Official Lance Armstrong Thread: Part 3 (Post-Confession)

[thehog]

Oh yeah. The super amazing profound topic of wildly speculating about Armstrong's financial situation when there are a f@ckton of unknows. Did he invest the $? Make tons off those investments? Loose his shirt? Stash it in hidden accounts long ago? Spend it on hookers and blow? No one here knows.

Yeah, pulling numbers out of ones' *** about Armstrong's financial situation, then arguing about it in this super serious way is a real nobel pursuit. "My *** numbers are right and your *** numbers are wrong!"

God, wouldn't want to interfere with that!!

Merckx index introduced the subject matter. Why avoid the topic he introduced? If you disagree with me, state why rather than attack.

I'm not actually introducing any numbers. Just pointing out the numbers posted by Merckx index cannot possibiliy be finite. It's not possible.

Incidental and unrelated expense cannot be used to draw down on the SCA credit. It's doesn't work like that. You know this as well.

 

[Merckx index]

Merckx index introduced the subject matter.

Yes, I?m the one who brought this issue up again. I think you have a right to reply. I don?t necessarily agree with your view, and Bluenote might be right that there are too many unknowns to make speculation worth it, but since RR has felt he could speculate, I think it's fair game to discuss in the Clinic. People who think all speculation is over the top are free to ignore.

 

[thehog]

Yes, I?m the one who brought this issue up again. I think you have a right to reply. I don?t necessarily agree with your view, and Bluenote might be right that there are too many unknowns to make speculation worth it, but since RR has felt he could speculate, I think it's fair game to discuss in the Clinic. People who think all speculation is over the top are free to ignore.

Agreed. There's a lot of speculation because we don't know Armstrong's total income for a given year nor his expenses thus his tax burden.

The point I was raising was from a pure accountancy point of view that if you were to conduct a financial analysis on the SCA alone the entire amount would be seen as income in a given year. You wouldn't subtract unrelated expenses front that amount. You'd add it to all income streams for that year, deduct expenses from the total amount and conclude the tax owned.

I hope that makes sense?

Additionally management fees and "performance coaches" for a professional athlete would be a tax deduction not deducted from the SCA credit. Those unrelated items would in fact reduce the tax burden in a given year (if declared).

 

[MarkvW]

Oh yeah. The super amazing profound topic of wildly speculating about Armstrong's financial situation when there are a f@ckton of unknows. Did he invest the $? Make tons off those investments? Loose his shirt? Stash it in hidden accounts long ago? Spend it on hookers and blow? No one here knows.

Yeah, pulling numbers out of ones' *** about Armstrong's financial situation, then arguing about it in this super serious way is a real nobel pursuit. "My *** numbers are right and your *** numbers are wrong!"

God, wouldn't want to interfere with that!!

You ought to stop your transparent attempt to bait hog into a ban.

 

[mewmewmew13]

Irony rears its head

 

[Berzin]

Enough with the bickering, please, and get back on-topic.

 

[D-Queued]

It is an interesting point, and a very interesting question, but really hard to quantify.

One would think a resource like Forbes would be pretty accurate, but as we know given the nature of the arbitration decision RR is right about the fact that arbitration award / penalty of the $10m is not likely to provide a tax deduction for Lance.

Fortunately, having to pay $10m, no matter what one's self worth is, should be enough to cause just about anyone some pain.

But to determine the net effect, we need to know the answers to basic questions like whether or not Lance actually files / filed his returns in Texas. Even if he does, how is his income reported and how is it sheltered? Someone with his kind of net worth, and that kind of income, is likely to have a fairly sophisticated personal tax structure.

As for deductions, he almost certainly did not declare Ferrari's coaching fee nor Motoman, nor his EPO prescriptions.

But, legal fees? Oh yeah. And, wouldn't it be great to know how big they are?

Dave.

 

[thehog]

Legal fees are tax deductible. They can be applied to the total income for a given year and most certainly would not be deducted from the SCA credit.

Defending against SCA has come 8 years after the actual event so not sure why there was an attempt to reduce the original SCA settlement amount with legal fees.

Applying standard tax rates is way too crude for a person who was earning $20m a year from several sources along with his own charity.

The speculation is fun. I assume the attempt was to present a worse case scenario but one should at least follow fundamental accounting rules when doing so.

