Tony Stewart's Taxes
So Tony Stewart has confirmed that he was "given" a 50% ownership stake in what will be Haas/Stewart Racing. Ostensibly, this means that Tony didn't actually transfer any money or property to Haas for his shares. Usually, gifts are not taxable to the recipient (your Grandma's $5 birthday gift is safe from Uncle Sam).
But...this is obviously not a "gift" from Haas to Tony Stewart, Tony is earning this stock through his agreement to provide services (driving and other) to Haas. As a result, the receipt of stock is ordinary income to Tony just like the money he will get paid to drive, just like the money any of us get paid to go to work.
Tony is getting 50% of the stock of the company…so to value the stock, you have to value the company. It’s been said that Haas has spent a lot of money on the race team over the last several years. It’s hard to say what the company is worth…but if the Forbes list that came out is any indication, I think it’s safe to say that the Haas team is worth at least $80M. If that’s true, then Tony just got a $40M bonus.
Now…this $40M could be subject to a few discounts…�lack of marketability� since it would be hard to find someone to buy the stock of a privately held race team; “lack of control� since Tony’s 50% is not a majority and thus he cannot control the company outright. These discounts could be worth as much as say, 25%...so for tax purposes we could reduce the value by another $10M, thus making Tony’s income on this transaction “only� $30M.
$30M puts Tony in the uppermost tax bracket…35%...that’s $10.5M in tax…not to mention the other money Tony earns for driving. Really, the best way to decrease this tax is to try to get the valuation of the company as low as possible…I’m sure that Haas is setting that up so that whenever the actual transfer of the stock occurs (my guess, 1/1/09)…the company is worth as little as possible.
Another way to accomplish this is to make Tony’s stock “restricted.� This means that while Tony has all the rights and benefits of ownership, he can’t sell the stock or do much else with it. In this case, these restrictions often can help to delay the imposition of tax so that maybe Tony doesn’t recognize the income from the receipt of the stock until he is done driving and his income is lower…or over time in chunks.
Finally, I’m sure that Tony’s other business interests will help to reduce his tax burden. I very much doubt that his interest in Eldora or in his other race teams earn him a profit on paper. Granted, he may get cash flow from them, but one of their biggest benefits might be the fact that he gets a paper loss and thus is able to offset other income. Plus, someone as wealthy as Tony I’m sure has many people like me hovering around him showing him all sorts of cool ways to decrease his taxes, invest for the long term and protect his assets.
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Wow, it's hard to fathom being in a position to owe $10.5 million in taxes.
- Buzz Cutler
- 10:54:13 07-16-2008
Exactly Clint, rich people like Tony can afford very smart people to minimize his taxes. That being said, it's sad that someone like Tony works hard and gets ahead only to be punished with obscene taxes for making too much money. Especially sad in the case of this because Tony gives away so much of his personal wealth and employs so many people.
I remember a few years ago Oprah gave every audience member a car, only most of the people were shocked at the amount of gift taxes they'd have to pay.
- Wester
- 11:24:16 07-16-2008
I wonder if his 'signing bonus' will be exactly the same amount post taxes to cover the ownership penalty.
- Lauren
- 19:49:03 07-16-2008
Gee, after all this I hope that Tony will have enough change left to buy a few Twinkies. I'd hate to see the guy miss a meal.
- archidude
- 21:14:40 07-16-2008
Great post! I did wonder about that tax issue a bit when it was said that he was "given" 50%of the team.
However, I can't agree with Wester's lament of how the super rich get shafted with taxes. The super rich have gov. tax incentives or tax wizards at their disposal to find the holes and lessen their debt, while working class and in the slightly higher tax brackets get hammered. A working class single mother who makes 30k plus decides that she will work all the overtime she can to get ahead and save for Christmas. So she busts her butt, loses sleep and family time only to owe the IRS a fat chunk because she worked herself into a higher tax bracket. Sure there are ways to whittle that down through a tax guru, but most don't have access to the guru, just some dude at H&R block.
Ten million is a hefty chunk, but Tony is known for his generosity, so I'm sure he will give half of that amount away to those in need. And really would lose any sleep over it.
- Tapeworm2042
- 06:56:14 07-17-2008
Great Blog Clint. Makes me look even harder at the FairTax talk thats been going around. What do you think about the FairTax option for taxation?
- Greg
- 08:29:34 07-17-2008
Archidude...hahahahaha!
Either that or hot dogs at Martinsville.
- Sweet Seventeen
- 10:54:14 07-17-2008
Lauren brings up a good point about Tony's signing bonus paying the tax due on the transfer of the stock. Actually, Haas' accountant can do what's called a "gross up" calculation to determine the amount of cash needed to (a) pay the tax due as a result of the stock transfer and (b) pay the tax due as a result of the cash transferred in order to pay the tax (tax on tax).
Basically...it's a lot of money.
- Clint
- 15:50:48 07-17-2008
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