Stakes Are Higher : New Tax Bill Fuels Rush to Sign Deals

Matthew Jenkins, Ben Maese and Bob Anderson have a common mission: to complete financial deals before year-end, when many current tax breaks expire.

Jenkins, president of a real estate and broadcasting company in Fullerton, is increasing his charitable donations to get a higher tax deduction. Maese, a San Luis Obispo accountant, is rushing to buy a rental duplex to lock in favorable depreciation write-offs. And Anderson sold his Carson City, Nev., manufacturing business to get a lower capital gains tax on his profit from the sale.

“Firms have been pursuing buying us for some time over the last several years,” Anderson said. “The tax law change was an incentive for us to get more serious about letting them catch us.”

Jenkins, Maese and Anderson are among millions of companies and individuals nationwide hurrying to buy or sell assets, make charitable contributions, pay medical bills or other expenses or follow other financial strategies to take advantage of the old tax law or prepare for the new one.

Large Stakes

Similar rushes in past year-end periods have taxed the creative efforts of businesses and individuals. But, because of the massive changes set forth by the sweeping new tax bill signed by President Reagan last month, the stakes in this year’s rush may be the largest in decades.

“This isn’t like any other year,” William G. Brennan, publisher of a Valley Forge, Pa., tax-planning newsletter, said in a recent issue. “Massive tax reform has created an atmosphere where failure to properly plan can cost a bundle.”

Thus, many businesses and individuals are trying tax-planning schemes not common in previous years. Businesses are rushing to sell office buildings or to merge before capital gains taxes rise next year. Some are changing from corporations into partnerships to lower their tax rates.

Consumers are buying cars, boats and other big-ticket items before sales-tax deductions expire. They are taking out home equity loans to pay off auto loans or credit card loans because interest deductions on those borrowings will be phased out.

Higher Contributions

Others are implementing year-end tax strategies far more extensively than in the past. Some taxpayers are boosting charitable contributions far above what they normally give or paying state and local taxes, magazine subscriptions and financial planning fees much further in advance than before. Accountants and tax attorneys say they are as busy as ever.

“We felt this would really be the year to take a big tax deduction. We are still in the 50% tax bracket,” said the wife of an Encino businessman who is donating $100,000 this year to a trust for his local synagogue, far more than the $10,000 he normally gives.

However, in their haste to close transactions before New Year’s Day, some companies and individuals may be getting into bad deals, financial experts say.

Those rushing to sell office and apartment buildings may drive down prices. Some individuals are investing in tax-shelter schemes that the Internal Revenue Service may nix or that may end up making them pay more taxes instead of less.

Some tax-oriented investments, such as for rehabilitation of historic buildings, may provide generous tax credits now but could produce losses later. And consumers buying big-ticket items just to save taxes may be missing out on lower prices next year when demand for those items subsides.

‘May Get a 10% Drop’

“It may be better to wait until next year when prices fall,” said Larry Biehl, a director of Bailard, Biehl & Kaiser, a San Mateo financial planning company. “You give up deducting the 6% sales tax but you may get a 10% drop in price.”

One of the most significant new twists in year-end tax planning stems from the increase in the capital gains tax to a maximum of 28% next year from 20% now, and from various other changes in taxation of rental properties and corporations. The result: a flurry of corporate mergers and sales of stocks, buildings and other assets.

Wall Street experts say many investors sold stocks in September, when stock market averages plummeted, in part to lock in lower capital gains taxes. Several mutual funds--which have gained in value this year because of the strong stock market--are planning special payments of capital gains to shareholders so they can have them taxed at a lower rate.

“Just about all funds are doing it,” said a spokesman for Los Angeles-based Capital Research & Management Co., which manages several mutual funds.

Extended Depreciation

The rash of sales of office buildings and apartments also is being spurred by changes in depreciation rules that will stretch write-offs over longer periods for buildings acquired after year-end. The current 19-year depreciation schedules will be extended to 27.5 years next year for residential rental properties and 31.5 years for office rental properties.

Accordingly, several major office buildings have been sold or placed on the market in recent weeks. BankAmerica and Atlantic Richfield sold their downtown Los Angeles office complex, and Exxon and the Rockefeller Group placed their Midtown Manhattan office tower on the auction block.

Stephen E. Roulac, president of a San Francisco real estate consulting firm, predicted that 50 office buildings valued at $100 million or more will be sold in the second half of this year, only 15 short of the number sold all last year. However, as a result, he said, “you’re definitely seeing a sharp moving down in prices.”

