ERICOPOLY

There is enough frustration over the government never making a decision to get me to bring it up again (out of frustration). The Democrats seemingly could finally get one thing they want (keeping more jobs onshore) if they could just give the Republicans some of what they want (US onshore corporate income won't get taxed twice). Instead they keep on trying all sorts of stimulus measures to get consumers to spend more, when part of the problem is that we already consume enough things that simply aren't produced here. Can't they at least make it relatively more profitable to do more business in the US by dangling a carrot to the Republicans? Maybe with more US jobs we'd need less unemployment benefits, and thus be part of the way to resolving "The Cliff". It seems painfully clear to me that one big benefit to the Australian dividend franking system is that it only applies to Australian sourced corporate income. An added incentive to not offshore your operations.

This is why (IMO) the corporate and dividend taxes would make more sense if replaced with a system like what Australia has where an income taxed at the corporate level can be paid out with an attached credit to be offset against personal income. They call it something like "franked dividends". Example: Take a corporation which payed 28% tax on that income in the United States and an individual personal tax rate of 35%. The individual needs to pay 7% tax on the dividend -- he gets a credit for the part already paid at the corporate level. Thus, shareholders of all companies are on the same level. If the corporation already paid taxes in the US, they get credit on the personal level. Benefit #1: The shareholder does not get any credit for corporate earnings that were taxed overseas. Thus it creates a disincentive to moving your taxable operations offshore. Benefit #2: The company is not incentivized to make uneconomic tax writeoffs and such -- it gets them nowhere as it only bumps up the eventual tax to be paid on the personal individual level. The Republicans ought to embrace it because it eliminates double taxation, and the Democrats ought to embrace it because it helps keep jobs onshore and ensures that the tax gets paid eventually even if the business operators are particularly clever at lowering their corporate tax rates.

From what I can tell there is a form of help from the Government: http://usmilitary.about.com/cs/joiningup/a/clrp.htm Active Duty. The military repays 33 1/3 percent of the outstanding principle balance of the loan annually, or $1,500, whichever is greater, for each year of service.

I take it the "duty to mitigate" doesn't apply here with respect to MBIA entering these contracts despite reason to suspect that Countrywide loans were substandard? Is that some other area of the law?

Unless the guys are MBIA are indeed the biggest rubes on the planet. Is that what they claim to be? :D

From BRK's perspective it would be. But from shareholder's perspective the capital gains (from BRK retaining the dividends) will be taxed again (but potentially deferred). That would take the rate for most shareholders to 27% = 1-(1-14%)*(1-15%) using the long term capital gains rate. For the sake of Warren's shares (and for many wealthy families who invest in Berkshire) there will be no such capital gains tax ever due (held until death).

I like this one last comment by Buffett in that article: In the meantime, maybe you’ll run into someone with a terrific investment idea, who won’t go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him. It's funny because Warren would probably invest in the idea through Berkshire where the dividend rate would only be 14% roughly (held in insurance subs).

Republican "president". Singular, not plural. Eisenhower did it in 1956,1957, and 1960. He raised the tax rate to 92%.

I wonder why he's leaving out real estate from these discussions. A person can defer capital gains taxes if an appreciated property is sold and the proceeds are reinvested in another piece of real estate. It seems this is a place where he could point out the inequity in the tax code. Especially since it would be fun to give a jab to Donald Trump.

You are right. Buffett is reaching though. Trading is where capital gains comes into play. He seems to be suggesting that the high tax on dividends would have cut into trading. Perhaps it encouraged trading (trying to play volatility instead of patiently waiting for dividends). EDIT: For example, trading around the dividend-ex dates is more rewarding if the dividend tax rate dwarfs the capital gains tax rate.

This part is interesting: Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent in extreme cases, I sold securities and did pretty well. In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70 percent — and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered. Towards the end of that period he shifted his focus to Berkshire Hathaway where that high 70% tax on dividends didn't apply. That's kind of a key issue -- it sounds like the tax rates did affect his investment style. He mentions the high 91% dividend tax rate didn't stop him from selling securities (at the relatively low 25% capital gains tax rate). In other words, he was invested only for capital gains. Does he expect everyone to do that? Nobody holding to collect dividends, instead only trading on volatility?

