How I misread News Corp’s taxes

By David Cay Johnston
July 13, 2011

By David Cay Johnston. The opinions expressed are his own.

Readers, I apologize. The premise of my debut column for Reuters, on News Corp’s taxes, was wrong, 100 percent dead wrong.

Rupert Murdoch’s News Corp did not get a $4.8 billion tax refund for the past four years, as I reported. Instead, it paid that much in cash for corporate income taxes for the years 2007 through 2010 while earning pre-tax profits of $10.4 billion.

For the first time in my 45-year-old career I am writing a skinback. That is what journalists call a retraction of the premise of a piece, as in peeling back your skin and feeling the pain. I will do all I can to make sure everyone who has read or heard secondary reports based on my column also learns the facts and would appreciate the help of readers in that cause.

No excuses. But I will explain how I made such a bonehead error.

The other facts I reported remain:

* Among the 100 largest companies in the United States, News Corp has the third largest number of subsidiaries in tax havens, a Government Accountability Office study found in 2009.

* On an accounting basis, which measures taxes incurred but often not actually paid for years, News Corp had a tax rate of under 20 percent, little more than half the 35 percent statutory rate, its disclosures show.

* Murdoch has bought companies with tax losses and fought to be able to use them, which reduces his company’s costs.

* News Corp lawyers and accountants are experts at making use of tax deferrals, though the company’s net tax assets have shrunken from $5.7 billion in 2007 to $3.3 billion last year as the benefits were either used or expired.

CHECKING THE RECORDS
Tax is my beat, and I was simply looking for what the record showed since Mr. Murdoch is much in the news these days. Some of his British journalists hacked into voicemails, paid off cops and interfered in a murder investigation. Having a long career writing not just about tax, but also about journalistic misconduct, I wondered if there was anything of interest in News Corp’s annual disclosure reports, known as 10-K forms. I examined them back to 2004, the year that it switched from an Australian to an American company.

What I found was four years of big negative numbers in the “cash paid for taxes” line in the footnotes to the consolidated statements of cash flows.

The most common convention is to report tax payments as positive numbers and to use negative numbers to report net refunds from government to a company.

Professor Ed Outslay, who teaches graduate accounting at Michigan State University and is an authority on extracting tax information from disclosure statements, teaches his students “normally ‘parens’ mean a tax benefit, not an expense.”

While that is the norm, it is not universal and I knew that. Some big companies report “cash paid for taxes” with payments in parentheses and refunds as a positive number. This reversal makes sense from a company’s point of view, though few companies do it that way.

I saw that over the seven years that News Corp has been a U.S. company it reported “cash paid for taxes” as positive numbers in 2004 through 2006 and then as (negative) numbers for 2007 through 2010.

ERROR ALERT
The first suggestion I had erred came in the middle of the night when a post at taxprofblog (I teach at Syracuse University College of Law) said I had made an error. I checked the disclosures and then wrote back that the poster was in error. Still, the note troubled me and before dawn I was reviewing every document. As I was rechecking my work, Robert S. McIntyre of Citizens for Tax Justice, who is respected across the political spectrum for the care he takes with numbers, sent me a note saying I had it wrong. News Corp, he said, was using negative numbers to report outflows, rather than tax inflows, starting in 2007.

Here is how the same number, in millions of dollars, for “cash paid for income taxes” for its 2006 fiscal year was reported in News Corp’s 2006 annual disclosure report and then in the 2007 report:  $558 $(558)

Add up the negative “cash paid for taxes” number for the years 2007 through 2010 and you get the negative $4.8 billion number I reported as tax dollars flowing to News Corp instead of to governments, as they actually did.

How did I miss the switch in convention for reporting positive and negative numbers? The company disclosed in its 2007 annual report that it was changing the way it reported some numbers. Here is the entire disclosure, from Note 2 on Page 87:

Certain fiscal 2006 and fiscal 2005 amounts have been reclassified to conform to the fiscal 2007 presentation.

