You Taxin’ Me?
Actor Robert DeNiro has played some of the most compelling characters in movie history: the schizophrenic ex-marine Travis Bickle in Taxi Driver, the young mob boss Vito Corleone in The Godfather Part II, the Chicago bootlegger Al Capone in The Untouchables, the “gentleman” gangster Jimmy Conway in Goodfellas, and the shrewd bookmaker “Ace” Rothstein in Casino. He’s accumulated seven Oscar nominations for his work (including two wins), along with nine Golden Globe nods (two wins), dozens of other awards, and even a star turn as Harvard’s Hasty Pudding Club Man of the Year.
But DeNiro is more than just an actor. He’s also a shrewd businessman and entrepreneur. He’s co-founded the TriBeCa Productions studio and TriBeCa Film Festival, and partnered with successful real estate and restaurant developers throughout the city. He’s even starred in “I Love NY” commercials promoting Hudson Valley tourism. (If Travis Bickle were still driving today — perhaps for Uber? — he wouldn’t recognize the streets. Ironically, DeNiro is partly responsible for that cleanup!) DeNiro’s business ventures have given him a $200 million net worth. And for a brief moment last month, they led to a $6.4 million back tax bill.
This isn’t the first time DeNiro has made news for his taxes. His first fight involved a 98-acre compound he owns in the Hudson Valley town of Gardiner, which the New York Times reports includes a house, “two guesthouses; a 14,000-square foot barn converted into a recreation center with a full gym, a swimming pool, boxing ring and film production suites; another barn turned into offices; tennis courts; and a ski slope.” In 2006, the trustees controlling the property sued the town to lower the assessed value, which was pegged at $6 million. The trustees argued it was worth $4 million, while the town countered it was actually worth closer to $9 million.
The town won and the trust’s lawyers appealed that decision. But by that point, the town’s legal bills dwarfed the extra tax they stood to collect, and the town’s residents were turning against DeNiro. (It may not have been quite like how Jimmy Conway turned against Henry Hill in Goodfellas, but it certainly wasn’t pleasant.) When DeNiro learned the trust’s lawyers had filed their appeal, he threw a fit that would have made Travis Bickle proud, withdrew the suit, and ordered his accountant to reimburse the town for $129,000 in legal fees.
DeNiro’s latest tax issue involves our friends at the IRS, with even more money at stake. Last month, the IRS filed a lien to collect $6,410,449.20 he owed on his 2013 personal return. That amount naturally includes interest and penalties that accumulated over time, but had to be a big bill to start out with!
Fortunately for everyone involved, DeNiro’s latest tax caper has a happy ending. That’s refreshing, considering how many of the characters he plays end up dead or in prison. His spokesman reported that the IRS bills had been “sent to an old address,” and once the actor learned about the debt, “he had a check for the full amount hand delivered to the IRS” the next morning. Apparently it’s good to be worth $200 million — even if you have so many addresses the IRS can’t find the right one to send the bills!
Hollywood’s brightest stars aren’t generally known for their financial smarts. DeNiro is an exception to that rule, but his success still hasn’t guaranteed him an easy time with the tax man. That’s why it’s so important to have the right advisors on your side, advocates who can help you pay the least amount possible with the least hassle possible. And that process starts with a plan. So call us when you’re ready for your star turn!
In The Headlines
It’s a Bird, It’s a Plane … It’s a Drone!
Now that the Federal Aviation Administration has published its proposed rules on drones, expect to start seeing plenty of unmanned miniature planes flying over places like AT&T Park in San Francisco, home of the World Series champions. But not when there is a game taking place, of course. Fresh off a $10 million investment led by GGV Capital, Ehang is staffing up in China and the U.S., and mapping out its initial strategy for getting consumer drones onto retailers’ shelves this year.
The Ghost, which sells online for $599 at the basic level, or $729 to $799 with a camera holder included, is controlled via smartphone app and designed to be simple enough for anyone to operate. The company will soon release an iPad controller that is even more intuitive, allowing users to guide the planes, change speed, take off, and land by tilting the mobile device in the desired direction. Embedded with sensors and linked to mapping software, the drones are smart enough to avoid running into buildings or hovering into no-fly zones. The demo in San Francisco was for the Ghost Aerial plus, and the attached video was taken from a GoPro camera onboard.