A similar drop in prices has hit apartments, spurring some buyers into the market. JMB Realty Corp., a Chicago-based real estate investment company that sold off 25,000 apartment units in the last five years, now is buying, President Neil G. Bluhm said.

‘Double-Edged Sword’

The rush to buy and sell has heightened the stakes in the bargaining process. Ben Maese, the San Luis Obispo accountant trying to buy a duplex, said he is willing to pay more just to close the deal by year-end. But the seller cannot go too far in holding out for a higher price because, as Maese said, “He’s trying to close the deal before year-end too, to get the lower capital gains taxes. So it’s a double-edged sword.”

The rush of corporate takeovers and liquidations is being fueled not only by the rise in capital gains tax, but also by a major change in the tax law that will tax corporations at the corporate level if they liquidate or sell themselves, as well as at the shareholder level. Now, only shareholders are taxed.

A dizzying number of megadeals have been announced in the last month alone. Wickes Cos. plans to acquire Collins & Aikman for $1.16 billion; American Hoechst plans to buy Celanese Corp. for $2.85 billion, and Campeau Corp. is buying Allied Stores for about $3.6 billion, to name just a few.

Large companies planning to liquidate include Transworld Corp., which is selling its Hilton International hotel subsidiary, and SFN Cos., which is selling its Scott, Foresman & Co. textbook publishing unit and another publishing subsidiary.

More Deals Closing

“We have had more deals scheduled to close in November or December than in all of the 10 months prior to this,” said Richard M. Rodnick, chairman of Geneva Cos., a Costa Mesa investment banking firm that handles mergers of medium-size firms. “This is purely a tax-driven phenomenon.”

But, although merger fever is a new twist in this year’s year-end tax rush, some old staples in the tax-planning game may be more popular than ever.

Such could be the case with charitable giving. Lower personal tax rates next year will reduce the tax savings for giving, and non-itemizers next year can no longer deduct charitable donations.

And, of key importance to the wealthy, capital gains from assets such as property or stocks donated to charity may be taxed next year under the alternative minimum tax. This year, a taxpayer giving assets to charity does not have to pay capital gains taxes on them.

Consequently, many wealthy taxpayers are hiking donations of artworks, real estate, stocks or other assets. Many charitable organizations have initiated special fund-raising drives, hoping to capture last-minute donations.

Double, Triple Gifts

Although no one knows yet for sure how much in contributions has come in on a national scale, several charities report that wealthier donors are giving double or triple what they normally give, some by setting up charitable trusts or foundations.

The California Community Foundation, an umbrella for nearly 200 philanthropic funds, expects to receive between $20 million and $40 million in gifts this year, up from between $5 million and $7 million in a normal year, Jack Shakely, the foundation’s president, said.

Matthew Jenkins, the Fullerton real estate and broadcasting executive, this year is donating, with his wife, $250,000 worth of real estate to a foundation they created to provide college loans for black students. Last year they gave $100,000 in real estate.

However, it is not clear whether less-affluent taxpayers are giving more, said Roger Schwarz, a Los Angeles financial adviser. “People that don’t have a pattern of substantial giving aren’t rushing to change their pattern just because they will save some taxes,” he said.

And fund-raisers and tax advisers are concerned that this year’s Santas will become next year’s Scrooges when tax rates fall. “People are bunching up gifts as much as they can,” Douglas K. Freeman, a Los Angeles tax attorney, said. “I hope that doesn’t cannibalize gifts to be made in the future.”

A lot of taxpayers and companies are also scrambling to use certain tax breaks that will expire or become less generous next year.

Boat Sales Up

One such break is the deduction for sales taxes, which will expire next year. Dale Johnston, owner of Johnston Yacht Sales in Newport Beach, said his boat sales are 25% higher because of tax considerations. “It’s definitely a factor,” he said.

Judith Martindale, a San Luis Obispo financial planner, said she has advised several clients to buy cars or other major items before Dec. 31 and recently bought a $26,000 BMW herself. “I had been planning to buy next year,” she said.

The scaling back of deductions for individual retirement accounts and 401(k) company-savings plans also is spurring taxpayers to make maximum contributions to those plans this year, investment advisers say. A number of savings institutions nationwide have initiated marketing campaigns designed to coax investors to put the maximum $2,000 into their IRAs before that tax break is scaled back for higher-income taxpayers.

Taking deductions for medical expenses also will be more difficult next year, prompting taxpayers to get medical work and drugs received and paid for by Dec. 31. Unreimbursed medical expenses will only be deductible to the extent that they exceed 7.5% of adjusted gross income, compared to 5% this year.

