View topic - Estate Tax not a problem? Dan makes 3rd offer to brothers

[thesteelhammer Profile]

Good that the Rooney brothers are still trying to work this out.

http://www.post-gazette.com/pg/08223/903229-431.stm?cmpid=steelers.xml

Estate taxes pose little threat to Steeler ownership
Sunday, August 10, 2008
By Mark Roth, Pittsburgh Post-Gazette
As the Rooney family prepares to meet with NFL Commissioner Roger Goodell to discuss a possible ownership change in the Steelers, the federal estate tax may turn out to be the least important factor affecting the team's future, tax experts and some family members say.

On the surface, the estate tax seems daunting -- 45 percent on all estates above $2 million in value. With the Rooneys' 80 percent share of the franchise being valued at $800 million or more on the open market, that would seem to make the family liable for hundreds of millions of dollars in tax liabilities.

In reality, though, few estates pay the full estate tax rate, and there is almost no evidence that any family-owned enterprises have had to dissolve or sell out because of the federal tax, said Ben Harris, a senior research associate at the Tax Policy Center in Washington, D.C., a joint operation of the Brookings Institution and Urban Institute.

The tax center estimates that 17,500 estates will pay about $23 billion in federal estate taxes this year, for an average payment of just $1.3 million. Even the wealthiest estates -- those worth more than $20 million -- will pay an average tax rate of about 22 percent, less than half the official rate, the center estimates.

"The destruction of family businesses is often used as a motivation for repealing the estate tax, but there is very little proof that many family businesses are devastated by the tax," said Samuel Donaldson, a law professor at the University of Washington and a nationally known expert on estate tax matters.

"There are very few ways to get around the tax entirely," he added, "but there are any number of ways to reduce the tax."

Family businesses like the Steelers -- and no business in Pittsburgh is run more like a family business than the Steelers -- often face multiple challenges as the generations age and financial power and financial responsibilities are passed from parent to child.

Sometimes younger generations grow impatient with the stewardship of the older generations. Sometimes younger family members worry that they're being deprived of the financial benefits they believe they are owed. Sometimes families crumble into distrust.

And sometimes outside factors -- like the NFL regulations barring teams from owning casino gambling operations -- force families to divest themselves of businesses they have owned for decades.

Lawrence Chane, head of the private client group for multi-state law firm Blank Rome, said that when valuable family business are put up for sale, it is often because younger relatives who don't have control over the firm want to reap the benefits of their shares and reinvest the money elsewhere.

"You often get a scenario where the relatives who control the business feel like they're working in part to produce profits for the others who are doing no work," Mr. Chane said, "and the ones who are doing no work are often saying, 'How do I get value for this asset?' "

When it comes to the estate tax itself, there are several different discounts and other mechanisms available under the federal tax code to minimize its impact.

The Rooneys and their cousins, the McGinley family, which owns 20 percent of the Steelers, would seem to qualify for two discounts that are available to family firms under the federal code.

One is a minority ownership discount, offered under the theory that majority owners have more control over a company's financial fortunes. Under the Steelers' structure, each of the five Rooney brothers owns 16 percent of the shares.

The second discount is for closely-held shares -- those that can't be sold easily on the open market.

Both types of IRS discounts would seem to apply in the Steelers' case, Mr. Donaldson said, because the shares can't be sold on stock exchanges, and "how much would someone pay for a 20-percent stake in a franchise when he wouldn't have the deciding vote?"

When it's time to appraise an estate for tax purposes, family lawyers and the IRS try to negotiate a figure, and sometimes adjudicate the matter in court.

"But it would not be at all unreasonable that the combined effect of the minority and marketability discount would be in the 30-to-40-percent range," he said.

In some cases, the discount can be much steeper.

In one high-profile dispute, the Internal Revenue Service went after the family-owned Newhouse media empire for $609 million in estate taxes, but a federal judge ruled in 1990 that the marketability problems of the company's stock entitled the family to pay just $49 million -- a 90-percent reduction.