COMPLEX STATEMENTS
I do not recall if I read that line, but even if I had I would not have connected it to the switch from positive to negative numbers in the “cash paid for taxes” line. In its profit and loss statement News Corp uses almost all positive numbers, even for costs. It lists revenues, for example, and operating expenses as positive numbers even though expenses, like cash paid for taxes, flow out of the company.

But in the “cash paid for taxes” and some other lines in the same document, I know now, it follows a different convention and that it switched conventions four years ago. Indeed, another journalist pointed out to me that within one of the tables in its latest disclosure News Corp made inconsistent use of positive and negative numbers.

Disclosures are complex statements, but they also are intended to inform investors and regulators, not confuse as can happen when mixing and matching positive and negative numbers. Here is a question for the SEC: Should companies be allowed to use inconsistent conventions on positive and negative numbers in the same document?

Before even writing my column I called News Corp. Neither of the News Corp spokespeople so much as coughed when I said my first column would be about News Corp making $4.8 billion from the tax system in the previous four years. I also instantly emailed my spreadsheet, at News Corp’s request, though the company says it did not get it. The company did not get back to me — they were, after all, besieged with other calls from journalists — and I did not check back again, though I should have.

SETTING THE RECORD STRAIGHT
As a further check, when I enter numbers in spreadsheets I use a yellow background to remind me that at least a second check needs to be done before publication. When I later examined the spreadsheet against the source document the numbers matched so I changed the background to white to indicate to myself that I had double-checked the numbers.

To keep my column as simple as possible I limited the graphic I roughed out to the four years starting in 2007. When the 2005, 2006 and 2007 numbers from the 2007 disclosure statement matched what was in my spreadsheet I clicked to the white background. I should have checked the earlier years where what was negative had been reported as positive.

When more than a day after the column was posted, a News Corp publicist called me, I had already discovered the mistake and told her it was being withdrawn and a correct column written. She also helped me tie down some crucial details, like finding that 2007 disclosure.

I often write tart notes at the Romenesko blog for journalists, the Columbia Journalism Review, Nieman Reports and elsewhere about what I consider flawed reporting by others. I lecture to young reporters around the world on the duty of care they need to take with facts and teach how to check and cross check. Until now I have never made a big mistake, but this is a painful reminder that we all put our pants on one leg at a time. The measure of character, I say in my posts and lectures, is whether when an error is found you forthrightly and promptly correct.

So I hope readers will trust that while I made a whopper of a mistake, it has been corrected forthrightly and promptly.

12 comments

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I think it needs to be made clear that in NO WAY was it necessary to know that the reporting convention had been changed in 2007 to catch this error. This error was not about an obscure footnote in the 2007 10-K that DCJ happened to miss as he tries to claim. This is about David’s ideological blinders leading him to make a simplistic error.

Page 144, Note 23, of the current 10-K, cash paid for interest, the line item directly below the tax numbers DCJ cited, was negative as well. Sale of other investments, the next line, was positive. The line after that, Purchase of other investments, was negative. EVERY INDICATION suggested that negative numbers were outflows from the company, positive numbers were inflows to the company.

To put the blame on the switch in convention, like it was some obscure change, is disingenuous. This is an issue of complete incompetence on the part of DCJ and his editors at Reuters.

Further, even if one takes DCJ at face value in this mea culpa, why didn’t he disclose how much News Corp. paid in cash taxes from 2004 to 2006 in his original column, when he thought negative numbers signified refunds and positive numbers payments? Why didn’t he investigate why there had been a dramatic change? Did News Corp. just start using tax avoidance strategies in 2006? None of this adds up if DCJ is an honest reporter making an honest mistake. He clearly isn’t: he is an ideologue whose arrogance blinded him to his own stupidity.

Posted by TinyOne | Report as abusive

What TinyOne said. I actually searched for a footnote explaining the change in convention, but it really wasn’t necessary to know that the figures were taxes paid.

