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May 20, 2013
Joe and Marilyn (and Apple)
by George White

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By George White

George White (Photo by Derek Squires)George White is a Tax Notes contributing editor and retired national tax partner at Ernst & Young LLP. Recently he was with the American Institute of Certified Public Accountants. An attorney and CPA, White is the author of several publications on consolidated returns and tax accounting and is an adjunct professor at the George Washington University School of Business, where he teaches graduate courses in tax accounting and corporate tax.

A recent nontax court case shed light on how Apple is really handling its "locked-out" foreign earnings.


The Miami Heat's recent 27-game winning streak invariably led to comparisons with probably the best-known streak in sports: Joe DiMaggio's 56-game hitting streak in 1941, a feat that gripped the attention of baseball fans for two months. (Here I'll be relying on my dad's recollections.)

The games, and the country, were obviously vastly different then. There were only 16 major-league teams (eight in each league) and none located west of St. Louis; team travel was exclusively by train; there were few night games; and perhaps most significantly, there was no television, no Internet, and thus no SportsCenter. Baseball fans had to scramble for the box scores in the next morning's newspaper to find out if DiMaggio had kept the streak going: 35 games, 40 games, 45 games (surpassing the previous mark of 44 set before the turn of the century and later equaled by Pete Rose in 1978), 50 games, and 55 games. The streak continued before coming to an end in Cleveland on July 17, 1941. Unaffected by the interruption, DiMaggio proceeded to hit safely in the next 17 games.1 Hitting streaks were nothing new for DiMaggio. Playing in the minor leagues for his hometown team, the San Francisco Seals of the Pacific Coast League, DiMaggio once hit safely in 61 consecutive games.

Consistency was a hallmark of DiMaggio's career. As my dad used to say, "Joe hates to strike out." That made him a rarity among sluggers. Until his final injury-plagued season of 1951, DiMaggio had more career home runs than strikeouts.2 No other slugger has that career profile.3 A previous column described Stan Musial's unique batting stance. While not as unusual as Musial's, DiMaggio's stance was definitely different.4 He was a flat-footed hitter. Every kid who has ever tried to hit a baseball has been told to "step into the pitch." Not Joe. Once he took his wide-spread stance in the batter's box, he never moved his front foot toward the pitcher. Unable to generate power from forward body movement, DiMaggio relied on wrists and forearms that were as strong as a Panamanian jockey's, strength developed pulling in the nets on his father's fishing boat during the off-season.

While the Heat's streak was ending in the sports world, another was continuing unabated in the tax world -- the accumulation of earnings by U.S. multinational corporations (MNCs) in their foreign subsidiaries. At last count, the balance was approaching $1.7 trillion.5 That phenomenon is usually referred to as the lockout effect, a phrase that conjures up images of hoards of dollars trapped overseas, like a latter-day Charlie on the Metropolitan Transit Authority (MTA).6 In less dramatic terms, the lockout effect is a consequence of an integral feature of U.S. corporate tax law: the deferral principle.7 Simply stated, U.S. tax on the earnings of a controlled foreign corporation is generally deferred until the earnings are repatriated.

Joe DiMaggio, New York Yankees, 1941 (Associated Press)But a recent court battle casts a decidedly different light on those seemingly forlorn dollars. Earlier this year, David Einhorn, the billionaire managing partner of the hedge fund Greenlight Capital, successfully sued Apple in federal district court in Manhattan.8 Einhorn's victory prevented Apple from implementing a proposal to curtail its power to issue preferred stock. Apple wanted shareholder approval of an amendment to its charter that would have required shareholders to agree before Apple could issue preferred stock.

Even though Apple's motivation for the proposal was murky, the effect would have been clear enough: It would have deprived Apple's board of directors of unilaterally issuing preferred stock (aka "blank check preferred"). Einhorn wanted Apple to issue a preferred stock dividend with a healthy annual cash payout. In Einhorn's view, that would unlock value in Apple stock by implementing a systematic distribution of its cash. Einhorn thought distributions to shareholders would be an appropriate use of Apple's staggering cash reserves of almost $140 billion, a sum greater than the total market cap of Intel.9 Einhorn argued that Apple is sitting on so much excess cash that it's investing in U.S. government securities. Apple argued that Einhorn's suit was an unwarranted intrusion on its corporate prerogatives.10

Einhorn's chutzpah so irritated Martin Lipton of Wachtell, Lipton, Rosen & Katz, who is the dean of the Wall Street corporate bar and the creator of the "poison pill" defense, that he denounced it in a memorandum to clients.11 Nevertheless, the Manhattan federal court decided in Einhorn's favor. Apple relented, taking the preferred stock proposal off the agenda for the annual meeting. Apple apparently learned a lesson from its losing encounter with Einhorn, later announcing that it intended to increase its dividends and to engage in a stock buyback program.12

