Appaloosa’s Move
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.