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Pepperdine University School of Law

Tuesday, July 12, 2011

Johnston: Rupert Murdoch Feasts at U.S. Tax Trough

David Cay Johnston comes out swinging in his first column for Reuters:  It Pays to be Murdoch. Just Ask US Gov't:

Rupert Murdoch may not garner as much attention for his financial savvy as he does for his journalistic escapades, which last week led to the shuttering of Britain's oldest tabloid. But that doesn't make his money management any less impressive.

Indeed, when it comes to taxes, instead of rendering unto Caesar, Murdoch has Caesar rendering unto him.

Over the past four years Murdoch's U.S.-based News Corp. has made money on income taxes. Having earned $10.4 billion in profits, News Corp. would have been expected to pay $3.6 billion at the 35% corporate tax rate. Instead, it actually collected $4.8 billion in income tax refunds, all or nearly all from the U.S. government.

Murdoch

Fox News, the editorial pages of his Wall Street Journal and other Murdoch outlets often rail against taxes. Their attacks on government benefits for the elderly, the sick, the jobless and children focus attention on the uses of tax dollars and away from his aggressive efforts to enjoy the benefits of civilization without paying for them.

Many other companies may follow similar practices but most of corporate America doesn't own one of the country's most powerful newspaper editorial pages.

How does Murdoch make money off the tax system? There are three basic elements, disclosure statements show.

One is the aggressive use of intra-company transactions that globally allocate costs to locations that impose taxes -- and profits to areas where profits can be earned tax-free. ... News Corp. has 152 subsidiaries in tax havens, including 62 in the British Virgin Islands and 33 in the Caymans. Among the hundred largest U.S. companies, only Citigroup and Morgan Stanley have more tax haven subsidiaries than News Corp., a 2009 U.S. Government Accountability Office study found.

Buying companies with tax losses is a second way Murdoch can pocket, rather than pay, taxes. ...

Third, Murdoch's tax lawyers are expert at maximizing the benefits of deferrals. Incurring a tax today, but paying it by-and-by can be profitable. ...

Imagine how well Jesus might have done if he had put a corporate jet at Caesar's disposal. Or if he had a tabloid like the News of the World to put Caesar in fear of him.

Update #1:  Reuters has pulled the article because it was wrong.

Update #2David Cay Johnston Apologizes

https://taxprof.typepad.com/taxprof_blog/2011/07/johnston-rupert-murdoch.html

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Comments

"Buying companies with tax losses is a second way Murdoch can pocket, rather than pay, taxes..."

How is that?

Posted by: BB | Jul 12, 2011 11:35:12 AM

Anyone who can come into a country, create an openly biased, partisan "news" channel, give it unblushingly a tag line like "fair and balanced", make it successful by allowing it to be the conduit for the demented fantasies of heretofore marginalized crackpots and cranks and not only be accepted by the mainstream, but be considered a major player in a great nations civic debate is indeed the Lord of Illusion. Whatever troubles he is in now I am sure he will come out smelling like an Aussie Rose.

Posted by: George W | Jul 12, 2011 11:49:21 AM

Johnston is misreading. The supplemental cash flow statements show negative 4.8 billion over the past 4 years. If it were a tax expense schedule, which is probably what CDJ is used to looking at, a negative 4.8 billion would indeed mean a tax benefit. However, this is a cash flow statement, not a P&L statement, and the negative tells us that it's a cash outflow - a payment - rather than a cash inflow - a refund. In other words, he gets it exactly backwards: News Corp actually paid $4.8 billion in income tax.

The other items on the cash flow bear this out: there's a positive number for proceeds from sale of investments, negative number for payment of interest, etc.

Posted by: jpe | Jul 12, 2011 11:50:22 AM

Johnston starts out with his left-wing partisanship by bringing up "journalistic escapades," which have nothing to do with the article except to initially instill an anti-Murdoch bias in the minds of readers.