 

[DirtyWorks]

Very interesting. And this seems to refute, again, the notion that LA might have come out ahead by investing the original award:

6% yield returns the following

2,500,000.00 0
2,625,000.00 1
2,756,250.00 2
2,894,062.50 3
3,038,765.63 4
3,190,703.91 5
3,350,239.10 6
3,517,751.06 7
3,693,638.61 8

No inflation discount in those numbers and most importantly, lawyer fees surely turned the initial reward into a voracious money pit bigger than a large boat, or a Specialized bicycle.

On the numbers alone, there's no way the initial fraud paid for itself. But!!!!! SCA still has to be paid. I think this will be another slow grind even after appeals are exhausted. He's broke! That vacation home is... not his .... or something....

 

[Scott SoCal]

Perhaps you should let it go and just discuss the content.

Get back to topic please & stop avoiding what was posted.

There's no content.

Please stop posting garbage.

 

[thehog]

6% yield returns the following

2,500,000.00 0
2,625,000.00 1
2,756,250.00 2
2,894,062.50 3
3,038,765.63 4
3,190,703.91 5
3,350,239.10 6
3,517,751.06 7
3,693,638.61 8

No inflation discount in those numbers and most importantly, lawyer fees surely turned the initial reward into a voracious money pit bigger than a large boat, or a Specialized bicycle.

On the numbers alone, there's no way the initial fraud paid for itself. But!!!!! SCA still has to be paid. I think this will be another slow grind even after appeals are exhausted. He's broke! That vacation home is... not his .... or something....

Armstrong's fraud aside;

The original settlement was $5m plus $2.5 in legal fees and costs for a total $7.5m.

How do one get themselves to $2.5m? Armstrong's legal fees were paid by SCA in 2006, new legal expenses are deductable but only due since he has only been fighting this case from 2012 onwards.

Using your example of 6% yield on the 9 years of $7.5m is $12m.

Tax would be due on the original settlement minus deductable expenses. Tax would also be due on any interest gained from the total sum after expenses are deducted year on year.

Sheltering and other methods of tax deferment would also be possible but we'll most likely never know.

Again fraud aside and what it might cost him in the end but it certainly hasn't been a loss maker.

For SCA, yes, as they've lost the ability to earn interest/profit from the $7.5m they gave away in the first place - they gambled $5m from Armstrong's original $465,000 policy payment and ended up paying $7.5m and gave it away for a very long time.

Giving money away is never smart.

 

[MarkvW]

Legal fees are tax deductible. They can be applied to the total income for a given year and most certainly would not be deducted from the SCA credit.

Defending against SCA has come 8 years after the actual event so not sure why there was an attempt to reduce the original SCA settlement amount with legal fees.

Applying standard tax rates is way too crude for a person who was earning $20m a year from several sources along with his own charity.

The speculation is fun. I assume the attempt was to present a worse case scenario but one should at least follow fundamental accounting rules when doing so.

What good does tax-deductibility bring you if you're not earning any money?

 

[thehog]

What good does tax-deductibility bring you if you're not earning any money?

Between 2006 and Jan 2012 he was still earning.

And we can only assume he is still earning interest and returns on the original $7.5m. That would be tax deductable. But we'll probably never know.

You can in theory defer deductions to a later date and apply it against capital gain or an asset sale etc. but again we'll never know unless he wants to tell us.

You don't lose tax deductibility. It will always be applied when you have income to apply it against.

 

[ChewbaccaD]

It is beyond stupid to suggest that Lance paying $10 million, assuming that happens, is not painful to his current financial situation. It is also pitifully stupid to suggest that past earnings offset the pain to his current fiscal state.

 

[thehog]

It is beyond stupid to suggest that Lance paying $10 million, assuming that happens, is not painful to his current financial situation. It is also pitifully stupid to suggest that past earnings offset the pain to his current fiscal state.

No one has suggested it wouldn't be painful. It will painful for Lance. Just as painful as it was for SCA giving up $7.5 in the first place for 9+ years.

Perhaps read the content prior to shooting from the hip.

 

[ChewbaccaD]

It's as if some people have never read their own TrollKrafted posts...

Pretending you didn't read your posts that said exactly opposite of what you just said is more TrollKraft...that's double TrollKraft.

 

[thehog]

It's as if some people have never read their own TrollKrafted posts...

Perhaps just stick to the content rather than getting personal. If you disagree then state why rather than just attacking people.

So back to the content, please.

 

[Scott SoCal]

Perhaps just stick to the content rather than getting personal. If you disagree then state why rather than just attacking people.

