Sam Zell is a billionaire businessman and #RealEstate investor known as the “grave dancer”.
He is less well known for what billionaire #investor guru @MohnishPabrai describes him as: “being one of the very best people on the US Tax code”.
#RuleHurdling 🧵 no.2
He is less well known for what billionaire #investor guru @MohnishPabrai describes him as: “being one of the very best people on the US Tax code”.
#RuleHurdling 🧵 no.2
In 1981 Congress passed the Economic Recovery Tax Act.
Among other things, it extended the life of net operating loss (NOL) carry-forwards from 7 to 15 years. NOLs allow companies to offset their current year's taxable income with past losses to reduce tax liabilities.
Among other things, it extended the life of net operating loss (NOL) carry-forwards from 7 to 15 years. NOLs allow companies to offset their current year's taxable income with past losses to reduce tax liabilities.
Zell examined all public companies with large NOLs finding they had little change in share price resulting from the Act.
The market overlooked the value added, presenting him with an opportunity to acquire the NOLs creating holding companies to shield business profits.
The market overlooked the value added, presenting him with an opportunity to acquire the NOLs creating holding companies to shield business profits.
Zell's strategy became:
1) Find the NOLs
2) Add profitable business subsidiaries
3) Maximize the value of the NOLs for which he had paid nothing
1) Find the NOLs
2) Add profitable business subsidiaries
3) Maximize the value of the NOLs for which he had paid nothing
Zell began executing this strategy in 1980, with a 3.5% stake in Great American Management & Investment Corp $GAMI, a massive REIT.
He made acquisitions of dull-tech companies using its $130m in NOLs to shelter income from taxes and turning it into a diversified holding company.
He made acquisitions of dull-tech companies using its $130m in NOLs to shelter income from taxes and turning it into a diversified holding company.
Next was Itel, a leasing conglomerate which emerged from bankruptcy with $450m in NOLs.
In 1984, Zell privately gained control and started a program of aggressive acquisitions.
By 1989, having rebounded as a fastest growing companies, $ITL began trading on the NYSE again.
In 1984, Zell privately gained control and started a program of aggressive acquisitions.
By 1989, having rebounded as a fastest growing companies, $ITL began trading on the NYSE again.
Finally in 1990, there was an insurer called Mission Insurance with $630m in NOLs that went bankrupt.
Zell bought them for $30m around 8 years after the bankruptcy transforming it through acquisition into Covanta $CVA, which recycles garbage into electricity.
Zell bought them for $30m around 8 years after the bankruptcy transforming it through acquisition into Covanta $CVA, which recycles garbage into electricity.
In 2017 the Tax Cuts and Jobs Act limited the use of NOL carry-forwards to 80% of taxable income.
Then the 2020 CARES Act reversed the NOL rules retroactively for 2018-2020 only, temporarily allowing them to be used 100% again in order to reduce a taxpayer's income to zero.
Then the 2020 CARES Act reversed the NOL rules retroactively for 2018-2020 only, temporarily allowing them to be used 100% again in order to reduce a taxpayer's income to zero.
NOLs are extremely challenging, being subject to complex & arcane rules.
Other deal makers couldn't stomach the rigor of mastering them, so they served as a barrier to entry.
This completive edge Zell derived from the tax system, is an application of what I call #RuleHurdling.
Other deal makers couldn't stomach the rigor of mastering them, so they served as a barrier to entry.
This completive edge Zell derived from the tax system, is an application of what I call #RuleHurdling.
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