Editore"s Note
Tilting at Windmills

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January 3, 2006
By: Kevin Drum

A TAXING ISSUE....This is hardly the most earth shaking issue to write about, but let's chalk up this post to a desire to ease ve-r-r-r-r-y slowly into the the blogging routine after a week off, OK? With that said, here is Ralph Lauren's daughter, Dylan Lauren, talking in the New York Times about her Manhattan-based candy store:

She says she has turned down rich business deals from, for example, Target, that other company owners would probably kill for. "It's not about the money to me," she said. "I believe I'm here to do something, to create something that makes people happy and expresses myself."

....She won't say how much money her parents gave her to start the business, except that it was "a lot." She also contributed money of her own.

....Ms. Lauren has not yet paid her father back for his initial investment...."I don't consider it a loan. She does. If she wants to pay me back, it's very good of her, and I'll take it. If she can't pay me back, I know whatever she did she's done because she believes in it and was honest about it and works hard. I'm glad she had a chance to use her creativity and express herself."

The Laurens have now made it crystal clear in the pages of the most influential newspaper in the country that Ralph's money was neither a loan nor an investment. It was a gift. So who's paying the taxes?

Kevin Drum 2:15 PM Permalink | Trackbacks | Comments (54)

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Comments

might have been less than $10,000

Posted by: andy on January 3, 2006 at 2:19 PM | PERMALINK

Only the little people pay taxes.

Posted by: theorajones on January 3, 2006 at 2:20 PM | PERMALINK

Andy: You're quite the comedian. But I have a feeling that Dylan Lauren would not consider $10,000 "a lot."

Posted by: Kevin Drum on January 3, 2006 at 2:21 PM | PERMALINK

It was a demand loan, for which no demand will ever come. So essentially it was a gift. But the IRS does not go after rich folk with expensive tax attorneys on retainer.

Posted by: Coltergeist on January 3, 2006 at 2:22 PM | PERMALINK

Maybe I missed something -- Kevin, do you have some reason to believe the proper taxes weren't paid? Should we speculate on whether you pay your taxes?

Posted by: Hamilton Lovecraft on January 3, 2006 at 2:28 PM | PERMALINK

IIRC, the usual principle is: If the recipient had to pay taxes, the donor can deduct from taxable income. If the recipient didn't pay taxes, then the donor doesn't get to deduct. (IOW, the money is taxed once somewhere.) Please LMK if I'm right since I need to do this correctly for a tax service.

Posted by: Neil' on January 3, 2006 at 2:28 PM | PERMALINK

Lies are the most holy of sacrements in my religion.

People who lie about the purpose of a loan, in order to shirk their responsibility for funding the public infrastructure, are lying for personal profit, to force others to shoulder the burden of responsibility.

Good little worshippers of Capital.

Posted by: Mammon on January 3, 2006 at 2:29 PM | PERMALINK

One other note on that big, fat article: Did anyone else see a blatant pay-off?

Polo Ralph Lauren is one of the NY Times biggest advertisers. Loads of ads in each issue - color too.

How do you make Ralph happy? Maybe by writing a huge puff piece about his wonderful daughter. And put it on one of the front section pages, with a color photo making her look like a knock-out.

I actually pointed to the article out to my wife immediately as an amazing example of a media kick-back. I couldn't see the news hook - just another rich kid doing something quirky.

Posted by: Samuel Knight on January 3, 2006 at 2:30 PM | PERMALINK

Sounds like the grinch survived Christmas.

I think each parent can give about $12K per year. So if the total was less than a couple hundred k$, it's pretty easy to structure the gift as a loan. Or maybe the shop counts as an "educational expenditure."

Posted by: CapitalistImperialistPig on January 3, 2006 at 2:30 PM | PERMALINK

Kevin
But think about how much candy you can buy for $10,000. That's a lot!

Posted by: andy on January 3, 2006 at 2:31 PM | PERMALINK

Who will pay the taxes? Mr. Lauren, of course. The size of the gift will be increased accordingly--since Ms. Lauren has to declare it on her tax return. The business loss on the venture should more than offset this liability.

Net tax gain to the Treasury: 0. Net social gain: less than zero, unless this venture is considered a "toy" maximizing Ms. Lauren's utility function and not an "investment".

Posted by: kaptain kapital on January 3, 2006 at 2:32 PM | PERMALINK

The top tax bracket is so 1999.