“With current technology that includes mapping technology, location technology and mobile technology you can actually make a better flying experience, even for kids,” said Jenny Lee, a managing partner at GGV and Ehang board member, who was with the team at last week’s demo. “If you know how to use a phone, you can learn how to fly.” Venture investors like Lee are anticipating an explosion of consumer demand for drones, now that advanced technology has brought prices down and regulators have provided some clarity surrounding the regulations.
According to research firm CB Insights, venture financing in drone start-ups more than doubled in 2014 to $108 million, with Ehang one of at least 10 companies to have received one or more rounds of institutional funding to date. 3D Robotics, the biggest U.S. drone manufacturer, said in a filing this week that it was raising $40 million in a funding round.
For now, drones will be quite limited in what they are allowed to do. The FAA released its highly anticipated proposals on February 15, and industry representatives and lobbyists have 60 days to offer public comments. Requirements would include flying below 400 feet, keeping the aircraft within eyesight, limiting the plane to 55 pounds, steering at least five miles clear of airports, and not flying “near people or stadiums.” The rules do not specify whether it is legal to fly over a stadium with no people in it, but perhaps that will be addressed during the comment period. Regardless, it appears the dream of having Amazon.com deliver diapers and a mystery novel to your doorstep by drone will have to wait.
The Ghost was created by James Hu, a flight enthusiast who owns a dozen planes in China and is co-founder and curator of the Beijing Aerospace Model Museum. The initial product was launched on crowdfunding site Indiegogo in November, and by the following month had raised more than $850,000. GGV then came in with the venture round. “This wasn’t typical A round financing,” said Lee, who is based in Shanghai. “When we saw them, they were flying.”
Ehang has competition both in China and the U.S. as it aims to capture consumer attention. In China, the market leader is DJI, which sells drones on its website starting at $1,000 as well as a portfolio of accessories. Like with other technologies, the battle for the future is in the software. Ehang, which has 80 to 90 employees now and is expanding rapidly, is pouring resources into winning the controller war. In addition to developing intelligent software for mobile devices, the company is also working on a pair of virtual reality-like goggles that would enable users to guide drones with head and body movements. “Eventually this will become a commodity,” said Jessie Lu, director of communications at Ehang, pointing to The Ghost. “We want to focus on the control of it and make it as intuitive as possible. That’s our competitive edge.”
Kellogg Struggles to Retain Its Place at the Breakfast Table
Last month, John Bryant, CEO of Kellogg, headquartered in Battle Creek, Mich., delivered bad news. He announced the company’s U.S. morning foods net sales fell 8% in the fourth quarter of 2014. It was the division’s seventh quarterly decline in a row. For almost a century, Kellogg defined the American breakfast as a moment when people would be jolted out of their drowsiness—often with a stupendous serving of sugar. Kellogg still spends more than $1 billion a year on advertising, but it no longer has the same hold on breakfast. The sales of 19 of Kellogg’s top 25 cereals eroded last year, according to Consumer Edge Research, a Stamford CT firm that tracks the food industry. Sales of Frosted Flakes, the company’s No. 1 brand, fell 4.5%, and Frosted Mini-Wheats declined by 5%. Meanwhile, Special K Red Berries, one of the company’s breakout successes in the past decade, fell by 14%. Kellogg executives do not expect cereal sales to return to growth this year, though they hope to slow the rate of decline and do better in 2016. But some Wall Street analysts say cereal sales may never fully recover. In Battle Creek, so-called Cereal City, that would be the equivalent of the apocalypse.
The 49-year-old Bryant blames Kellogg’s financial woes on the changing tastes of fickle breakfast eaters. The company flourished in the Baby Boom era, when fathers went off to work and mothers stayed behind to tend to three or four children. For these women, cereal must have been heaven-sent. They could pour everybody a bowl of Corn Flakes, put a carton of milk on the table, and be done with breakfast, except for the dishes.