Marilyn Monroe, Korea, 1954 (SNAP/ZUMAPRESS/Newscom)At the same time that Apple is adding to its cash accounts to the tune of more than $117 million a day,13 it's also a leading member of the lobbying effort to persuade Congress to enact another repatriation holiday.14 In 2004 Congress enacted a temporary window allowing MNCs to bring home their CFC earnings at a sweetheart rate of 5.25 percent.15 One of the lobbyists' arguments is that bringing home all that foreign cash will enable MNCs to help grow the domestic economy. So it's instructive to ask where all that foreign cash is sitting these days, while hopefully awaiting a second round of congressional largesse. According to a recent Wall Street Journal story,16 the money's not that far from home. In fact, a lot of it is already within reach in U.S. bank accounts. (Seriously, you didn't think MNC corporate treasurers were opening shilling accounts in the First National Bank of Mogadishu, did you?) And a lot of the foreign cash is invested in U.S. government securities, just like Apple is doing today.17

So who needs the Chinese to buy our debt when we've got MNCs?


********

A favorite DiMaggio anecdote has nothing to do with his on-field records. After his retirement following the 1951 season, Joe was famously, if briefly, married to Marilyn Monroe, who apparently had little appreciation for his iconic stature in the sports world. During the Korean War, Marilyn went to the war zone to entertain the troops, who mobbed her performances. The story goes that on returning home, she was still excited over her reception by the GIs: "Oh, Joe," she enthused, "do you know what it's like to be cheered by 50,000 people?" "Yeah," Joe replied, "as a matter of fact, I do."

FOOTNOTES

1 Hitting safely in 73 out of 74 games is also a record, even if not well known.

2 Until his final year, DiMaggio had 349 home runs and 333 strikeouts. Playing virtually on one leg that season, Joe had 36 strikeouts and only 12 homers, giving him a career total of 361 homers and 369 strikeouts.

3 For comparison, the career totals for Babe Ruth were 1,330 strikeouts and 714 home runs; for Ted Williams, 709 strikeouts and 521 home runs.

4 Interestingly, two Hall of Famers besides DiMaggio had similar "flat-footed" stances: Ralph Kiner (369 home runs) and Paul Molitor (3,319 hits).

5 Kate Linebaugh, "Firms Keep Stockpiles of 'Foreign' Cash in U.S.," The Wall Street Journal, Jan. 22, 2013.

6 A 1959 hit song by the Kingston Trio lamented the plight of Charlie, doomed to ride forever on Boston's mass transit system, then known popularly as the MTA (now known as the Massachusetts Bay Transportation Authority (MBTA)):


    Well, let me tell you of the story of a man named Charlie on a tragic and fateful day.

    He put ten cents in his pocket, kissed his wife and family, went to ride on the M.T.A.

    Chorus:

    Well, did he ever return? No, he never returned and his fate is still unlearned. (What a pity! Poor ole Charlie. Shame and scandal. He may ride forever. Just like Paul Revere.)

    He may ride forever 'neath the streets of Boston. He's the man who never returned.

    Charlie handed in his dime at the Kendall Square Station and he changed for Jamaica Plain.

    When he got there the conductor told him, "One more nickel." Charlie couldn't get off of that train.


Today, Charlie's fate is preserved in the name of the fare card of the MBTA, called the "Charlie Card."

7 Deferral is an inevitable consequence of the U.S. classical system of corporate taxation in which a corporation is taxed separately from its shareholders.

8 Greenlight Capital LP v. Apple Inc., Nos. 13-CIV-900, 13-CIV-976 (S.D.N.Y. 2013).

9 Michael J. De La Merced, "Einhorn Sues Apple Over Plan to Discard Preferred Stock," The New York Times, Feb. 7, 2013.

10 It's hard to argue that Apple has been mismanaged since it brought Steve Jobs back into power as its "interim CEO," or "iCEO" -- yep, that's one theory about where that little "i" in the Apple products comes from.

A small sliver of Jobs's genius recently made the news: The iTunes store has sold more than 25 billion songs since Jobs created it 10 years ago. In addition to revolutionizing the music business, Jobs killed Sony's Walkman by pairing iTunes with the iPod.

11 William Alden, "A Warning on Abuses of Shareholder Power," The New York Times, Feb. 26, 2013.

12 Rather than use its cash to fund the stock buy-back, Apple has recently issued $17 billion in debt securities, the largest-ever corporate debt issuance. Norris, "Apple's Move Keeps Profit Out of Reach of Taxes," The New York Times, May 2, 2013. At first glance, Apple's move would appear to lend support to the argument for another repatriation holiday. But note that under the previous repatriation holiday, Apple would not have been permitted to use its repatriated funds for dividends and stock redemptions. Notice 2005-10, 2005-1 C.B. 474, sections 6.04 and 6.05.

13 See supra note 9.

14 David Saleh Rauf, "Guess Who's Pushing for Tax Holiday?" Politico Pro, Apr. 5, 2012.

15 American Jobs Creation Act of 2004, section 965. A special 85 percent dividends received deduction reduced the rate on CFC dividends to 5.25 percent (35 percent x [$100 - $85] = 5.25 percent).

16 See supra note 5.

17 See supra note 9.


END OF FOOTNOTES


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