Has Johnston mentioned that his former employer, the NY Times, which also "owns one of the country's most powerful newspaper editorial pages" but advocates higher taxes, engaged in tax slight of hand by jacking up interest deductions on a note payable and also cutting $160 million in taxes with its write-off of About.com? No, because he agrees with its editorial board opinions, which is how he measures his friends and enemies.

And, what is this nonsense in his chart about "cash paid" basis, which is not the same as the tax basis? And, why the selected years for his presentation? He might as well compare pirate sightings to taxes paid.

Warning - don't pay Johnston to prepare your corporate tax returns. He would base the tax on what's he considers "fair" rather than what is actually due.

But, we get the gist of Johnston's liberal argument - Murdoch should pay more taxes to support Johnston's very selective causes, which do not cover the three primary Constitutional duties of government - defense, commerce, and justice - and completly ignores the tremendous waste and absolutely stupid programs that steal from taxpayers every year.

Maybe Murdoch and most taxpayers really don't want to support (just a few programs in no particular order of importance):
Congressional earmarks,
Government supported abortions,
Offensive NEA "art," like a crucifix immersed in urine,
$400,000 for researchers to cruise bars in Buenos Aires to find out why gay men engage in risky sexual behavior while drunk,
$2 million for a library commemorating Charlie Rangle's service in the House,
Billions to buy General Motors to reward big labor for its support,
Support of public television made unnecessary by an expanded private market,
$1.1 trillion dollar for a failed stimulus and interest,
$200,000 to study why politicians make vague statements,
$112 million in fraudulent tax refunds to prisoners,
$442,000 to study male prostitutes in Vietnam,
Trillions for rapid rails to nowhere, ....

Using those examples, anyone with a brain would side with those who say that govenment has to cut spending before raising taxes. Don't come to me or anyone looking for more money if you haven't done your part in cutting fraud, waste, and unnecessary departments and programs.

Without any data available, I suspect that Murdoch paid a premium for corporations that he purchased that had loss carryovers. Taxes were not avoided on those acquisitions. Murdoch would have paid them to the sellers in the form of higher sales prices, and the sellers remitted those taxes on their gain from sale.

I previously predicted that Reuters would lose credibility from Johnston's hiring, and he's starting off proving me right. His article is sophomoric, wrong in the selection of data, and so incomplete in research that his points are meaningless. But, one really has to like the finishing touch, of comparing Murdoch with Jesus.

Now, let's wait for Johnston's lengthy and boring replies, after he googles every reference to his article and tries to defend the indefensible.

Posted by: Woody | Jul 12, 2011 2:31:43 PM

"I suspect that Murdoch paid a premium for corporations that he purchased that had loss carryovers."

What about 382?

Posted by: BB | Jul 12, 2011 2:54:54 PM

jpe is correct...Johnston made a mistake but was too busy writing the rest of the article as a diatribe against Fox News to make sure the tax side of the story was correct.

Liberals put on blinders to David Cay Johnston because he says what they want to hear, just like conservatives do when the WSJ editorial page recites talking points.

Johnston is a hack who writes articles that are 1/2 anecdotal cherry-picked numbers (often used incorrectly like this case) and 1/2 diatribe against something that is tangentially related to the topic of the data.

Reuters (and Tax Analysts as well) should be ashamed to have hired the guy. Him and Steve Moore belong together.

Posted by: AZ | Jul 12, 2011 7:38:17 PM

@Woody,

ill-informed as usual and full of false assumptions and irrelevancies.

Read my earlier tax.com column revealing the NYTimes Co's 71% cash tax rate for the last ten years, with the same facts mentioned in my new Reuters column. I have 37 years of clips (and awards) criticizing news organizations, including my employers, as well as having caused six broadcast stations to be forced off the air for news manipulations and blackouts.

@ jpe, you misread Note 23; those parens mean the company received net refunds. And as always the numbers were run by News Corp. before the column ran; notice, in my column, what the company had to say in response after they received my spreadsheet.

