Although the Wall Street Journal did not, itself, use the “H” word, I think it is fair to say that their editorial attack on Jim Sinegal was charging him with hypocrisy. I’m not a regular WSJ reader, but I happened to pick up a copy Friday morning. I thought the whole thing was rather odd. Costco, it seems, is making a large dividend payment this December to help shareholders beat upcoming tax increases.
I’ve been making a list and checking it twice of clients who should be considering a variety of maneuvers because of upcoming tax changes, both certain and uncertain. Accelerating dividends borders on a no brainer. As a matter of fact when I heard that some companies are not accelerating dividends, even ones that will be paid in January, so that they will have a better looking balance sheet on December 31, I thought it was outrageous. It seems darn near irresponsible. That type of behavior should rate a WSJ editorial condemning it. Maybe there was one. Like I said I am not a regular reader.
The problem of course is that Mr. Sinegal supported President Obama.
When President Obama needed a business executive to come to his campaign defense, Jim Sinegal was there. The CostcoCOST +2.00% co-founder, director and former CEO even made a prime-time speech at the Democratic Party convention in Charlotte. So what a surprise this week to see that Mr. Sinegal and the rest of the Costco board voted to give themselves a special dividend to avoid Mr. Obama’s looming tax increase.
Here is Mr. Sinegal at the Democratic National Convention
There was some accounting commentary in the article that I did not quite get
More striking is that Costco also announced that it will borrow $3.5 billion to finance the special payout. Dividends are typically paid out of earnings, either current or accumulated. But so eager are the Costco executives to get out ahead of the tax man that they’re taking on debt to do so.
Actually in order for something to be a dividend for income tax purposes it has to come out of “earnings and profits”, a not very well-defined term. Computing a corporations “earnings and profits” for tax purposes can be quite a project. Regardless of that, earnings, accumulated or otherwise, do not perfectly correlate with cash flow so it strikes me that the comment is mixing oranges and apple sauce.
Here is another observation which struck me as rather odd.
Costco’s chief financial officer, Richard Galanti, confirms that every member of the board is also a shareholder.
In context, it almost sounds sinister. So the board sat around and came up with something they thought would be good for the shareholders. It would be so much better if it was a board that had hardly any shareholders so that when somebody suggested that they could save the shareholders some money by accelerating the dividend, they would have been more focused on important things like figuring how that would affect bonus computations.
The bottom line was this. By supporting President Obama, Mr. Sinegal was, in effect, supporting higher taxes and now he supported a tax planning maneuver to avoid some of the tax for himself and his fellow shareholders for the next year or two.
Here we have people at the very top of the top 1% who preach about tax fairness voting to write themselves a huge dividend check to avoid the Obama tax increase they claim it is a public service to impose on middle-class Americans who work for 30 years and finally make $250,000 for a brief window in time.
I have to say I appreciate the Wall Street Journal thinking about the little guys like me, the potential victims of this upcoming onerous tax. I hate to point out that I don’t think it is really that big a deal to the low six figure plodders who get the brief time in the sunlit lands over a quarter million in AGI. You really have to have quite a bit in invest-able assets outside retirement accounts for the new tax on investment income to sting an awful lot. Regardless of that, I think the condemnation of Mr. Sinegal is ridiculous.
Are they really saying that only Republicans should be able to do tax planning ? American business culture (I’m sure it is broader than that, but I’ll stick with what I know) has a tenet that overpaying taxes is irresponsible. That is independent of what you might think taxes should be. Learned Hand said it best:
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
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Originally published on Forbes.com Dec 2nd, 2012