So back to the content, please.

Or everybody could just skip backwards three or four hundred pages to read your same drivel.

 

[ChewbaccaD]

One person counters his own argument from previous posts, pretends he never wrote the original posts, and then pretends he is being attacked. He attacked himself. The TrollKraft train is a'rumblin' down the tracks again.

 

[thehog]

One person counters his own argument from previous posts, pretends he never wrote the original posts, and then pretends he is being attacked. He attacked himself. The TrollKraft train is a'rumblin' down the tracks again.

You are avoiding the content. That tells me you have no argument. Personal attacks occur in those circumstances. It's very obvious.

If you disagree with the statements made, then argue the point rather than getting personal. Its very straight forward.

Back to the content, please.

 

[ChewbaccaD]

Watching a troll argue with himself:

 

[Afrank]

Everyone please stop with the insults and off topic posts, thank you.

 

[D-Queued]

It is beyond stupid to suggest that Lance paying $10 million, assuming that happens, is not painful to his current financial situation. It is also pitifully stupid to suggest that past earnings offset the pain to his current fiscal state.

Agreed.

But, there remains an interesting question. Could Lance truly have generated enough income on the original settlement ($5m + $2.5m) to cover the penalty?

Thus, please allow me to provide the following analysis:

There are a couple of approaches we can take to consider the question of whether or not Lance earned enough from the original payment to cover the $10m penalty.

These approaches are based on different assumption scenarios. Those assumptions required because we don?t know how much the net amount was to Lance nor how his tax filings have been structured.

In the first case, we can consider the $7.5 as entirely accruing to Lance and then guessing at his legal and related costs.

In the second case, we can start with $5m as the $2.5m was assessed by the Arbitration panel to cover Lance's legal and related costs to arriving at that settlement.

However, for the purposes of this discussion, we need to view this as an isolated situation. In neither case should we apply his ongoing legal costs or his other sources of income and expense as these are extraneous to the "pot of gold" that he has (not) amassed from the original SCA settlement.

SCA 2006 Payment

Settlement Amount:
$7.5m

Case #1
Less:

Direct Tax-Deductible expenses
- Legal fees $500k+
- Commissions/Agent fees 10%+

Income tax (35% Federal, no Texas state tax): $2.1875m

Income after tax, before extraordinary
$4.06m

Ferrari fee: $465,000 * **
(Source: http://www.businessinsider.com/ital...rong-to-banned-doctor-michelle-ferrari-2012-6)

Net income after tax and expenses:
$3.6m

SCA 2015 Decision
$10m

Average pre-tax return rate required between 2006 and 2015 to meet 2015 settlement obligation:
12%

BUT, Lance would have some tax payable on the investment income. As noted above, it is hard to know exactly what that would be. For the sake of illustration, we can use the 35% Marginal Rate (even though this has been increasing to 39.6%, i.e. IRR * 1/.65)

Average post-tax return rate required:
18.5%

Case #2:

As above, but starting with $5m and not including Legal fees related to the initial settlement.

Gross: $5m
Commissions/Agents Fees 10%
Net before tax: $4.5m
Tax: $1.575m
Extraordinary (Ferrari) after tax: $.465m * **
Net after tax & Extraordinary: $2.96m

Avg pre-tax return required to meet 2015 obligation:
14.55%

Avg post-tax return required:
22.3%


Based upon these two cases, it appears that Lance would require something on the order of a 20% annual return if he had wisely invested the original settlement amount.

While 20% is not outside the realm of possibility, there weren't a lot of folks making that kind of financial return during this period of global recession.

Dave.


NOTE:

*The Ferrari payment was clearly 'under the table' and unlikely to have been claimed as a tax deduction in Lance's tax return. Thus, the full amount of the fee, and not a post-tax cost, should be applied to the settlement amount

**Ferrari's fee was based upon a percentage of Lance's (net) winnings.

Thus, we can also backwards calculate Lance?s take from the settlement based upon the size of Ferrari's fee. Assuming that Ferrari was paid at a 10% rate, then Lance's net bonus before tax would have been $4.6m. This is pretty close to Case #2.

 

[Scott SoCal]

Agreed.

But, there remains an interesting question. Could Lance truly have generated enough income on the original settlement ($5m + $2.5m) to cover the penalty?

Thus, please allow me to provide the following analysis:

There are a couple of approaches we can take to consider the question of whether or not Lance earned enough from the original payment to cover the $10m penalty.

