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Shooting Down A Hyped-Up Story

Why would a journalist with a prestigious job at a respected outlet tell a misleading, exaggerated, hyped-up story?

For pretty much the same reasons anyone else might stretch the truth or embellish his accomplishments. The drive to acquire more money, more influence and more respect is a powerful motivating force. It leads individuals astray. It leads organizations astray too - more often, probably, than we recognize.

You may think this column is about NBC News anchor Brian Williams, but it isn’t. Williams’ situation is so simple, its driving causes so clear, that it scarcely merits a commentary of its own. A network news anchor is supposed to look and sound important. Back in 2003, when Williams was still rising into his position as the handsome face, baritone voice and polished hairstyle of NBC, broadcast custom dictated that he have his very own in-the-field war story. Walter Cronkite cast the mold when he went to Vietnam and pronounced the conflict an unwinnable stalemate, supposedly causing President Lyndon Johnson to despair. Dan Rather had his caricature-ready moment when he donned mujahedeen garb to report from the front of the Afghan war against the Soviets. Tom Brokaw more sensibly tossed on a windbreaker to cover the fall of the Berlin Wall. Television news is still television, and audiences, with the ratings and money they bring, tune in for drama.

So of course Williams was tempted to make his story more dramatic, shifting from being in the same convoy that took enemy fire to being in the same helicopter that did. His is an individual story of ego-driven blindness.

I am more disturbed by institutional blindness - a philosophy that can lead top-tier news organizations to produce junk and promote it as award-worthy journalism. And because journalism awards are handed out by other journalists, who are frequently impressed by top-tier news organizations, sometimes this junk actually goes on to win awards. This is a fairly regular occurrence at The New York Times.

Sunday’s Times devoted its best front-page real estate to a piece by Louise Story and Stephanie Saul headlined “Stream of Foreign Wealth Flows to Elite New York Real Estate.” A tagline ominously threatened that this is the first of a five-part series labeled “Towers of Secrecy.” Here is what the intrepid journalists of The New York Times discovered:

1. New York City has some very expensive real estate.

2. Very expensive real estate tends to be purchased by very wealthy people, a significant share of whom are foreigners.

3. Very wealthy people often value their privacy. Many prefer not to have their names associated with the purchase of, say, a $15 million condominium, when that information would then be accessible to every PAC, charity and franchise peddler. They also do not care to have menus for the local Chinese take-out place slid beneath their doors, which is one reason why access to these sorts of residences tends to be limited to people who live or have other business there.

Of course, this is not how The Times portrayed the findings of its exhaustive investigation. Here is how the newspaper put it (cue sinister music for the TV documentary): “ Behind the dark glass towers of the Time Warner Center looming over Central Park, a majority of owners have taken steps to keep their identifies hidden, registering condos in trusts, limited liability companies or other entities that shield their names. By piercing the secrecy of more than 200 shell companies, The New York Times documented a decade of ownership in this iconic Manhattan way station for global money transforming the city’s real estate market.”

The Time Warner Center consists of two skyscraper towers that were built, beginning in 2000, on the site of the old New York Coliseum. In the years before the Coliseum was torn down, my daughters were part of a group called Project Share, which delivered hot meals to homeless people near its doors. Nobody else lived there. Decide for yourself whether the new condos are therefore “transforming the city’s real estate market” in any sense other than that they created property for which people are willing to pay large sums of money.

And what about those trusts, LLCs and other so-called “shell companies?” First, let’s start with the label. I don’t know anyone who works in finance who would call an entity that holds assets worth millions of dollars, or tens of millions of dollars, a “shell.” A typical journalist could never create a shell of that sort. Some companies, like my own LLC, operate commercial enterprises. Others exist, and have always existed, to hold assets, directly or indirectly. One well-known example is Warren Buffett’s Berkshire Hathaway. Most of us who work with these entities call them “holding companies,” because that is what they do. I counted 39 references to “shell” entities in the Times piece. A Pulitzer jury might be impressed.

