What Do You Give the Man Who Has Everything?
Last week, New York Yankee shortstop and future Hall-of-Famer Derek Jeter played his last Major League Baseball game. He chopped a single to third in the third inning to drive in a run, then took himself out for good. That final hit brings his total to 3,465 hits, along with a .310 batting average, five Gold Glove awards, and five World Series rings. Jeter was that rare player who stayed with a single club for his entire career. He’s also untainted by so-called “performance enhancing drugs” plaguing the game (or, in the case of Jeter’s teammate Alex Rodriguez, you can leave off “performance enhancing”). Jeter goes out a very popular guy — and that popularity is about to send him into extra innings with our friends at the IRS.
Jeter earned over $265 million over the course of his 20-year career. And that’s before his endorsement deals with Gatorade, Fleet Bank, Ford, VISA, Discover Card, Florsheim, Gillette, Skippy peanut butter, XM Satellite radio, and even his own Nike shoe. If ever there were a guy who could buy anything he wanted, it’s “Captain Clutch.”
But that didn’t stop the baseball world from showering him with gifts upon his retirement. The Tampa Bay Devil Rays gave him a custom-painted kayak that cost more than $6,000. The Cincinnati Reds gave him framed autographed jerseys of fellow shortstops Dave Concepcion and Barry Larkin, along with three photos from the weekend in Cincinnati when Jeter was named captain of the Yankees. The Seattle Mariners gave him a seat from the Kingdome, where he made his major league debut on May 29, 1995. Even the lowly Chicago Cubs, which hosted Jeter for just five career games, honored him with a number from the hand-operated scoreboard. All told, the gifts are said to be worth about $33,000.
So, naturally, Jeter will owe another $16,000 or so in tax on those gifts. That includes 39.6% federal income tax, 3.8% Medicare tax, plus whatever state and local taxes apply where he receives the gifts.
Wait a minute. We’re talking gifts here, right? How can Jeter owe income tax on gifts?
It all comes down to why the giver makes the gift. If a gift is made out of “detached and disinterested generosity,” like when you give your children a birthday present, the officials in charge of collecting income tax generally turn a blind eye. (If the value of gifts to any single individual exceed $14,000 per year, the officials in charge of collecting gift taxes start getting interested.) But if the gift is really a marketing gesture in disguise — like when a team hosts a ceremony to present Jeter with his gift, then uses it as part of its marketing — that “gift” becomes taxable income.
What could Jeter do to avoid the tax? He could refuse the gifts, which wouldn’t seem very sporting. Or he could request they go to his charitable foundation. But that would defeat the purpose of gifts like the Cincinnati shortstops’ jerseys that are intended to be sentimental rather than valuable.
Jeter’s final-season salary was $12 million, which works out to about $74,000 per game, or $8,230 per inning. So the good news is that the tax on the gifts should only eat up a couple of inning’s worth of income.
Are your business associates planning to lavish you with gifts this holiday season? Call us. We know you won’t be happy to pay tax on them, but at least we can help you with a plan to pay the least amount allowed. And remember, we’re here for the rest of your teammates, too!
In The Headlines
More Dangerous than Ebola: Medical Mistakes
The Dallas hospital treating the first Ebola case diagnosed in the U.S. sent the patient, Thomas Duncan, home the first time he showed up because the doctors who saw him never learned that he had just come from West Africa. The hospital has blamed a flaw in its electronic medical record system for keeping information collected by a nurse, including Duncan’s travel history, from being presented to the treating physician, who mistook Duncan’s symptoms for a low-level infection, on September 25.
The apparent mistake meant Duncan was not admitted and isolated until three days later on September 28. That increased the risk of infection for those he came in contact with while he was sick, including his family who are now quarantined in their Dallas apartment. It also widened the circle of contacts that public health officials must trace and monitor for symptoms.
America’s risk of an Ebola epidemic remains vanishingly small. The country has the public health resources and hospital capacity to stop the spread of the infection, which is only transmitted through direct contact with bodily fluids after a patient exhibits symptoms. The misstep at Texas Health Presbyterian Hospital-Dallas, though, indicates something patients should be concerned about—the very real chance that errors, oversights, or deviations from established procedures could kill them.
It is hard to say precisely how often this happens. A 2013 review of studies in the Journal of Patient Safety suggested medical errors cause somewhere between 210,000 and 400,000 deaths each year in the U.S. In a landmark report 15 years ago, the Institute of Medicine put the number between 44,000 and 98,000. Even the lower estimate would mean medical errors kill more Americans than car accidents do. The moment when one clinician turns over care of a patient to another is particularly hazardous, says Dr. Marty Makary, a Johns Hopkins surgeon who has written on hospital safety. “The most dangerous procedure in American emergency rooms is a patient handoff,” Makary says. Breakdowns in communication during patient handoffs “are endemic in American health care,” he says.