Posted by: David Cay Johnston | Jul 12, 2011 9:03:01 PM

You presented the info to News Corp. and they confirmed you were correct or they simply didn't comment? To whom from investor relations did you speak to? It does appear you are wrong based on the financials jpe references, specifically the sign convention used for interest paid being negative and sale proceeds being positive. Also purchase of other investments is a negative... all suggesting that they are using the convention of negative numbers being cash outflows and positive numbers being inflows.

Posted by: tiny | Jul 13, 2011 12:18:02 AM

Note 23 shows a negative cash flow effect for "cash paid for income taxes." This would imply that NewsCorp paid taxes.

Just look at the 3rd line "sale of other investments." This was a positive number as you'd expect. Then "purchase of other investments" is negative, as you'd expect.

Posted by: AZ | Jul 13, 2011 4:47:33 AM

@ David: the paren in this context mean it's a cash outflow. There are different ways of reflecting income tax paid, and showing it as negative (like it would in a direct statement of cash flows) is perfectly acceptable. Compare to interest expense, which is also negative. Since there can never be net negative interst paid in a cash flow, we know that News Corp is presenting cash outflows as negatives and cash inflows as positive.

They did previously use the standard form of reporting (where a positive equals taxes paid and negative is a refund): you can see that in the 2006 annual report where taxes is paid is reported as positive 558. The next year they switch to a different convention and report cash outflows as negative and, accordingly, the 558 is then reported as (558)

Posted by: jpe | Jul 13, 2011 6:39:36 AM

DCJ, it's nice to see that you completely ignored almost all of my critique of your article to point out that you wrote an article about the NYT's 71% "cash tax rate," which is hardly attacking their tax dodges that I mentioned. Since the rest is unopposed, it stands. When you wrote, "ill-informed as usual and full of false assumptions and irrelevancies," you must have been projecting.

How many corporate tax returns, other than your own small corporation, if you have one, have you prepared in your life? Please tell us. I think that one should understand how such returns are correctly prepared before attacking companies that comply with tax law in preparing their returns.

Posted by: Woody | Jul 13, 2011 7:15:53 AM

Nothing new here. Rueters and a socialist inspired anti-US constitution hating writer go arm-in-arm. I think to get a job at Rueters you have to be a bona fide card carrying member of the International Communist League?

Posted by: SCtax | Jul 13, 2011 7:24:23 AM

NPR is losing all credibility, too, if it had any left. Note that NPR and MSNBC regularly interview Johnston when they need a left-wing shill, qualified or not, for attacks against Republicans and conservatives. Heck, call Paul, call JPE above, call anyone who actually understands tax law.

Now, get this. Johnston says that the "scandal" is that Murdoch is doing nothing illegal on taxes and that he hires "smart people" (oh, the humanity!) to navigate tax law. What investigative analysis! Maybe Murdoch should hire stupid people and pay more than required. After all, that's "fair."

NPR Moring Edition: How News Corp. Received Billions In Tax Refunds - July 13, 2011
http://www.npr.org/2011/07/13/137811869/how-news-corp-received-billions-in-tax-refunds?ps=cprs
Listen to the Story - [3 min 37 sec]

As British investigators dig for details in the News Corp. scandal, a columnist for the Reuters news service looked at figures that were already public. News Corp. is a publicly-traded company in the U.S., meaning it must disclose its finances. So columnist David Cay Johnston ran those numbers and talks to Steve Inskeep about what he found.

I'll consider paying more taxes when the Democrats quit doling out money to NPR, which is something that it doesn't do for Murdoch. Write about that.

Posted by: Woody | Jul 13, 2011 8:35:33 AM

Honestly, Mr. Johnson, why pick on Fox? Most major corporations in the United States engage in similar tax planning; just talk to Obama's Jobs Czar Jeff Immelt about the company he runs, GE, and their tax planning techniques. Oh, yeah, that's right, picking on another news outlet or company might make it look like Fox just does the exact same thing every other company seeking to maximize shareholder value does. Notice how even Reuters paid a paltry 12.9%, so close to that 35% statutory rate, eh? Instead of slamming one company for doing what is absurdly commonplace, maybe you should focus your articles on the broad need for corporate tax reform (elimination of deductions and lower marginal corporate tax rates in line with the rest of the world) so that the government will actually get its share.