It's interesting how disconnected some analysts are from what Moynihan is saying: http://www.thestreet.com/story/11775041/2/bank-of-america-to-fall-off-cliff-then-bounce-analyst.html From Guggenheim Securities analyst Marty Mosby: In its quarterly 10-Q filing with the Securities and Exchange Commission, Bank of America reported that the total unresolved mortgage repurchase claims against the company had risen to $15.5 billion as of Sept. 30, from $12.6 billion at the end of last year. Mosby said that "we have calculated a range for potential remaining after-tax losses of $15-50 billion. While our best-case scenario could be funded with about one year's earnings, the worst-case scenario could create a $2 haircut to BAC's year-end estimated tangible book value per share of $14." ... Mosby said that "that until short-term rates begin to rise, BAC's earnings power is between $10 billion and $12.5 billion a year."

I can't really determine anything from the P/B comparison for BAC because of all that goodwill. What if they had grown organically? The book value would just be $13.50, and 1.8x would be $24.30. That's a country mile from the number used in that comparison, which was horrifically inflated by putting a multiple on goodwill.

I plan on starting a position in my ROTH IRA. The hardest part may be deciding what to sell in order to accumulate more. Although, Jan 1 is coming up. As far as dividend reinvestments, my return on capital will be dependent on what LRE is trading at. If they were able to retain and deploy the capital, my return would be what rates they can invest it at. The two can be very different. Also, do you know if I would be paying the spread if I had my brokerage account automatically reinvest for me? They'll withhold a portion of the dividend for foreign tax. A poor location for a foreign dividend payer is the RothIRA.

Red state denizens are tanning coon hides, calling in turkeys, arguing over road kill. He's probably waiting in line for the Black Friday sale at Cabelas.

Here is somebody not willing to step out on the risk curve: I asked a few of the people I meet on my Scene Last Night rounds to name their favorite Thanksgiving dish. Here’s what they said. John Griffin, Blue Ridge Capital LLC “Anything my wife makes, especially the cranberry sauce --with oranges.” http://www.bloomberg.com/news/2012-11-19/thanks-to-einhorn-robertson-cohn-for-holiday-treats.html?cmpid=yhoo

My recollection is that BAC requires anyone who tenders to them to covenant that they won't sell the note in a way that the vote could be changed. I might be remembering that wrong. So if you short a bond, how can you be sure that the bond you located and borrowed is a bond that hasn't voted yet? In other words, how can the buyer at the other side of the short sale be certain that he can tender it? And if he can't tender it, it's damaged goods. I don't know for sure. Here's what I would guess from having done bond votes before. One, the onus is on the original holder, the one who votes and then sells it. They are the one who has covenanted to BAC that they will abide by the terms of the tender (it's all spelled out in the docs). Two, when the votes are being counted the way I always saw it was that each bond had some kind of identification to it - a number. I don't know how that would work with global positions (i.e. DTC). But someone has to be tracking it somehow, or attempting to anyway. When all bonds are physical it's easy. You hold bond R-2, for example, and you vote affirmatively. They then see the same R-2 come around again and they know there's a problem. I don't recall how it was done with global positions. In terms of the bond you locate and try to tender, I am not sure. That's a problem with global positions. With physicals, the seller would need to tell you that. I am not sure here (I'm assuming these bonds are through DTC, if not it's easy as explained above). And if you haven't yet voted your bond, then you must be planning on tendering it. But you can't tender what you've loaned out to a short seller who might not sell it back to you in an un-voted form. Why would anyone lend out a bond that they haven't yet voted on?

My recollection is that BAC requires anyone who tenders to them to covenant that they won't sell the note in a way that the vote could be changed. I might be remembering that wrong. So if you short a bond, how can you be sure that the bond you located and borrowed is a bond that hasn't voted yet? In other words, how can the buyer at the other side of the short sale be certain that he can tender it? And if he can't tender it, it's damaged goods.

Suppose you vote early and then sell the note before the voting deadline. Can the new holder of the note reverse the previously submitted vote? In other words, can a note be voted multiple times with only the last submitted vote counted?

I guess I don't understand. If the notes are shorted, and then delivered to BAC (the buyer of the notes you are selling short), then how does this stop BAC from getting all of the notes that they want? Or perhaps the person who buys them out of the short sale then tenders them to BAC.

Ironically I might finally qualify for a mortgage because I'll have tons of dividend income. Even though it's not income! Thus ending my long struggle with those underwriters. Ha, ha, ha, ha.