Now Americans have fewer children. Both parents often work and no longer have time to linger over a serving of Apple Jacks and the local newspaper. Many people grab something on the way to work and devour it in their cars or at their desks while checking e-mail. “For a while, breakfast cereal was convenience food,” says Abigail Carroll, author of Three Squares: The Invention of the American Meal. “But convenience is relative. It’s more convenient to grab a breakfast bar, yogurt, a piece of fruit, or a breakfast sandwich at some fast-food place than to eat a bowl of breakfast cereal.”
People who still eat breakfast at home favor more labor-intensive breakfasts, according to a recent Nielsen survey. They spend more time at the stove, preparing oatmeal (sales were up 3.5% in the first half of 2014) and eggs (up 7% last year). They are putting their toasters to work, heating up frozen waffles, French toast, and pancakes (sales of these foods were up 4.5% in the last five years). This last inclination should be helping Kellogg, though, since it owns Eggo frozen waffles. But Eggo sales were not enough to offset its slumping U.S. cereal numbers. “There has just been a massive fragmentation of the breakfast occasion,” says Julian Mellentin, director of food analysis at research firm New Nutrition Business.
And Kellogg faces a more ominous trend at the table. As Americans become more health-conscious, they are shying away from the kind of processed food baked in Kellogg’s four U.S. cereal factories. They tend to be averse to the carbohydrate component, which is a problem for a company selling cereal derived from corn, oats, and rice. “They basically have a carb-heavy portfolio,” says Robert Dickerson, senior packaged-food analyst at Consumer Edge. If such discerning shoppers still eat cereal, they prefer the gluten-free kind, sales of which are up 22%, according to Nielsen. There is also growing suspicion of packaged-food companies that fill their products with genetically modified organisms (GMOs).
Bryant says Kellogg is laboring to develop cereals that will overcome these cultural shifts. Some of Kellogg’s wounds, however, are self-inflicted. Its two largest competitors—General Mills, maker of Cheerios and Lucky Charms, and Post Holdings, whose brands include Grape-Nuts and Honey Bunches of Oats—are struggling with the same morning trends. Yet the decline in the 2014 cereal sales at General Mills was half as bad as at Kellogg’s, and Post eked out a 2% increase.
Kellogg’s dismal sales are indicative of the company’s larger problems. Of the 21 analysts covering Kellogg, 19 have a sell or a hold rating on the company’s stock. Only two recommend buying the cereal maker’s shares. It has cut costs only to increase spending again. There have been three heads of U.S. breakfast foods in four years as the division’s profits fell. Bryant’s latest scheme to revive cereal sales—by adding more fruit and natural ingredients to some of its best-known brands—seems far-fetched at best. The meltdown in Battle Creek is puzzling because, until recently, the company was known as a well-managed organization. “Kellogg was perhaps the most respected consumer-product company out there,” says David Palmer, a food industry analyst at RBC Capital Markets. “They went off the rails.”
Citations
1. http://www.cnbc.com/id/102456753 – CNBC
2. http://bloom.bg/182eh7b – BusinessWeek
The Good News Is . . .
• The National Association of Realtors said its monthly index of pending sales, an indicator of future closed sales, rose 1.7% month-to-month, and is now 8.4% higher than it was a year ago. Pending home sales numbers in the Northeast inched up 0.1% and are now 6.9% above a year ago. In the Midwest, sales fell 0.7%, but are still 4.2% above January 2014. Sales were strongest in the South, up 3.2% and 9.7% above last January. Sales in the West rose 2.2% and are 11.4% above a year ago. This is the fifth straight month of year-over-year gains, and the gains are increasing.
• Lowe’s Companies, Inc., a leading home improvement company, reported earnings of $0.46 per share, an increase of 48.4% over year-ago earnings of $0.31. The firm’s earnings topped the consensus estimate of analysts by $0.03. The company reported revenues of $12.5 million, an increase of 7.5%. Management attributed the company’s results to both its ongoing efforts to transform the company and to an improving overall economic environment.