In estates where more than 35 percent of the value is in closely-held shares, the families can also use another provision of the tax code to pay the estate tax over a 15-year period at an extremely low interest rate.

That option is being considered now by the McGinley family, which has been waiting for the IRS to assess the value of their part of the franchise since the death of John McGinley Sr. in 2006.

"Our principal concern is where we will find the money" for the tax payments, said Mr. McGinley's son, Jack McGinley Jr., an attorney at Eckert Seamans. "If the IRS comes in with a valuation that is different than what we have, we will have a hard time serving the debt in installments."

One way some families alleviate that kind of risk is to take out life insurance policies designed to pay part or all of the estate tax upon an owner's death, said Mr. Chane, a Philadelphia attorney who is not involved with the Steelers deal.

One kind of policy that many family-owned businesses use, Mr. Chane said, is survivorship life insurance, which doesn't pay off until the owner's spouse dies. Under the federal code, the estate tax can be deferred until the death of a spouse.

In other cases, he said, family members take out life insurance policies on each other and use them to buy back an owner's shares when he dies.

The money that heirs get for such shares not only can be used to help pay the estate tax, but is not subject to capital gains tax, he said.

Beyond that, there are several legal "freezing mechanisms" that estate planners can use to limit the impact of the estate tax.

One of the most popular is a GRAT -- a grantor-retained annuity trust -- Mr. Chane and Mr. Donaldson said.

Under that approach, a family business owner can bequeath his shares to a trust for his heirs that will pay him an annuity for a fixed period of time and which carries a modest interest rate set by the federal government -- currently a little more than 4 percent.

If the owner dies after the annuity is paid off, the government will tax his estate only on the value of the annuity. But if the family company has done well, the actual value of those shares may be much higher, and any increase in their worth beyond the annuity amount will go to the heirs tax-free.

In other words, the next generation doesn't have to face either a gift tax or an estate tax on the increased value of the shares.

On top of all these measures, of course, any gifts to charity also can be used to lower the value of an estate and reduce the estate tax burden.

It isn't known whether Rooney family members have set up any of the tax-limitation mechanisms, but Mr. Chane said the discounts and other financial shelters available under the tax code usually mean that "if there is a proper level of sophistication in the estate planning, a family wouldn't be in the position of having to sell its business because of the estate tax. With proper planning, the inheritance tax isn't a fatal blow."

One additional risk that a highly valued family-owned sports franchise can face, said one Rooney adviser who asked not to be identified, is that even after discounts, the estate tax may be high enough that the business' cash flow will not take care of installment payments on the tax.

"If you don't have outside assets [to sell] or life insurance, and don't have enough money to pay installments, that is where you can have a problem," he said.

Whether the Rooneys will face that situation remains to be seen.

While the club is far from the wealthiest in the National Football League, it also isn't scraping the bottom of the barrel. Forbes Magazine last year ranked it 16th in valuation out of 32 NFL teams, and estimated it had annual operating income of $20 million.

Steelers' patriarch Dan Rooney has now made a third offer to buy his brothers' shares of the team, keeping alive the possibility that at least some members of the family will retain control of the franchise.

And while the Steelers is an unusual business, the tax problems it faces as a family firm are not.

Small businesses, many of them family-owned, create up to 80 percent of all new jobs in the United States, and account for nearly half of the nation's private Gross Domestic Product, Mr. Donaldson said, and for most of these firms, "almost always, there are techniques or other strategies to mitigate any impact from the federal estate tax."

[steelerette Profile]

Steelers' patriarch Dan Rooney has now made a third offer to buy his brothers' shares of the team, keeping alive the possibility that at least some members of the family will retain control of the franchise.

I really hope something can be worked out between the Rooney bros. I really don't want to see the Steelers under a different ownership.

Thanks for posting the article, thesteelhammer.