Why does anyone need a holding company to take title to a personal apartment? If you are Times reporter who lives in a rent-stabilized flat in Brooklyn, you don’t need one. In fact, the rent control rules in New York do not permit you to have one. So why do rich people use LLCs or trusts?

Any competent financial or estate planner would have been happy to explain the answer to the Times journalists. In most cases, it has nothing to do with hiding the actual owner or sources of funds used for the purchase. Even if the seller does not know the buyer’s identity, modern anti-laundering and anti-terrorism laws generally require banks that transmit the funds to make extensive inquiries. I can tell you from experience that the paperwork is considerable.

Mostly, we use holding entities because people die, and death creates a lot of complications when expensive property is involved. If you own a condominium and are not a New York resident, dying with a property in the Time Warner Center in your own name means your estate must undergo probate in New York. Your will becomes a public record, and there are costs and delays in transferring the property to your heirs. A nonresident’s holding company does not normally need to go through New York probate. Trusts typically avoid probate everywhere, including the owner’s home state.

Also, when you own such expensive property, you probably have household help - a housekeeper or two, or perhaps a home health aide if you are elderly and infirm. If you are paying them personally, things get sticky in the event of your death. Who is the employer that signs their next paycheck, or files the next quarterly payroll tax return, or pays the workers' compensation premium? A holding company provides better management continuity.

Then there is the risk of lawsuits if someone is injured in your apartment. A holding company is exposed only to the extent of what it owns, which is typically just the home itself. Other personal and business assets are shielded.

Finally, there are estate taxes. An American couple that has a $5 million condo and $5 million of other assets can generally avoid federal estate taxes (though if that condo is in New York, they will be subject to some state tax). But if the same couple are foreigners who reside abroad, and their only American asset is the condo, their heirs are likely to owe $2 million of federal estate tax - possibly as soon as the first member of the couple dies. And if the owners give that condo to a child, the gift will attract the same $2 million of federal tax.

The typical solution is for the foreigners to create a foreign holding company, which owns the American property directly or through an American holding entity. There is nothing nefarious about this type of planning. The laws were written as they are in order to facilitate foreign investment in all sorts of illiquid U.S. assets. As a byproduct, they may also shield the owners from financial abuse or political targeting in their home countries. Think of Venezuela or Argentina, for example.

The Times piece includes a ludicrous statement attributed to Alabama law professor Susan Pace Hamill: “Nothing in the genesis of limited liability companies suggested they would be used to purchase personal real estate.” According to The Times, Hamill worked on “LLC policy” at the Internal Revenue Service.

LLCs are creatures of state law, not the federal tax code or other federal law. Like the subchapter S corporations and limited partnerships that they have largely supplanted, LLCs have always been used to hold all sorts of personal real estate. If a client of mine owns land on which other people hunt deer, I have always recommended putting the property in an LLC to reduce risk in the event of an accident. The only IRS policy at issue was a sensible 1990s project that created what are known as the “check the box” regulations, in which single-owner LLCs are disregarded for tax purposes, and multi-owner LLCs are treated as partnerships unless the owners elect to be taxed as corporations. That election is almost never made.

The rest of the Times piece is similarly hyped and distorted. Ownership of “shell companies” can “be shifted at any time, without any public record” - just as any private company can be sold privately. Some apartment owners at Time Warner Center have had their businesses fined or sued in their home countries, which is pretty much a standard occurrence for any large business. The developers and other sellers of high-end condominiums do not conduct investigations as to the sources of funds used to make purchases, because they are not financial institutions and are not in a position to do so. However, when a foreigner sells one of these high-end properties, American lawyers and other closing agents typically withhold a large portion of the proceeds to cover potential capital gains taxes; tax advisers like my firm then file U.S. tax returns to reclaim any excess withholding. American interests are not compromised.

There was less to Brian Williams’ story than he said. There is less to The Times’ big cover story than it says. Williams’ conduct is an individual indiscretion; The Times’ is the product of innumerable deliberate and negligent editorial decisions.

Which one is worse? Again, decide for yourself. I’ll just say that I won’t stop watching NBC because of Williams, but I am getting pretty tired of pointing out the same misbehavior time and again at The Times.

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