Through the force, higher taxes you will see.

A galaxy’s worth of nerds rejoiced when news broke that George Lucas sold the Star Wars franchise to Disney in October, 2012. More movies are on the way, and this nerd is excited about them. At the time of the sale, Mr. Lucas said that he always envisioned the Star Wars empire (no pun intended) would live on long after he was gone and that he felt he was leaving the franchise in good hands. What he was probably thinking was, “my CPA and my lawyer told me to do it.”

The Star Wars sale was closed in late-October, 2012, when there was a great deal of uncertainty in the tax world and the “fiscal cliff” was looming on the horizon. What was certain at the time was that the Bush era long term capital gain tax rate of 15% was set to expire at midnight on December 31st. It was widely expected that the tax rate on these gains, especially for individuals in the highest income tax brackets, would be the target of democratic lawmakers in the fiscal cliff negotiations. It was also known that the new Unearned Income Medicare Contribution tax of 3.8% would kick in for gains recognized by high-income taxpayers like Mr. Lucas, in January, 2013.    

So what did Mr. Lucas do? He sold in 2012 for just over $4 billion: $2 billion in cash and 40 million shares of Disney stock (valued at $2,000,800,000 on 10/31/2012). It is impossible to know the exact tax figures without information on Mr. Lucas’ tax basis in the Star Wars franchise at the time of the sale, but we can make some educated guesses. Mr. Lucas probably recognized close to $2 billion in gain in 2012 and he owes the IRS approximately $300 million in long term capital gains tax on receipt of this cash. Mr. Lucas will recognize (and be taxed on) gains on the Disney stock whenever he decides to sell his shares. It has been speculated that Mr. Lucas may donate the shares to charity which could reduce or eliminate the tax bill when the stock is sold.

Had Mr. Lucas waited to sell Star Wars until 2013, the $2 billion he received in cash would have been taxed at the new 20% rate agreed to under the American Taxpayer Relief Act of 2012, adding an additional $100 million to his capital gain tax bill. The 3.8% Medicare Contribution tax would have added another $75 million, bringing his total tax bill to about $475 million.

Whether this sale strategy was outlined by a CPA who was reading the Congressional tea leaves or Mr. Lucas turned to a more trusted source for his tax planning (“Through the force, the future – and rising taxes – you will see…”), the result is the same: Mr. Lucas probably saved close to $175 million in taxes by selling when he did. The gains from the sale will be going to educational charities, who will put the extra $175 million to good use. You can read more about Mr. Lucas’ charitable plans here:

http://www.hollywoodreporter.com/news/disney-deal-george-lucas-will-384947

The sale of the Star Wars franchise presents a good opportunity to analyze some of the effects that the American Taxpayer Relief Act of 2012 has on a high-income earning taxpayers. We will be discussing these recent changes to the income and estate tax calculations at a seminar in our office on March 7, 2013, at 7:30 am. A light breakfast will be served. If you would like to attend this complementary seminar, please RSVP to events@samuelslaw.com or 503-226-2966. May the force be with you.