Electronic medical records have sometimes been hailed as a tool to help standardize care. Many doctors complain that they are a distraction, collecting too much information without prioritizing the most important facts. In the case of Mr. Duncan, the design of the software apparently stopped doctors from seeing crucial information that might have made a difference in their initial diagnosis. According to Texas Health Dallas, nurses and the doctor who initially saw Duncan followed proper procedures when he arrived with a fever, abdominal pain, and a headache.
The intake nurse took a travel history, along with an array of other information, and recorded in an electronic medical record that he had been in Africa within the past four weeks. That important fact never made it to the doctor who saw Duncan, though, because the software has separate workflows for nurses and doctors. “As designed, the travel history would not automatically appear in the physician’s standard workflow,” according to a statement from Texas Health Presbyterian Hospital-Dallas. The potentially critical oversight has now been eliminated, at least for this one hospital, which is now making travel history, including specific references to regions with Ebola outbreaks, more visible “to alert all providers,” the hospital says.
It is impossible to say whether the same mistake would have happened had the hospital been using paper charts. “Even in traditional paper and verbal communication, the lack of a headline is one of the greatest problems in relaying information that results in patient harm,” Makary says.Texas Health Presbyterian Hospital-Dallas, to its credit, released details of what went wrong “in the interest of transparency, and because we want other U.S. hospitals and providers to learn from our experience.” Let’s hope they do.
An Ailing Sears Faces an Uncertain Holiday Season
Sears Holdings deepening financial troubles have forced insurers and banks to raise the cost of guaranteeing payment to vendors, rattling the retailer’s supply chain as the company heads into the key holiday season.
The move by these financial intermediaries—in an opaque but vital quarter of the retail business where makers of goods ranging from apparel to TVs seek to insure they get paid—comes in the wake of unusual steps Sears has taken to raise cash for operations. In the past three weeks, the retailer twice has turned to its billionaire CEO Eddie Lampert’s hedge fund for a cash infusion, first as the anchor on a $400 million loan and then again, this past Thursday, as a buyer for most of its stake in the ailing Sears Canada. Sears aims to raise $380 million with that deal.
Sears spokesman Chris Brathwaite said the company is on track to raise $1.45 billion this year, a sign of its “financial flexibility” and capacity to meet its obligations. He said the company has the financial resources to work directly with vendors and that there has not been a significant impact on its supplier relationships following the events of the past few weeks.
Suppliers, however, have become increasingly concerned about the company’s financial strength. The retailer, which oversees some 2,300 Sears and Kmart stores, has lost about $6 billion since 2012, and its margins are far below the industry average. To protect themselves from the risk of non-payment, suppliers sometimes will buy insurance on their receivables. In more extreme cases, they purchase a derivatives contract, called a put option, which pays out if the company defaults. With concerns about Sears’ cash flow on the rise, insurers have sharply reduced coverage. And put options have become so costly they no longer make economic sense for some suppliers.
Large underwriters of credit insurance—a vendor’s conventional first line of defense against nonpayment—essentially have stopped offering coverage on Sears for new clients, insurance brokers said. The Euler Hermes Group, one of the top underwriters, told clients this week that it was canceling coverage for new shipments, said a person informed of the new policy. Euler Hermes declined to confirm those cancellations, but said it was closely monitoring the situation. A senior executive at Atradius, another large underwriter, said recent fundraising by Sears had not eased his concerns about the business. The Lampert loan worried investors in part because it was secured by 25 properties, whereas previous short-term funding from Lampert had been unsecured.
To be sure, there are no outward signs of vendors cutting ties with Sears as insurance and other hedges dry up. However, if Sears has a poor holiday quarter there is a risk that suppliers will start reducing exposure in 2015, insurance brokers and analysts said. Suppliers long have turned to factoring companies, which purchase invoices at a discounted price and profit if they receive payment from the retailer. But factoring companies, too, have scaled back on coverage to vendors doing business with Sears.
With vendors on edge, performance in the upcoming fourth quarter, to be announced in February, could prove critical, some analysts said. Sears lost $358 million in the last holiday season quarter and has not turned a profit during the industry’s key selling season since 2011. “This year I think they are good,” said Evan Mann, a senior analyst at debt research firm Gimme Credit, referring to the possibility of vendors reducing exposure to Sears in 2014. “But if they have a really bad Christmas and liquidity looks bad at the end of the year, next year could be problematic.”
Sources:
1. http://www.businessweek.com/articles/2014-10-03/ebola-hospital-mistakes-are-scarier-than-risk-of-infection-in-u-dot-s#r=rss – Businessweek
2. http://www.cnbc.com/id/102060363?trknav=homestack:topnews:3 – CNBC
The Good News Is . . .
