With Great Power Comes Great … Debt. Marvel Comics’ 1996 Bankruptcy.

I have a blog where I discuss various legal issues. Sometimes the issues cross over with this more … nerdy-culturally-aimed blog …

Thought you might get a kick out of it …

Celebrity Spotlight: Marvel Comics

Bankruptcy affects people of every age, creed, sex or ethnicity from every part of the country. Even celebrities both loved and disliked have their financial problems and depend on the bankruptcy laws to get out from under crippling debt.

Sometimes even superheroes…

marvel-case-presentation-26-638

From Den of Geek: my thanks for aloowing me to reprint their wonderful article…

Marvel Comics had grown in stature throughout the ’60s, ’70s, and ’80s thanks to the often stunning art and storytelling in such comics as Fantastic Four and The Amazing Spider-Man, Marvel’s financial success had reached a peak by the early ’90s. But then a series of bursting financial bubbles and questionable business deals saw Marvel’s stock value collapse; shares once worth $35.75 each in 1993 had sunk to $2.375 three years later. An ugly fight between a group of very rich investors followed, and for a while, the company’s future seemed uncertain.

Yet somehow, Marvel fought through all the corporate intrigue which dogged the company in late 1996 and for many long months afterwards, and emerged from the rubble a decade later as a film industry behemoth.

In 1993, while Marvel and the comics industry as a whole seemed to be in rude health, Sandman writer Neil Gaiman stood before about 3,000 retailers and gave a speech which few in attendance wanted to hear.

In it, he argued that the success of the comic book market was a bubble – one brought on by encouraging collectors to buy multiple editions and hoard them up in the hope that they’ll one day be worth a fortune. This, Gaiman said, was akin to tulip mania – a strange period in the 17th century when the value of tulip bulbs suddenly exploded, only for the market to collapse again.

“You can sell lots of comics to the same person, especially if you tell them that you are investing money for high guaranteed returns,” Gaiman  said. “But you’re selling bubbles and tulips, and one day the bubble will burst, and the tulips will rot in the warehouse.”

The bubble Gaiman described had begun several years earlier, when comic books, once considered disposable items by parents, were becoming prized items by collectors who’d grown up with their favorite superheroes as kids. By the 1980s, comic book collecting had gained the interest of the mainstream media, which latched onto stories about Golden Age comics selling for thousands of dollars.

Publishers were themselves courting the collector market by introducing variant covers, sometimes with foil embossing or other eye-catching, fancy printing techniques. These were snapped up hungrily by readers, but also by speculators assuming that they’d stumbled on a sure-fire means of making money by storing copies up and selling them for a profit in the future.

While the comics were flying off the shelves, Marvel attracted the interest of a man named Ron Perelman. Often pictured with a broad grin and a huge cigar in his hand, Perelman was a millionaire businessman with a variety of interests: in 1985, he’d made a huge deal for cosmetic firm, Revlon through his holding company, MacAndrews & Forbes. In early 1989, Perelman spent $82.5 million on purchasing the Marvel Entertainment Group, then owned by New World Pictures.

Within two years, Marvel was on the stock market, and Perelman went on a spending spree: he bought shares in a company called ToyBiz, snapped up a couple of trading card companies, Panini stickers, and a distribution outfit, Heroes World. All told, those acquisitions cost Marvel a reported $700m.

Through the early ’90s, Marvel was buoyed by the success of Spider-Man and X-Men, which were selling in huge numbers. Sales of a new comic, X-Force, were similarly huge, thanks in part to a cunning sales gimmick: the first issue came in a poly bag with one of five different trading cards inside it. If collectors wanted to get hold of all five cards, they – you guessed it – had to buy multiple copies of the same comic. With the boom still in full swing, that’s exactly what collectors did – as former Comics International news editor Phil Hall recalls, fans were buying five copies to keep pristine and unopened, and a sixth to tear into and read.

Then, just as Gaiman predicted, the bubble burst. Between 1993 and 1996, revenues from comics and trading cards began to collapse. Suddenly, Marvel, which at one point seemed invincible as it grew in size, now looked vulnerable.

“When the business turned,” observed then-chariman and CEO of Marvel Scott Sassa, “it was like everything that could go wrong did go wrong.”

Some in the industry went further, and argued that Perelman’s tactics had endangered the entire industry:

“[Perelman] reasoned, quite correctly, that if he raised prices and output, that hardcore Marvel fans would devote a larger and larger portion of their disposable income toward buying comics,” Chuck Rozanski, wrote CEO of Mile High Comics. “Once he had enough sales numbers in place to prove this hypothesis, he then took Marvel public, selling 40% of its stock for vastly more than he paid for the entire company. The flaw in his plan, however, was that he promised investors in Marvel even further brand extensions, and more price increases. That this plan was clearly impossible became evident to most comics retailers early in 1993, as more and more fans simply quit collecting due to the high cost, and amid a widespread perception of declining quality in Marvel comics.”

Whether Perelman was directly to blame or not, the consequences for the industry as a whole were painful in the extreme. Hundreds of comic book retailers went bust as sales tumbled by 70 percent. Suddenly, the boom had turned to bust, and even Perelman admitted that he hadn’t anticipated the dark future Gaiman had warned about in his speech.

