements (not sure how much he paid and how much the taxpayers picked up), other team/business expenses. If we were to say he has spent another $5 million on team improvements, his adjusted cost basis is $5,050,000. If he sells the team this year for $800 Million, he has a capital gain of approximately $795 Million. In 2012, the long term capital gains tax rate is 15% (I believe) so he'd pay approximately $120 million in taxes just on the sale of the investment/business.

 

2) If Ralph holds onto the $675 Million (795-120 taxes=$675 million) and dies with this amount of cash in the bank, the federal estate tax exemption is going to fall back to $1 Million (unless he has a wife in which case he can transfer the whole estate to his wife on death tax free). He can also set up Credit Shelter Trusts, etc. to defer the payment of estate tax until the death of his wife. But let's just say his executor wants to pay the whole tax while administering Ralph's estate rather than set up a QTIP election for deferred estate tax. They would combine Ralph's other assets with the $675 Million (say he has another $100 Million in assets) so he has a taxable estate of $775 Million. If they apply the estate tax rate of say 50%, he pays $387 million in taxes, his family walks away with the balance of $387 Million.

 

3)In the final example, if Ralph doesn't sell the team, upon the date of his death, his estate (and beneficiaries) take the stepped up basis in the asset. That means his estate will not have a cost basis of $50,000 (or $5,050,000) but their cost basis will be the fair market value of the team on the date of death. Therefore, even though the asset itself worth $800 Million will be considered an asset of the estate, the estate will not have to pay capital gains tax on it if it is sold for $800 Million (on the next day after his death). If the estate sells the team for $900 Million one month after death, let's say, they will have to pay tax on the $100 Million dollar gain.

 

Using the same numbers as above, if Ralph doesn't sell the team and keeps it as part of his estate, the $800 Million team plus his other assets of $100 Million is a gross estate of $900 Million. If you apply a 50% tax rate, the estate pays $450 Million and the family walks away with $450 Million.

 

So, it seems the easy answer is selling the team now is tax prohibitive because he would pay a total of $507 Million in taxes (Capital gains plus estate tax) as opposed to leaving it in his estate for an estate tax of $450 Million.

 

Question for CPA/Accountants/Finance Guys/Attorneys: Isn't it better to sell the team now (pay the capital gains tax rate of 15%) before the capital gains tax increases significantly and the estate tax rate increases even more so as we appear to be heading toward a financial crisis. I think Ralph and his family (and their estate planners) are overthinking this. The safe bet is to sell the team now (2012) before tax rates go haywire in the next four years.

 

I'm all for it. Ralph knows jack about being/keeping/sustaining a winning franchise.

[bbb]

If he sold now and paid capital gains tax and was left with say $500M as an example, wouldn't his estate then have to pay estate taxes on that once he died? Wouldn't this be actually worse - as he would get taxed twice?