- Family considerations said to be main factor for Tepper's move
- Moves could save managers millions ahead of a 2017 tax change
New Jersey lost its richest resident late last year when billionaire David Tepper decamped to the tax friendly climes of Florida.
Tepper registered to vote in Florida last October, listing his residence as a Miami Beach condominium, and followed up in December by filing a court document declaring that he is now a resident of the state. He also carried out a business reorganization on Jan. 1 that relocated his Appaloosa Management from New Jersey to Florida, which is free of personal income and estate taxes.
The move could save Tepper hundreds of millions of dollars in state taxes several years from now. Florida has been pitching itself as a warm-weather tax haven to hedge fund managers in the Northeast, some of whom face a 2017 deadline to pay taxes on billions of dollars in performance fees that they had kept offshore for years. A Florida residence could offer partial relief to New York and New Jersey money managers who face the prospect of surrendering at least half of the deferred money to federal, state and local taxes.
“Anyone who has a large deferral coming due in 2017” is thinking about ways of reducing the tax hit, said Anthony Tuths, a tax attorney in the New York office of Withum who advises alternative investment funds. “What is easier than packing up your house in New York City and moving down to Miami?”
Tax planning was a factor but not the main reason for Tepper’s decision to move, according to a person familiar with the situation. Family and quality-of-life considerations carried much more weight, as Tepper had recently separated from his wife in New Jersey and his mother and sister both live in Florida, said the person, asking for anonymity to discuss the billionaire’s personal affairs.
Tepper, 58, lived in New Jersey for more than two decades, initially as an executive at Goldman Sachs Group Inc., where he helped run junk-bond trading during the late 1980s and early 1990s. He founded Appaloosa in 1993 and now has an estimated fortune of $10.6 billion, according to the Bloomberg Billionaires Index. That ranks him as the wealthiest person in New Jersey.
New Jersey residents bear the third-highest tax burden in the country, according to Jared Walczak, an analyst at the Tax Foundation in Washington. In addition to charging the highest effective rate on owner-occupied housing, New Jersey is one of two states that levy both an estate tax on the deceased and an inheritance tax on their heirs. The state income tax rate for top earners is 8.97 percent, and the state’s Democratic legislators have repeatedly pushed for a so-called millionaire’s tax that would increase the levy to 10.75 percent.
Florida, using its lack of an income tax as part of a recruiting effort, has tried for years to attract wealthy Northeastern fund managers, with mixed success. Prominent investors who have moved to the state include Edward Lampert, the controlling shareholder of Sears Holdings Corp. Florida was home to 62 firms that primarily run private pooled vehicles such as hedge funds at the end of 2014, up from 37 at the end of 2012, according to the latest U.S. Securities and Exchange Commission data.
When Tepper personally relocated to Florida, part of his firm came along. Under a Jan. 1 reorganization, the firm moved what was formerly its main investment advisory unit to Miami from Short Hills, according to a filing with the SEC. Because the previously deferred offshore fees would normally be paid out to this unit, the move could be key to saving money on state taxes in 2017.
The 2017 deadline was set by Congress in 2008 when it closed a loophole in the Internal Revenue Code that managers had used to defer taxes on performance fees by locating their funds in offshore tax havens such as the Cayman Islands and Bermuda. By reinvesting these fees in their hedge funds, managers let the money grow tax-deferred until they took receipt of the income. George Soros amassed $13.3 billion in deferred performance fees over four decades through a Netherlands Antilles-based affiliate of what is now known as the Quantum Endowment Fund.
Appaloosa at the end of 2014 had more than $12 billion of gross assets in a pair of British Virgin Islands funds, one of which has generated average annual gains of 30 percent since inception in 1993. Tepper had been deferring fees earned by the offshore funds, according to the person familiar with the situation, who declined to quantify the amount at stake.
New Jersey Tax
As a New Jersey resident, Tepper would have to pay the 9 percent state tax upon reporting his deferred compensation in 2017 on top of a federal tax rate of 39.6 percent. Moving to Florida could at least eliminate the 9 percent tax.
Because Appaloosa Management is now in Miami, the deferred fees that it receives in 2017 from the offshore funds will qualify as Florida-sourced income for tax purposes, Tuths said. So will the future performance fees that Appaloosa Management receives as the general partner for Tepper’s primary onshore vehicle, Thoroughbred Fund LP. As a Florida resident, Tepper won’t have to pay any state income taxes on such fees when they’re passed along by Appaloosa Management.
Tepper’s firm also incorporated a new investment advisory unit under the name Appaloosa LP that is based in Short Hills. That’s where the firm’s annual management fee, typically 2 percent of assets, would probably be paid in order to cover salaries and other expenses for Appaloosa employees who continue to work out of New Jersey.
New York previously claimed the right to tax fees that a resident deferred while living there, even if the payout occurs long after the person has moved away. But it’s much harder for a state to make a case to collect such taxes when the entity that receives the deferred fees, in this case Appaloosa Management, has moved to the same place, Tuths said.
In the 1991 court case McDonald v. N.J. Director, the state’s division of taxation successfully imposed taxes on deferred compensation earned by a former resident, according to Geoffrey Weinstein, special counsel at the law firm Cole Schotz. But the state never put in place regulations that would guide taxpayers on reporting the deferred compensation, Weinstein said.