”We couldn’t get a handle on how much of the market was driven by speculators,” Perelman said; “the people buying 20 copies and reading one and keeping 19 for their nest egg…”

By 1995, Marvel Entertainment was heavily in debt. In the face of mounting losses, Perelman decided to press on into new territory: he set up Marvel Studios, a venture which he hoped would finally get the company’s most famous characters on the big screen after years of legal disputes. To do this, he planned to buy the remaining shares in ToyBiz and merge it with Marvel, creating a single, stronger entity.

Marvel’s shareholders resisted, arguing that the financial damage to Marvel’s share prices would be too great. Perelman’s response was to file for bankruptcy, thus giving him the power to reorganize Marvel without the stockholder’s consent.

Marvel filed Chapter 11 bankruptcy on December 27, 1996. Coincidentally, its highest debt of $1.7 million was owed to Disney. Over one-third of Marvel employees were laid off.

There followed a bewildering power struggle which raged for almost two years. A stockholder named Carl Icahn tried to oppose Perelman, and the financial press eagerly reported on the very public spat which ensued. Perelman, Icahn argued, “Was like a plumber you loan money to get him started in business; then he comes in, wrecks your house, then tells you he wants the house for nothing.”

The battle, when it finally ended in December 1998, had a strange outcome which few could have predicted: after a lengthy court case, ToyBiz and Marvel Entertainment Group were finally merged, but Perelman and his nemesis Icahn were both ousted in the process. Other executives with ties with Perlmutter were also severed, including CEO Scott Sassa, whose tenure had, all told, lasted just eight months.

They’d been pushed out by two ToyBiz executives who’d been on Marvel’s board since 1993: Isaac Perlmutter and Avi Arad. With Scott Sassa gone, they installed the 55-year-old Joseph Calamari, who’d been at the helm of Marvel in the 80s, as its new CEO.

With the financial intrigue in the boardroom settling down, Marvel began to turn its attention to a target it had been trying to hit since the 1980s: the movie business. The rest, as they say …

MArvel money

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Please check my legal blog for other famous bankruptcies!

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Cap money

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About the author: Michael Curry is the author of the Brave & Bold: From Silent Knight to Dark Knight, The Day John F Kennedy Met the Beatles and the award-winning Abby’s Road, the Long and Winding Road to Adoption and How Facebook, Aquaman and Theodore Roosevelt Helped.  Check his website for more releases! Thanks for reading!

 

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Form 1099-C; When Forgiving is NOT Divine, part two

1099-C, when forgiving is NOT divine…

Part Two

Read Part one here.

If a Creditor forgives some of the debt you owe it, the IRS considers that amount as additional income for you that year. The Creditor can send you a 1099-C for the amount they wrote off and that is added to your total income. It may be enough to jump you into the next tax bracket – especially if it is a mortgage loan of tens of thousands of dollars.

During the few times clients ask me about debt consolidation, I advise them about the possibility of a 1099-C being sent to the IRS. I also tell them to seek the advice of an accountant or a tax attorney as to any forgiven debt and its tax consequences.  This, plus the fact that SOME debt consolidation companies are scams, are enough to convince them not to abandon the idea.  There ARE plenty of good debt consolidation companies out there, and I recommend a few – particularly Clearpoint – but otherwise caveat emptor (Google it)!

In over 5000 bankruptcies filed, I have had perhaps one percent of my Debtors receive a 1099-C on the forgiven debt. But since they filed for bankruptcy and received a discharge, there IS something they can do about it.

If you filed bankruptcy and received a discharge, and you later receive a 1099-C on the debt from the Creditors, you do not have to worry about it. You still have to DO something about it, but you do not need to WORRY about it.

Simply, a debt discharged in bankruptcy is not forgiven, instead the creditor is required to stop collecting the debt! The debt is still owed, but it is uncollectible, so the creditor might as well write it off on their own taxes and submit it to their insurance.

But they send out a 1099-C to you anyway. Why? Good question, do they get any monetary benefit from it? No, unless it helps keep their bankruptcy insurance premiums down, I suppose. They report it to the IRS and now you have to spend extra time and forms.

How can they send the IRS a 1099-C form on a debt that has not, technically, been forgiven? Another good question. I am not a tax attorney and the tax code is second only to the Harry Potter series in page count. Perhaps somewhere in that former rainforest of volumes, the tax code says that debt discharged in bankruptcy still counts as forgiven debt (although it is excepted). Perhaps it says the opposite; perhaps it does not address it at all (most likely).

Perhaps it may mention what happens when a company sends the IRS an intentionally false 1099-C.  An Attorney General (state or federal) looking to make some bonafides with a non-big-business constituency can look into this if they are looking for some political clout should they ever run for office.

I am sure some attorney, SOMEWHERE, has looked into this…

Regardless, the credit company sent you a 1099-C on a debt you discharged in bankruptcy. You HAVE to claim it on your taxes – the IRS has a copy of the 1099-C as well and will be looking for that income on your returns! What do you do?