These approaches are based on different assumption scenarios. Those assumptions required because we don?t know how much the net amount was to Lance nor how his tax filings have been structured.

In the first case, we can consider the $7.5 as entirely accruing to Lance and then guessing at his legal and related costs.

In the second case, we can start with $5m as the $2.5m was assessed by the Arbitration panel to cover Lance's legal and related costs to arriving at that settlement.

However, for the purposes of this discussion, we need to view this as an isolated situation. In neither case should we apply his ongoing legal costs or his other sources of income and expense as these are extraneous to the "pot of gold" that he has (not) amassed from the original SCA settlement.

SCA 2006 Payment

Settlement Amount:
$7.5m

Case #1
Less:

Direct Tax-Deductible expenses
- Legal fees $500k+
- Commissions/Agent fees 10%+

Income tax (35% Federal, no Texas state tax): $2.1875m

Income after tax, before extraordinary
$4.06m

Ferrari fee: $465,000 * **
(Source: http://www.businessinsider.com/ital...rong-to-banned-doctor-michelle-ferrari-2012-6)

Net income after tax and expenses:
$3.6m

SCA 2015 Decision
$10m

Average pre-tax return rate required between 2006 and 2015 to meet 2015 settlement obligation:
12%

BUT, Lance would have some tax payable on the investment income. As noted above, it is hard to know exactly what that would be. For the sake of illustration, we can use the 35% Marginal Rate (even though this has been increasing to 39.6%, i.e. IRR * 1/.65)

Average post-tax return rate required:
18.5%

Case #2:

As above, but starting with $5m and not including Legal fees related to the initial settlement.

Gross: $5m
Commissions/Agents Fees 10%
Net before tax: $4.5m
Tax: $1.575m
Extraordinary (Ferrari) after tax: $.465m * **
Net after tax & Extraordinary: $2.96m

Avg pre-tax return required to meet 2015 obligation:
14.55%

Avg post-tax return required:
22.3%


Based upon these two cases, it appears that Lance would require something on the order of a 20% annual return if he had wisely invested the original settlement amount.

While 20% is not outside the realm of possibility, there weren't a lot of folks making that kind of financial return during this period of global recession.

Dave.


NOTE:

*The Ferrari payment was clearly 'under the table' and unlikely to have been claimed as a tax deduction in Lance's tax return. Thus, the full amount of the fee, and not a post-tax cost, should be applied to the settlement amount

**Ferrari's fee was based upon a percentage of Lance's (net) winnings.

Thus, we can also backwards calculate Lance?s take from the settlement based upon the size of Ferrari's fee. Assuming that Ferrari was paid at a 10% rate, then Lance's net bonus before tax would have been $4.6m. This is pretty close to Case #2.

The thought that goes in to this is fun... but it could be any number of thousands of scenarios.

As an example, let's just say that Lance plopped down his SCA after tax settlement into something where a "buy-and-hold" strategy was the order of the day. Let's also assume that it was a few company stocks of which he didn't sell or perhaps hasn't sold.

In this scenario the tax on investment income is out the window... or if sold and held more than 2 years would be LT Cap Gains which has only recently increased from 15 to 20%.

But your larger point remains.

 

[thehog]

That's a really good analysis, well done. Thanks for putting the thought and time into it.

A few points though on a cursory look through;

The $2.5m award for legal fees and costs would not be taxable. Only the $5m settlement fee would be. If you are being restored costs to your previous position prior to the litigation those costs are restored in full and you're not taxed. It's a little more complex than this but some of the reasons the award and the "costs" are separated is because they will be treated differently by the IRS.

Interest income whilst taxed at Federal income rates can be deferred and invested to avoid income tax due to the amounts they earn. Although using a federal rate for the example given is fairly normal.

Management fees/commissions are tax deductible but these would have been a regular expense regardless of a SCA paying out or not. Nevertheless the "costs" award by SCA would have covered these off, they would not be due a second time around. You really shouldn't be subtracting those from the SCA credit as SCA paid "costs".

I'm unconvinced on the Ferrari fee. I don't disagree that it most likely wasn't declared but I don't see it that it would be paid in the manner which is was suggested. The article itself says it wasn't "confirmed". If it was made the fact that it was shoveled through Swiss bank accounts gives rise that it was pre-tax income that never saw the light of day in the US.

Whilst the analysis is good the numbers are off.