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Hydo can be a valuable tax loophole

Scott Jagow Jan 26, 2009
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Hydo can be a valuable tax loophole

Scott Jagow Jan 26, 2009
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TEXT OF INTERVIEW

Scott Jagow: Here’s an interesting question: Would the government bail out a media company? Just asking, because they are plenty of them in trouble. Last week, the New York Times said it was in talks to sell part of its building. And the Times got a $250 million check from Mexican billionaire Carlos Slim. That money won’t come cheap, but the Times does have some good tax attorneys.

Allan Sloan from Fortune Magazine is with us, and he’s been snooping around that deal. And he says the Times has avoided the Hydo tax rules. OK, Allan, you’re gonna have to explain that one.

Allan Sloan: Everybody must know that, Scott, it stands for High-Yield Discount Obligation. I mean, didn’t they teach you that in elementary school?

Jagow: It sounds like an elementary school game of some sort, Hydo. All right, no really, what is it?

Sloan: What it is is a high yield, which means junk in English. A high-yield security that is issued at a discount from face value. If you have one of these, the Internal Revenue Service puts sharp limits on how much of the interest you’re paying you can deduct.

Jagow: OK, so how does that benefit The New York Times?

Sloan: The New York Times is paying something more than 50 percent a year to the Carlos Slim companies for money. Normally, only about half of that interest would be tax-deductible. But because The New York Times has figured out how to get around the Hydo rules, it can deduct all of the interest — and it makes a difference to the Times of something of the order of $6 million or $7 million a year that it keeps rather than sending to the Internal Revenue Service and various state and local things.

Jagow: And this is what you might call a legal loophole?

Sloan: Uh, yeah. Because the Hydo concept was created to close a loophole. So this is a counter-counter thing. It’s like an anti-missle missle. They’re doing something to make sure that the loophole closer doesn’t affect them.

Jagow: And lord knows these days, The New York Times could use whatever help it could get.

Sloan: Well absolutely. And it may be special pleading given that, you know, I’m a print journalist, but to me anything that help keeps The New York Times afloat is good. I have no problem with them doing this, I just felt this is the kind of thing people should know, and I just find it enormously interesting because it’s an example of how hard it is to really close a loophole when you have competent tax attorneys working for the people looking to use the loophole.

Jagow: All right, Allan Sloan from Fortune Magazine. Thank you.

Sloan: You’re welcome, Scott.

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