Posted by: JamesP on January 3, 2006 at 2:34 PM | PERMALINK

Actually, unless Ralph and his wife have used up their lifetime exclusions ($1M each for lifetime gifts), they can exceed $11k per annum per donee (the 'de minimus' gift limit) in gifts and just apply part of their exemption to the amount that exceeds $11k ($22k per year per donee for Mr. and Mrs. Lauren).

They would then have to actually file a gift tax return (unlike in the case of de minimus gifts), although no gift tax would actually be owed until they exceeded $2M aggregate in lifetime gifts (Ralph and Mrs. - $1M each) that exceeded $11k per year per donee.

Any gift taxes that are due or will be due are the obligation of the donor.

Posted by: Lewis Carroll on January 3, 2006 at 2:35 PM | PERMALINK

It was a gift. So who's paying the taxes?
Kevin Drum

Who cares? But the answer is that they both pay taxes on it. Ralph Lipschitz (originally from from the Bronx - remember the old SNL holiday routine with Bill Murray?) paid the original income tax, and his daughter, unless the laws have changed (I should ask my wife, she'd know), will pay tax as well. Giving your kid $10K is not the same thing as the $10/week allowance.

Posted by: Jeff II on January 3, 2006 at 2:36 PM | PERMALINK

He probably just bought stock in her company or other such mechanism. So he might technically own her company, even if he allows her to vote/control his shares. But if the company goes under, he can probably write-off the loss...

Posted by: tinfoil on January 3, 2006 at 2:45 PM | PERMALINK

Who cares,Did anyone read that Bob Barr is calling for Impeachment. They truly do eat there own.

Posted by: scott on January 3, 2006 at 2:46 PM | PERMALINK

But its a GREAT candy Store!

Posted by: candystriper on January 3, 2006 at 2:49 PM | PERMALINK

Regardless of the amoutn, that money has gone through lots of taxing. Ralph paid at least "some" tax when he earned it. And everywhere Dylan spent it resulted in more tax being paid by the targets of that spending (eg: income tax for the people she bought candy from) Plus she probably had to pay various municipal/state taxes in the form of business licenses, property taxes on the store, etc.

The fact that there may have been little-or-no tax on the father->daughter transfer is almost refreshing when you view the big picture!

Posted by: JustInTime on January 3, 2006 at 2:52 PM | PERMALINK

I guess Lewis Carrall had it right.

Though, I am confused that the law does not just treat this like income to the daughter.

Anyway, the proper thing to do is to write a note due back to the father, and write off $11,000 each year on the note.

The rule is simple. When stupid jerks create another confusing tax because they are whining, then just use collateral transfer, in the form of notes to eliminate the problem.

Posted by: Matt on January 3, 2006 at 2:58 PM | PERMALINK

JustInTime,
You are right. It is so refreshing to see people breaking laws that you don't agree with.

Posted by: DR on January 3, 2006 at 3:03 PM | PERMALINK

Thanks Patton for adding to the reasoned discussions on this site. Please refrain from using all caps, if you would.

Anyway, I still think that the most offensive part of the piece was that it seemed to be such a nice favor to big advertiser. So much of that "wall" between the news and advertising departments.

Posted by: Samuel Knight on January 3, 2006 at 3:07 PM | PERMALINK

Though, I am confused that the law does not just treat this like income to the daughter.

IIRC, the tax law has never treated gifts as income to the recipient (assuming it is a true gift and not more properly characterized as compensation for services).

And Lewis Carroll is correct, if they use up some of their lifetime exclusion, they can exceed the $11K cap ($12K in 2006). So there may not be any tax due from anyone.

Posted by: Ugh on January 3, 2006 at 3:10 PM | PERMALINK

Better a candy store than his son David's godawful magazine Swing.

Posted by: J on January 3, 2006 at 3:14 PM | PERMALINK

Good point, Kevin, and an important, recurring issue. Is the transfer a gift, loan, donation, or income to the transferee; or, a transfer in trust?

As to taxes, folks always forget about State taxes and only look at federal.

Posted by: union on January 3, 2006 at 3:18 PM | PERMALINK

Even if it is a loan, interest free loans are still considered a gift under the gift tax, or at least a portion of it is considered a gift (assuming the loan here is interest free . . .).

Posted by: Jeremy on January 3, 2006 at 3:19 PM | PERMALINK

I'll bet it was structured as an equity investment in the entity that holds her company.

Posted by: Al on January 3, 2006 at 3:28 PM | PERMALINK

"It was a demand loan, for which no demand will ever come. So essentially it was a gift. But the IRS does not go after rich folk with expensive tax attorneys on retainer."