Plastic Surgery

Dennis P. Thompson, a Santa Monica plastic surgeon and president of the Los Angeles Society of Plastic Surgeons, said several of the organization’s members report that patients are coming in for tax reasons. Some members also report patients paying this year for work to be done next year.

Donald Levine, a Sherman Oaks pharmacist, said he is seeing the usual year-end surge in buying of pharmaceuticals. “But it’s hard to tell whether they’re doing it because their deductibles have been met on their insurance or if they’re trying to beat Uncle Sam,” he said.

Cutbacks in deductions for magazine subscriptions, union and professional dues, accounting fees and other miscellaneous expenses are also spurring year-end activity. The new tax law will allow these expenses to be deducted only to the extent that they exceed 2% of adjusted gross income. They are fully deductible now.

As a result, scores of magazines, newsletters and other publications are pushing advance subscriptions. One investment newsletter, Forecast & Strategies, is even offering “lifetime” subscriptions for $995, contrasted with the normal $95 one-year subscription. Forbes magazine has been urging readers to get “maximum tax savings while they last.” Result: Advance subscriptions are up 55%, spokesman Don Garson said.

Earlier Work Requested

Meanwhile, accountants and financial planners report that more clients want work that normally would be done next year performed and paid for by year-end. “Most of my clients are doing it,” said Steven B. Enright, New York director of financial planning for Seidman Financial Services.

Taxpayers are flocking to a number of investment products favored by the new tax law.

One such product is the home equity loan. Consumers see them as a way to pay off other debts, like car loans or credit card loans, because deductions for interest on non-mortgage consumer loans will be phased out.

Trying to capture a piece of this lucrative market, banks in several states in the Southeast and Northeast are waging furious marketing wars. Some are waiving fees, which can run as high as $850, and others are cutting initial interest rates on such loans to near rock bottom. First Florida Bank in Tampa, for example, has cut its introductory rate to a meager 2.9%, and Equibank in Pittsburgh has cut its initial rate to 4.9%. Of course, those initial rates will probably rise later because these loans carry adjustable rates.

Home Equity Loans

“The home equity loan is the darling of 1987 for the banking industry,” said Robert Heady, publisher of Bank Rate Monitor, a North Palm Beach, Fla., newsletter. “By the end of next year, every major bank and thrift in the country will be marketing home equity loans.”

“We have to pull people out of some other areas just to process applications,” said Patrick W. Harrison, executive vice president for consumer credit at Nashville, Tenn.-based Commerce Union Bank, which has cut its introductory rate to 6.9% and has waived fees.

Another product undergoing a marketing surge is single-premium whole life insurance, which was left relatively intact by the new tax law. Investors typically pay one-time premiums between $5,000 and $50,000 for these policies and get death benefits and investment returns not subject to taxes unless the policy is cashed in.

A number of insurance companies, including Beneficial Insurance Group, Transamerica Occidental Life and Metropolitan Life, said they have introduced or will soon introduce new single-premium life products tailored to capitalize on tax laws.

New Municipal Bonds

Investors are also buying up new versions of tax-exempt municipal bonds, which tax revision preserved as one of the few remaining legitimate shelters. A number of brokerage firms, including Salomon Bros., are offering “stripped” municipal bonds similar to the so-called zero-coupon Treasury bonds that have gained wide popularity in recent years.

Dealers create stripped bonds by splitting off the periodic interest and principal payments of conventional bonds and selling them as separate securities. Investors buy the bonds at a deep discount from face value and earn their gains from the price they receive at maturity. Such bonds are seen as ideal for saving for retirement or college expenses.

Meanwhile, mutual-fund companies are offering additional funds investing in the municipal bonds of particular states, providing exemption from state as well as federal tax for residents of the state involved. At least a dozen of these “double tax-exempt” funds have been introduced in the last two months, including four investing in California tax-exempt bonds, said Reg Green, editor of Mutual Fund News Service, a newsletter published in San Francisco.

Limited Partnerships Suffer

But, although municipal bonds and home equity loans are gaining popularity, limited partnerships that act as tax shelters are losing adherents. Tax revision kills many of their tax advantages.

As a result, sales of some tax shelters have virtually collapsed since Reagan signed the tax bill in early October, when certain provisions favoring tax shelters ended. Sales of cattle-feeding shelters, for example, totaled $135.4 million in October last year but only $100,000 in October this year, said Fuhrman Nettles, a vice president at Robert A. Stanger & Co., a Shrewsbury, N.J., tax advisory firm.

Sales of cattle shelters, like other shelters, “went to hell in a hand basket,” Nettles said. “People aren’t buying.”