• Iberdrola, a large Spanish utility company, agreed to acquire the UIL Holdings Corporation of New Haven CT, for $3 billion in cash and stock as it seeks to expand in the United States. Iberdrola will combine UIL’s power and gas operations with its existing local unit and will list the new company on an American stock exchange. The combined company will serve 3.1 million customers in New York, Connecticut, Massachusetts and Maine. The deal is consistent with the company’s expansion strategy. Iberdrola capitalized on subsidies to renewable energy projects like wind turbines, but cutbacks in aid and sluggish markets at home have prompted it to seek growth abroad.
Citations
1. http://bit.ly/1EWnARf – National Assoc. of Realtors
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/17GhEAQ – Lowe’s Companies Inc.
4. http://nyti.ms/1vKD6j5 – NY Times Dealbook
Planning Tips
Tips for Protecting Assets with a Credit Shelter Trust
Benjamin Franklin once wrote that nothing is certain, except death and taxes. And sometimes, unfortunately, death and taxes are closely related. You are certainly used to paying taxes during your lifetime, but you may also be taxed after you die. Moreover, it is possible for the whole estate that you leave behind to be taxed not once, but twice. Death and taxes may be unavoidable, but there are ways to make them less burdensome to your loved ones. A credit-shelter trust can help alleviate those burdens. Before establishing a trust, you should consult with your financial advisor to determine what is appropriate to meet your financial goals and circumstances. Below are tips to help you better understand how credit shelter trusts work.
What is a credit shelter trust? – With a credit-shelter trust (also called a bypass or AB trust), you write a Will bequeathing an amount to the trust up to, but not exceeding, the estate-tax exemption. Then you pass the rest of your estate to your spouse tax-free. And there is an added bonus: Once money is placed in a bypass trust, it is forever free of estate tax, even if it grows. This type of trust allows a married investor to avoid estate taxes when passing assets on to heirs. The trust is structured so that upon the death of the investor, the assets specified in the trust agreement (up to a specified maximum dollar value) are transferred to the beneficiaries named in the trust (normally the couple’s children). However, a key benefit to this type of trust is that the spouse maintains rights to the trust assets and the income they generate during the remainder of his or her lifetime.
How is a credit shelter trust set up? – Under a credit shelter trust, each spouse has a document that creates a trust to be established after the death of the first spouse. It is important that each spouse have a document naming the other spouse as the beneficiary because of the uncertainty of who will die first. Thus, in this type of trust, instead of joint ownership (or tenancy by the entirety), the husband and wife would divide their assets so they each have a separate “taxable” estate. This is known as an AB trust. When the first spouse dies, the trust is split into two separate trusts. Trust A will contain the property of the first spouse to die, and Trust B will hold the property of the surviving spouse. When the first spouse dies, the property in Trust A goes to named beneficiaries. However, the surviving spouse usually retains the right to use the property for life. When the surviving spouse dies, the property in Trust B passes to the beneficiaries.
What are the tax implications for a credit shelter trust? – Importantly, the surviving spouse’s property is not considered part of his or her estate for estate tax purposes. It “bypasses” the survivor’s estate at his or her death. Even though the assets in the credit shelter trust are “taxed” for estate tax purposes at the first spouse’s death, no tax is due because of that spouse’s exemption. And if the first spouse had an estate whose value exceeds the exemption amount, the surplus may be left to the surviving spouse tax-free under the marital deduction.
What are the advantages of a credit shelter trust? – Some of the advantages of a credit shelter trust include:
• Appreciation of trust assets and undistributed income will not be subject to federal or state estate tax on the surviving spouse’s passing
• As a trust, it provides asset and creditor protection
• A trustee is in place to manage assets and financial matters as the surviving spouse ages
What are the disadvantages of a credit shelter trust? – Some of the downsides of a credit shelter trust include:
• Undistributed income of the trust can be subject to higher income tax rates than individuals
• The annual expense of filing a trust tax return
• There is no step-up in basis on the death of the surviving spouse
Citations
1. http://zoo.mn/18yxChl – LegalZoom.com
2. http://bit.ly/1G3Pzlq – Investopedia
3. http://cnnmon.ie/1EA2F8w – CNN Money
4. http://bit.ly/1G3PH4A – UnderstandEstatePlanning.com
5. http://bit.ly/1K0dvt4 – clacConnect.com