I also love how you slam News Corps basically being the devil incarnate, yet you trust them to approve numbers you run in your article. Great journalism right there.

Also, you did misread the Supplemental CF data in Note 23 - if you'll notice throughout the statements, deductions, expenditures, cash outflows, etc. are reported in parenthesis, in keeping with the notion of comparability, the rest of the statements and reports are likely to be presented in the same way. Might want to go back and take that Principles of Financial Accounting course before your next expose article about something everyone already knows.

Posted by: Jon | Jul 13, 2011 11:34:08 AM

Article is withdrawn, apparently because DCJ can't read a Supplementary Statement of Cash Flows.

http://blogs.reuters.com/mediafile/2011/07/13/advisory-david-cay-johnston-column-on-rupert-murdoch-is-withdrawn/

Posted by: Tyler | Jul 13, 2011 1:13:12 PM

Of course, we already figured it, but this must be embarrassing for Johnston's first Reuter's article. (Via Going Concern)

Advisory: David Cay Johnston column on Rupert Murdoch is withdrawn

Please be advised that the David Cay Johnston column published on Tuesday stating that Rupert Murdoch’s U.S.-based News Corp made money on income taxes is wrong and has been withdrawn. News Corp’s filings show the company changed reporting conventions in its 2007 annual report when it reversed the way it showed positive and negative numbers. A new column correcting and explaining the error in more detail will be issued shortly.

Reuters Retracts Column Saying News Corp. Got Billions In Tax Refunds

On Morning Edition today, Johnston made the case that News Corp. had utilized "off shore [tax] havens" to report "a theoretical loss" — and that the company did not do anything illegal. Apparently, he did not factor in the change in the way the company reports its results.

Update at 3:40 p.m. ET: NPR says that "Johnston is expected to appear on Morning Edition Thursday to offer further clarification. We will provide updates as they become available."

I can hardly wait for the "clarification."

I don't mind news that goes against my principles and views. However, I expect it to be presented accurately and fairly. I'm anxiously awaiting the day that DCJ does that.

Posted by: Woody | Jul 13, 2011 1:21:40 PM

It looks like the column has been taken down. If it was removed for inaccuracy, I hope a correction or clarification is issued. That article was widely disseminated, and if it was incorrect (of which I'm 90+% sure), the author has a duty to disseminate the correction at least as widely.

Posted by: jpe | Jul 13, 2011 1:42:19 PM

I should note that DCJ is generally a great journalist, and I've always enjoyed reading his work. His willingness to engage critics is absolutely fantastic and very, very commendable.

Posted by: jpe | Jul 13, 2011 1:57:35 PM

Just a scan of the chart with one year totally out of whack from the others should have been a sign to go back and recheck the numbers.

Posted by: Woody | Jul 13, 2011 6:18:44 PM

I just checked for the link to the related financial statements, so here it is if anyone wants to trace the problem per the discussion. Go to page 100 of 116 of the 2009 report. -- http://www.newscorp.com/investor/annual_reports.html

Posted by: Woody | Jul 13, 2011 7:26:33 PM

Paul,

Methinks that "Update: Reuters has pulled the article because it was wrong." in the same size as font and at the end of the article is irresponsible. At a minimum, this information (in whatever size font) should be at the top of the post, and perhaps even it/title/legend. I also think it should be either in a larger font, in a font that draw your attention to the fact that it is wrong (e.g.) read, or both.

Posted by: tax guy | Jul 14, 2011 3:24:10 AM

NewsBusters: David Cay Johnston's Utterly Humiliating, Totally Incorrect Anti-Murdoch Adventure
http://newsbusters.org/blogs/tom-blumer/2011/07/15/david-cay-johnstons-utterly-humiliating-totally-incorrect-anti-murdoch-a

Posted by: StewartIII | Jul 15, 2011 1:51:31 PM