• Job growth resumed in September after a disappointing August, with the U.S. economy creating 248,000 new positions. The Bureau of Labor Statistics also reported that the unemployment rate fell to 5.9%. The August job growth number of 142,000 was revised up to 180,000, while the July number came up from 212,000 to 243,000. The numbers renewed hopes that employment growth is on a sustainable upward trend.
• Ulta Beauty, Inc., a leading beauty retailer for prestige, mass market, and salon products and services in the U. S., reported earnings of $0.94 per share, an increase of 34.3% over year-ago earnings of $0.70. The firm’s earnings topped the consensus estimate of analysts by $0.11. The company reported revenues of $734.2 million, an increase of 22.2%. Management attributed the company’s results to improvement in store traffic, successful new product and brand launches, and rapid e-commerce growth.
• News Corporation agreed to buy Move Inc., an operator of real estate listings websites, for $950 million in cash, as the newspaper publisher continues to branch out into new businesses. Under the terms of the deal, News Corporation will pay $21 a share through a tender offer for Move’s stock. Facing steep declines in advertising and subscription revenue, News Corporation is trying to stretch beyond newspapers. The Move deal is expected to jump-start News Corporation’s current real estate services business, which delivered $408 million in revenue to the company in the year that ended in June, up 18% from the previous year.
Sources:
1. http://www.bls.gov/news.release/empsit.nr0.htm – Bureau of Labor Statistics
2. http://www.cnbc.com/id/102056652 – CNBC
3. http://www.cnbc.com/id/18080780/ – CNBC
4. http://ir.ulta.com/phoenix.zhtml?c=213869&p=irol-newsArticle&ID=1966297 – Ulta Beauty, Inc..
5. http://dealbook.nytimes.com/2014/09/30/news-corporation-to-buy-move-a-real-estate-listings-site/ – NY Times Dealbook
Planning Tips
Tips for Investing When Interest Rates are Rising
For decades, Americans have grown used to an environment where interest rates, for the most part, have declined. But as the country recovers from the Great Recession and the Federal Reserve scales back its program of quantitative easing, it is becoming more likely that interest rates will rise in the near to mid-term future. In preparation for this scenario, below are some ideas for investing in a rate-rising environment. Any investment, or shift in investment strategy, involves risk. You should consult with your financial advisor before making any changes to your current strategy.
Shift to stocks that can prosper in a high rate environment – When looking to profit when rates move up, you should consider purchasing stocks of companies which are major consumers of raw materials. The price of raw materials often remains stable or declines when rates rise. The companies using these materials to produce a finished good, or simply in their day-to-day operations, will see a corresponding increase in their profit margins as their costs drop. Rising interest rates are also good news for the real estate sector, so companies that profit from homebuilding and construction may be good investments as well.
Construct a bond ladder – A bond ladder is a series of bonds that mature at regular intervals, such as every three, six, nine or 12 months. As rates rise, each of these bonds is then reinvested at the new, higher rate. This can be done with CDs as well.
Invest in the dollar – If you invest in currencies, you may want to consider the U.S. dollar. When interest rates start to rise, the dollar usually gains momentum against other currencies because higher rates attract foreign capital to investment instruments that are denominated in dollars, such as T-bills, notes, and bonds.
Move to more conservative instruments for high yield – Rising interest rates mean that more conservative instruments will begin paying higher rates as well. Furthermore, the prices of high-yield offerings (such as junk bonds) will tend to drop more sharply than those of government or municipal issues when rates increase. Therefore, the risks of high-yield instruments may eventually outweigh their superior yields when compared to low-risk alternatives.
Refinance your home – Just as it is wise to keep your fixed-income portfolio liquid, it is also prudent to lock in your mortgage at current rates before they rise. If you are eligible to refinance your house, this is probably the time to do so. Locking in a mortgage at 5% and then reaping an average yield of 6.5% on your bond ladder is a relatively low-risk path to profits.
Sources:
1. http://news.investors.com/investing-mutual-funds/091114-717050-how-to-cope-with-rising-interest-rates.htm – Investors.com
2. http://investing.covestor.com/2014/07/bond-investing-strategy-shields-rising-interest-rates – Covestor.com
3. http://www.investopedia.com/articles/basics/10/protect-portfolio-from-interest-rates.asp – Investopedia
4. http://online.wsj.com/news/articles/SB10001424052702303640604579296464068676966 – Wall Street Journal
5. http://www.cnbc.com/id/101589070 – CNBC
6. http://www.bloomberg.com/news/2013-05-06/an-investing-strategy-that-shines-when-rates-rise.html – Bloomberg