That's right. We all know the IRS will only go after poor black folks on welfare.

BTW, it's not April 15th yet. How do you know they won't file properly and pay their taxes?

Posted by: Freedom Fighter on January 3, 2006 at 3:47 PM | PERMALINK

Ralph Lauren has a daughter? I could have sworn he was gay ... All those waspy pretty boys in his ads.

Ah, more the children of the wealthy using their vast financial resources to spread diabetes and tooth decay in Manhattan. It's truely heartwarming. I'm sure the children of Sudan must be delighted.

Posted by: Adventuregeek on January 3, 2006 at 3:48 PM | PERMALINK

Al: equity is still a claim on the business. Doesn't sound like Papa is requiring return of his capital under any description. "If she wants to pay me back, that's very good of her".

Posted by: Adrian on January 3, 2006 at 3:49 PM | PERMALINK

Hey patton you gotta make them turn around before you can call it tail.. wink..wink you big manly man.

Posted by: allen kayda on January 3, 2006 at 4:09 PM | PERMALINK

Al: equity is still a claim on the business. Doesn't sound like Papa is requiring return of his capital under any description. "If she wants to pay me back, that's very good of her".

Well, unless the investment was made via preferred stock (or a similar equity structure - for example as preferred distributions to a limited partner or LLC interest), then the equity would generally only be claim upon liquidation. And it is likely that Ms. Lauren wouldn't be the liquidator.

Posted by: Al on January 3, 2006 at 4:14 PM | PERMALINK

One would think Ralph would be a bit more sophisticated than to pop off in the Times about this, but the best guess is that his lawyers correctly structured it as in investment in the shop.

Whether or not the peanut gallery thinks this "investment" was really a gift, the only technical question is whether the terms of the investment are followed. For equity, that would mean paying Ralph a share of the profits (if the business is profitable) and paying him back when and if the store was sold.

For the record, it would take a bit more than sloppy talk like Ralph's for the IRS to overide the actual characterization of the investment.

Posted by: hank on January 3, 2006 at 4:25 PM | PERMALINK

Hank: sure, it's not like Ralph filed a gift tax return in the NYT. But his sloppy talk rather suggests that any equity terms won't, in fact, be followed. And a statement of apparent donative intent might pique interest in the Field.

Al: Not *just* liquidation, like Hank says. (Current profit distributions can be avoided, provided Ralph's undistributed profit share surfaces when the scoresheets are tallied.)

Posted by: Adrian on January 3, 2006 at 5:48 PM | PERMALINK

What a fun post! So far I see multiple explanations-some contradictory-of how the federal gift tax works, some ranting about how this isn't "important", crazy liberals and even crazier fake conservatives. Fun!

By the way, I think independent candy stores are nothing but a good thing.

Posted by: Alexander Wolfe on January 3, 2006 at 6:08 PM | PERMALINK

What I found amusing (and what I thought the point of the post was going to be) was all of the pontificating about how "it's not about the money" to her. "I believe I'm here to do something, to create something that makes people happy and expresses myself." Yeah,if my millionaire father gave me a non repayable loan to start a business, it wouldn't be about the money for me, either. I don't mind him giving her the money, but geez, don't make it sound like it's all just a pure expression of creativity.

Posted by: ChrisO on January 3, 2006 at 6:11 PM | PERMALINK

If it's a gift, and it exceeds the annual exclusion per donee (increases to $24K this year on a joint gift; $22K last year), and it exceeds the lifetime exclusion, then Daddy pays the GIFT tax.

If it's a loan (with appropriate interest) then it becomes a gift if and when the loan is forgiven. As long as there is in fact an enforceable promissary note on this, the loan isn't really forgiven. It might be forgiven in the will, and it may therefore be part of the taxable estate, if the estate tax isn't repealed.

Dylan never pays the tax in any case.

Posted by: Libby Sosume on January 3, 2006 at 6:33 PM | PERMALINK

Lewis Carroll at 2:35 PM and Ugh at 3:10 PM get it right. Gifts are not treated as taxable income to the donee. See 26 U.S.C. 61, 26 U.S.C. 63. Instead, gift taxes are imposed on the donor. See 26 U.S.C. 2501(a)(1). But those gift taxes are subject to the exclusions both Lewis Carroll and Ugh mentioned.

Posted by: Kenneth Fair on January 3, 2006 at 7:00 PM | PERMALINK

Hank: sure, it's not like Ralph filed a gift tax return in the NYT. But his sloppy talk rather suggests that any equity terms won't, in fact, be followed.