I don't really understand this. How can a dividend tax be applied when no cash was distributed? For example, non US residents are not required to pay capital gain tax in the states but are withheld dividend tax. So how is that going to work for them with no dividend actually paid? I mentioned earlier that there is already a similar precedent in US tax law. TIPS adjust every year with the CPI. An upward revision to the CPI increases the principle value -- it's only an inflation adjustment, and it is non-cash in nature. However, it is taxed as regular income during the year that the adjustment is made. Personally, I think the worst part of it is that by design it's an inflation adjustment and thus not any "real" gain, but it's taxed as regular income anyhow. Well, someone who does not pay taxes in the states wouldn't have to pay that "regular income" tax as well, right? So that's the same with the comment about the dividend. And another question about "an increase in the proportionate interest". If, for example, the common price is now at the current strike price and there is a large regular dividend which reduces the strike price there is actually no increase in the proportionate interest from this aspect of the dividend amount as it was already at the strike price and it's not like it went from 0 share to 1 share. Thanks for having the patience to reply, Ericopoly. I don't know what to say with regards to the foreigners who own these things. I have no experience paying taxes as a non-resident of the US. I guess I was only addressing the US taxpayers who are griping that taxes will be due despite there being no cash dividend paid out. I don't really understand your question about the proportionate interest. I suppose I can just repeat my understanding of how this thing should work, but it still wouldn't be an opinion from a tax professional. But I can't help myself so I'm going to repeat my understanding of how this should work: First quarterly dividend : Step 1: Taxable dividend income is calculated by the declared dividend (less 1 cent) multiplied by 1 (the share conversion adjustment). Step 2: Warrant convertibility now adjusts to 1.x shares (to simulate the dividend being reinvested into more shares of the common) Step 3: the taxable amount from Step 1 is added to the cost basis of the warrant. Step 4: warrant strike reduced by the amount of the declared dividend (less one cent) Second quarterly dividend: Step 1: Taxable dividend income is calculated by the declared dividend (less 1 cent) multiplied by 1.x (the share conversion adjustment). Step 2: Warrant convertibility now adjusts to 1.y shares (to simulate the dividend being reinvested into more shares of the common) Step 3: the taxable amount from Step 1 is added to the cost basis of the warrant. Step 4: warrant strike reduced by the amount of the declared dividend (less one cent) etc.. etc... etc... I don't believe Step 2 in it's own right ever triggers any tax, just like the act of buying more common with your dividend shouldn't be taxable. But when the next quarterly dividend is paid, you have a greater number of underlying shares per warrant so you'll have to pay a dividend tax on the dividends that each of those shares receives. So for example after several years if the convertibility of the warrant is to 1.5 underlying shares and a $1.01 dividend is paid, there would be $1.50 of taxable dividend and the warrant strike would decrease by $1. Let's say the stock is trading at $10 at the time the dividend is paid -- the convertibility of the warrant should be increased by roughly an additional 0.15 shares ($1.50 worth of dividends when paid at a $10 stock price can be reinvested into 0.15 shares) so it should now be roughly 1.65 underlying shares that the warrant converts to. And the cost basis of the warrant should increase by $1.50. EDIT: I fixed some math in that last paragraph and also corrected the error I had made in Step 4

I don't really understand this. How can a dividend tax be applied when no cash was distributed? For example, non US residents are not required to pay capital gain tax in the states but are withheld dividend tax. So how is that going to work for them with no dividend actually paid? I mentioned earlier that there is already a similar precedent in US tax law. TIPS adjust every year with the CPI. An upward revision to the CPI increases the principle value -- it's only an inflation adjustment, and it is non-cash in nature. However, it is taxed as regular income during the year that the adjustment is made. Personally, I think the worst part of it is that by design it's an inflation adjustment and thus not any "real" gain, but it's taxed as regular income anyhow. EDIT: So I guess see how that issue is handled in the TIPS example. Perhaps you'll get lucky and not owe any tax on the adjustment?

There might also be some selling of winners this year to book long term capital gains rates at 15% and without any Obamacare taxes.

More to that point... BAC earlier released a legal opinion that they had paid for. It said that BAC would most likely win a piercing the veil decision. Perhaps that was a message not to MBI, but rather a message to BAC's shareholders. MBI has almost certainly also paid for an opinion, but they have not yet (as far as I'm aware) disclosed what it said. Separately, Moynihan disclosed to the press (or so it was reported) that he had thought about putting Countrywide into bankrupcy but decided against it due to the harm it might bring to their reputation. Well, perhaps in blocking the bond consent issue it's a signal that now he's serious and willing to go that step.