When you file your taxes, you should also file a Form 982, labelled Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

982

Fill in your name and social security number, check box 1a and fill in Line 2 with the amount on the 1099-C. Then complete the rest of Form 982 and file it with your taxes.

Don’t do this by yourself! I cannot stress this enough! It’s okay to get the forms free online, but take them to an accountant or a good tax preparer. I have nothing against the people who work in the kiosks in discount department stores or the people who volunteer their time at churches and care facilities who help with taxes. If not for the 1099-C I have no problem recommending you go to them to help you with your taxes. But this is worth paying a little extra. Remember – the IRS is waiting for you to account for the amount on that 1099-C.

Same for credit companies. Some loan companies will help you file your taxes. That’s fine … but they may be the same companies that will send you their own 1099-C in the future.

If you discharged the debt in bankruptcy, a 1099-C is nothing to worry about, although it may cost you extra time and costs when you file your taxes (you can deduct the cost of the tax preparer on next year’s taxes if that is any consolation). A 1099-C is the final thrash at you from a discharged creditor.

Mean? Yes. Petty? Yes. Are you stuck with it? Yes. Can you do something about it? Yes – if it was discharged in bankruptcy.

 

Original Material Copyright 2016 Michael Curry

Form 1099-C, When Forgiving is NOT Divine … part one

1099-C, when forgiving is NOT divine…

Part One

Bankruptcy clients rarely receive a 1099-C. Only on certain specific debts do I advise a client that after discharging their debt they might get a 1099-C in the mail. Usually mortgages, specifically mortgages with Greentree.

Also, they come in waves every few years. Earlier this year (2016) I had four or five calls from clients about getting a 1099-C. This is the first time I have had to handle calls about it in about five years. I suspect that the person in charge of doling them out at a credit company has moved on and a new person takes over the department trying to make his (or her) bones by inflicting these flimsy pieces of paper on their heretofore loyal customers.

What is a 1099-C form? When a creditor forgives a debt that you owe, it can send a 1099-C to the IRS and that counts as part of your income you must report and on which you must pay taxes.

1099c

What?!

Let’s suppose you owe a credit card $11,000.00. Miraculously you have managed to persuade the company to accept $6,000.00 in one lump payment and they write off the rest. They agree and do not renege.  You pay (somehow managing to collect the money – hopefully not as a loan from another credit card company thereby going from the frying pan into another frying pan) and they still do not renege.

(Keep in mind this is a fantasy only used as an example. The odds of a credit card company actually agreeing to something like this and not weaseling out of it even after payment are the same as winning the lottery – so you might as well win the lottery and pay off the card entirely…).

Everyone is now happy. Until you get a letter from the credit card company some months later containing a 1099-C. Now you have to declare that $5,000.00 that was forgiven as income.

Note that you have to declare that $5,000.00 as income whether you get a 1099-C or not!

The logic, that word used loosely, is as follows: now you do not have to pay that $5,000.00. You have five grand you would not have had if the credit card company had not forgiven the debt. That $5,000.00 is income for the year in which it was forgiven.

“But it would have taken me more than five years to pay off that $5,000.00, why does it count for only that one year?” Don’t try to argue around this with reason and sensibleness …

Imagine this family earns $35,000.00 per year. For 2016, their income will be $40,000.00.  If this person is single they are in a new tax bracket – 25% instead of 15%.

The problems come in with real estate mortgages – either modifications or short sales or whatever the latest scheme is from the mortgage companies. In cases like this we are not talking about a “few” thousand, but tens of thousands. Suppose the bank writes off $60,000.00 from the house you just gave back to them. They send you a 1099-C.

Now you go from $35,000.00 to $95,000.00. That a jump up one tax bracket for a married couple, two brackets for a single person!

Here’s an ugly scenario: imagine if the student loan problem is resolved and the government starts forgiving loans. What if THEY start sending out 1099-Cs? You might go from owing the Department of Education $200,000.00 to owing the IRS $100,000.00! And the IRS doesn’t believe in forbearance or deferment! {Note that if a student loan was forgiven because the person who received the loan worked in an underprivileged area as a teacher or a physician (remember that was the original premise for the TV show “Northern Exposure”), that is an exception to this rule.}

Does the credit card or mortgage company benefit from this? No. They do it because 1) they are required to under the tax code, and (more likely) 2) it tickles them.

What can you do? Not much, I’m afraid. You will have to consult an accountant or a tax attorney. You can except the “income” from a 1099-C only in certain circumstances – proving insolvency, if the debt was your home, your business or farm property … things that go beyond this blog and my expertise.

Speak to an accountant or a tax attorney for ways to stave off the extra income.  Tax avoidance versus tax evasion.

Can you file bankruptcy on the debt? No, as there is no debt to discharge. I have had to break this bad news to a few clients in my twenty years of practicing bankruptcy, but not many. And remember – even if the creditor did NOT send you (and the IRS) a 1099-C, it is still your duty to report it as income!

But what if it WAS for a debt that was discharged in bankruptcy?

Ah, that is another story altogether! And a story with a happy ending!

 

Original Material Copyright 2016 Michael Curry