Well, it's not up to Ralph to follow the terms of whatever equity he received for his investment (assuming it was an investment). It's up to the corporation/LLC/LP to act in accordance with its governing documents (certificate of incorporation, operating or partnership agreement, etc.). Now, what happens if the entity doesn't follow its governing documents AND Ralph doesn't enforce his rights? Does the IRS step in to recharacterize the investment as a gift? Dunno.

Al: Not *just* liquidation, like Hank says. (Current profit distributions can be avoided, provided Ralph's undistributed profit share surfaces when the scoresheets are tallied.)

Well, sure. On a sale of the company, winding up, etc. All generally cases where Dylan wouldn't be paying money to Ralph, but rather the money would come via the purchaser, liquidator, or similar source. But you are correct that the equity Ralph invested in can be structured such that profits need not be paid to him on a current basis.

Posted by: Al on January 3, 2006 at 7:08 PM | PERMALINK

But you are correct that the equity Ralph invested in can be structured such that profits need not be paid to him on a current basis.

Right. Firms aren't required to pay dividends. Dylan will just pay herself a salary (heck, I doubt she needs to because she undoubtedly is already independently wealthy via the establishment of a trust fund by Daddy), and Daddy probably won't receive one, or else his will be nominal if he's an officer. Ralph's return will be in watching his shares in the candy store increase in value (not an impossibility; I could forsee stupid snobby people paying lots of money for "Dylan Lauren" choclates and what not; if she has the old man's business smarts, maybe she'll even make a go of it and be successful who knows?). When Ralph goes to that big deed-restriced WASP neighborhood in the sky (assuming they overlook his membership in the Tribe) he'll just leave his shares in the candy store to Dylan (assuming the business still operates) and she'll pay any inheritance taxes due with life insurance proceeds.

Posted by: horse on January 3, 2006 at 8:08 PM | PERMALINK

Presumably, unless Ralph Lauren is a business idiot, which I don't think likely, what really happened is that his daughter formed a corporation or limited partnership or what-have-you of some kind, and presumably the money went directly to the business, right?

How do you turn THAT into a personal gift? It's an investment (or some kind of loan), for Christ's sake, despite any flowery language employed.

Posted by: frankly0 on January 3, 2006 at 8:10 PM | PERMALINK

Ralph Lauren has a daughter? I could have sworn he was gay ... All those waspy pretty boys in his ads. Posted by: Adventuregeek

I think you are confusing him with Calvin Klein, and I would think the way-too-handsome-to-be-preppy boys and men in his ads are the art director's domain, so to speak.

Posted by: Jeff II on January 3, 2006 at 8:13 PM | PERMALINK

My guess is that Ralph Lauren simply lent the money to his daughter's BUSINESS, and that he's just saying, in a fatherly way, that he isn't going to be in any way upset if the business fails and he doesn't get paid back.

Posted by: frankly0 on January 3, 2006 at 8:17 PM | PERMALINK

My personal finances are, to be blunt, none of your fucking business.

Posted by: Ralph Lauren on January 3, 2006 at 9:01 PM | PERMALINK

IRS would treat it as a loan. Meaning that an interest payment would be taxed. And at death, the value of the loan would be subject to estate tax.

However if you make loans to your dependents in high-risk businesses, either they earn enough to pay you back with ease or they the firm goes broke and you write off the loan...getting a Tax Deduction.

This is why Democrats have it all wrong when they think income taxes hit the rich.

Note- he can't make it tax free, he has to charge nominal interest on the loan but he can actually just add to the debt.

Posted by: McAristotle on January 3, 2006 at 9:08 PM | PERMALINK

I'm sure if they have lawyers worth a lick, they structured it to avoid gift taxes.

Why do the winger/trolls on this board assume that the Laurens have been taxed out the wazoo? Technically the rich are supposed to be taxed more, but they usually come up with tons of phony losses to reduce their income taxes down to or below middle class taxation levels. As Mr Delay and Bush demonstrate daily, the law is for pikers.

Taxwise, the real issue here is: Since little Dylan has eschewed any profit motive, how big are the losses, and who is claiming them on their tax returns? Classic IRC section 183 issue there. And if daddy structured it as an S corp stock purchase, he might take the losses on his Schedule E, while letting Dylan take a fat salary. The fatter her salary, the bigger his losses. Not only does he evade gift tax, he gets a loss for giving is daughter a gift (altough she has to pay income tax on the salary - unless she's got other tax shelters). The possiblities for tax evasion are endless, and I have no doubt that they've all been explored.

