Remember the famous Sherlock Holmes story "Silver Blaze," where the key to the mystery was the dog that didn't bark? Well, think of this as the story of the $130 million tax break that Laurence Tisch didn't take.
Tisch, the tough, shrewd and frugal chairman of Loews Corp., the tobacco-television-insurance conglomerate, didn't become a billionaire by leaving money on the table. Certainly not amounts like $130 million. Tisch giving up a tax break of this size seems to be a violation of the natural order -- as if the sun rose in the west or a sucker got an even break.
Yet the CBS stock buyback, announced last week, will someday cost Loews a huge tax payment that it could have avoided had CBS paid out $2 billion of dividends to its holders rather than buying back $2 billion of stock. Because Tisch is CBS's chairman and because Loews is by far CBS's biggest stockholder, you have to think that if Tisch made a fuss, CBS would have gone the dividend route.
So why didn't he? No one involved in the deal wanted to discuss it with me. The reason, as best I can tell, is that, while paying a dividend would have cost Loews less in taxes, it would have cost other CBS stockholders more. And that Tisch took seriously his obligation to maximize income for CBS holders, toward whom he has a fiduciary duty.
CBS is buying 44 percent of its stock from its holders at $190 a share, an above-market price. Because Loews owns about a quarter of CBS's stock, it will get about a quarter of the total payout. Let's call it $500 million. For reasons complicated beyond belief, tax law allows Loews to treat the $500 million as a dividend. And any corporation getting dividend income receives a huge tax break: 80 percent of the dividend is excluded from tax.
Let's say that instead of buying back 44 percent of its shares for $190 each, CBS had paid an $83-a-share dividend -- which amounts to the same thing. That would be quicker, simpler and cheaper than the buyback plan, which is a logistical mess.
Loews would get around $500 million of dividend income this way, too. But because CBS is doing a buyback, the tax laws require Loews to reduce the value of its remaining CBS stock for tax purposes by $400 million. Had CBS paid a dividend instead, Loews could have avoided the $400 million reduction.
What all this means is that when Loews sells the CBS shares that it will have after the buyback, it will pay taxes on $400 million of income that it could have sheltered. At today's 34 percent federal corporate tax rate, the tab would be $136 million.
"There is no question that Loews knew about this and could have reaped the benefit," says Lehman Brothers Inc. tax genius Robert Willens, whom I consulted. "Loews is obviously sacrificing a clear benefit for the common good of other CBS stockholders."
Consider, if you will, what would have happened to the estate of the late William Paley, the longtime CBS chairman. Paley, who died on Oct. 26, took advantage of the only fail-safe tax loophole: death. Your heirs get to value the stock in your estate at what it sells for on the day you die. No income tax is due, ever, on the difference between that price and the price you paid for the stock. In Paley's case, that's big dough: His 1.3 million shares cost him around $5 each, but were worth $164 when he died.
Assuming that CBS buys 44 percent of the estate's stock at $190 a share, the estate will raise $109 million and will pay a $6 million income tax bill, by my math. If CBS had paid an $83-a-share dividend, the estate's tax bill would have been $43 million. Any other tax-paying CBS stockholder would be in the same situation, only with fewer dollars at stake. So Tisch is giving up a potential $136 million tax saving for Loews in order to save money for other CBS stockholders.
Contrast this with the special deal MCA Chairman Lew Wasserman got when he sold the company to Matsushita Electric Industrial Co. Other holders get $66 a share of cash and have to pay a tax bill. Wasserman gets $327 million of Matsushita preferred stock in lieu of cash, and owes no tax until the preferred is sold. Which surely won't be while Wasserman, 77, is among us.
The reason, of course, is the death loophole. When Wasserman shuffles off this mortal coil, his heirs will be able to value the stock at $327 million for tax purposes, and sell it back to Matsushita. The tax saving: $113 million of federal and California income tax, by my math.
MCA said Wasserman wouldn't talk to me. But in an Associated Press story last month, he was quoted as saying, "Well, is that against the law?" No, but it would have been nice to offer the same deal for other MCA holders who wanted it.
You can argue that I'm being too nice to Tisch, who has dismembered CBS, and too nasty to Wasserman, who built MCA. That's a whole other subject. But there's no question that when it came to treating his shareholders fairly, Tisch bent over backwards. And that Wasserman should have, too.
Allan Sloan is a columnist for Newsday in New York.