Posted by: jussumbody on January 3, 2006 at 10:08 PM | PERMALINK

McAristotle,

I think if you make business loans to dependents and they go bust, at best you have a nonbusiness bad debt, which is only deductible like a short term capital loss. Because nobody is in the "business" of lending money to their kids. Of course in the real world this would be set up with multiple layers of trusts, partnerships, LLCs, LLPs, S corps etc, sometimes with circular ownership. So even if the IRS does find an "adjustment" writing the reports and figuring the tax consequences to all the parties, and following all the administrative procedures required could take hundres of hours for one case.

Posted by: jussumbody on January 3, 2006 at 10:15 PM | PERMALINK

"she'll pay any inheritance taxes due with life insurance proceeds.
Posted by: horse on January 3, 2006 at 8:08 PM |"
WHAT inheritance taxes? The Repukes have abolished the "death tax" for the moment -- and it's odds on that they will be able to make it permanent before this Congress is over. IIRC, that was their first order of business immediately after Katrina hit... then again, all the rightist atrocities just kinda blend into one big clusterfuck after a while.

Posted by: smartalek on January 3, 2006 at 11:17 PM | PERMALINK

Ralph Lauren directly holds 304k shares in RL (NYSE). At a price of $55.76/sh, that's ~$17 mil. The annual dividend rate is .20. So Ralph's getting 304k * .2 = $60k/yr tax free personal income (dividends aren't taxed at all right now if the corporation is paying its corporate taxes properly). His executive pay is much higher than that--$14.26 mil. But who knows how much of that is ordinary income and what his deductions might be, but I'd be really surprised if his effective rate was lower than 33% or so.

RL's structure is quite different from (e.g.) Walmart's, where the Waltons are basically living tax-free. John's estate has 11 million shares earning .40/sh tax-free per year (assuming they pay their corporate taxes).

Posted by: Stoffel on January 3, 2006 at 11:33 PM | PERMALINK

I, too was surprised that Kevin's story ended by asking about the tax consequences, although I've certainly had my eyes opened by reading your thread.

That article was painful to read, and seemed to be composed that way, intentionally.

You sit there reading about this girl who's running a "CANDY" shop to "express herself" and has never had to worry about a dime, let alone a tootsie roll.

Her carefree life of luxury makes every working woman feel like she's been punched in the stomach. You think of all the amazing things she could do with her money to encourage artistic expression in this country... but from the looks of the article, she's never given it a thought.

There's a certain kind of "I wonder what the poor people are doing today" article that gets published in the NYTimes Style section with regularity. They're designed to solicit jaw-dropping envy and despair.

I certainly fell for it... read the whole thing and had a terrible tummy ache afterwards.

Posted by: Susie Bright on January 4, 2006 at 2:19 AM | PERMALINK

Al: but Dylan and Ralph make the decisions. If this was the public Inc., there'd be lawyers all over this stuff; but it's private family business and we all know how sloppy that can get, even when lawyers are involved at the start. Can the IRS recharacterize it as a gift if the terms are ignored? Sure, though first Ralph has to "win" the audit lottery. But he just bought himself a couple more tickets.

Frankly0: assuming Ralph didn't get proper consideration--the IRS can recharacterize the recipient of the transfer as well as its nature. Since no one gives money to business entities for love, the IRS can take the view that, in substance, he gave the money to Dylan and *she* invested it.

Posted by: Adrian on January 4, 2006 at 3:38 AM | PERMALINK

There's a certain kind of "I wonder what the poor people are doing today" article that gets published in the NYTimes Style section with regularity. They're designed to solicit jaw-dropping envy and despair.

That's right. And anyone who thinks the Times is "liberal" is sadly mistaken -- it's the Establishment's power organ, plain and simple. If the Times were truly liberal, it would make this woman look as ridiculous as she almost certainly is.

Posted by: Vincent on January 4, 2006 at 8:50 AM | PERMALINK

She's not ridiculous, she's just rich. Paris Hilton is ridiculous.

In a perfect world, where both newspapers and their readers are rational, the Times wouldn't write about her at all.

Posted by: Adrian on January 4, 2006 at 8:54 AM | PERMALINK

She won't say how much money her parents gave her to start the business, except that it was "a lot." She also contributed money of her own.

Posted by: trooper on January 4, 2006 at 9:01 AM | PERMALINK

Minimum of a couple hundred thousand $$ - more likely half a million.

Posted by: mcdruid on January 4, 2006 at 5:14 PM | PERMALINK




 

 

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