Posted by jpe12 | Report as abusive

Did you have another tax attorney or CPA look at the accounting sheets and double check your conclusions? This seems like too big of a mistake for someone of your experience and caliber to make, pardon me for saying.

I dislike News Corp. and all Murdoch’s media outlets; however, this article did a grave injustice to his company.

Personally, I think your credibility has been greatly damaged by this article. I know that various blogs still have links to the article up and/or summaries of the article, so the misinformation continues to circulate. (But the links to it from at least one site go to a “page not found” link on Reuters so they may have removed it entirely, which I think is a mistake as well, without guiding readers somewhere where the mistake is explained – such as your above article.)

And I must also ask if Reuters has anything called editors anymore? Did not anyone check the article? Hopefully a lot of folks have learned a lesson from this misinformation.

Posted by RedSteve | Report as abusive

And I would suggest that TinyOne’s ideological bias prevents him from understanding an error based on an assumption, and subsequent admission of that error. Why would a reporter report that a corporation paid taxes in prior years? BECAUSE THAT’S NOT NEWS. (caps borrowed from TinyOne’s post). The mistake, as admitted, is sloppy and regrettable, but can be rationally understood. More than that is purely ideological speculation.

Posted by Gee-Andy | Report as abusive

This seems much more like an attempt at deflecting rather than admitting sheer guilt and culpability for a monumentally stupid error. A first year business school student would get an F on his assignment if he made this error. There is no “why” with a long explanation as to how it was made, as this article attempts to assert. It was simply wrong and boneheaded to assault a legitimate public corporation in such a politically biased manner.

Posted by GS-CEO | Report as abusive

PS: The title of the author’s last book I think makes his bias about this type of situation perfectly clear: “Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat Everybody Else”.

Well, I’m sure he viewed News Corp in an entirely neutral light. Is this the kind of reporting we should expect from Reuters?!

Posted by GS-CEO | Report as abusive

This error should have been easily noticed by cross-checking with the statement of cash flows. I can’t believe such an egregious error made it onto a published article.

Posted by MikeGayner | Report as abusive

Kudos for addressing your mistake promptly and correcting it. It’s rare to see people take responsibility without excuses.

Posted by Belgoran | Report as abusive

Heck of a debut there, Dave. Looking forward to reading your next effort. I’m sure it will merit Pulitzer consideration as well.

Posted by expat1980 | Report as abusive

Good job in reporting your mistake and taking full blame for the error. It’s unfortunate that this has to be made a big deal; too many reporters (and “news” organizations) simply would not have bothered, or have done so only in a footnote. You did what you should have done: admitted the error and took full responsibility for the consequences. Kudos for being a real reporter (and a human being, mistakes and all).

Posted by bobSmith | Report as abusive

I thank you for correcting yourself but sadly Pandora’s box has been open. This will never get the same amount of exposure, that his initial article did because it involved Murdoc not being this evil all seeing entity. Don’t get me wrong, I don’t like all the crap that has been coming to light in the Phone Hacking Scandal but journalist have to be careful when putting out their articles because the same people that read that and said “THAT”S BULLSHIT!” aren’t going to believe that. That will believe that the company got to you in some way and come up with all kinds of Illuminati type of conspiracies. Thus the circle of misinformation continues. Doing this, not matter how your apologize, is irresponsible. 45 years in the game? Duke you should know better but glad you still admitted wrong doing, something A LOT of reporters don’t do.. Look at the justification those rag mags use to excuse their phone hacking.

Posted by MAbans | Report as abusive

Thank you for the retraction. That shows integrity.

To those claiming ideology blindness, could the same not be said of you, that your evaluation of David’s error is driven by your own ideology?

A better explanation is all of our mistakes are tied to our beliefs. We humans are more thorough in examining things that disagree with our beliefs and more enthusiastic about things that do agree. It’s called confirmation bias and we all have it.

It’s then largely moot to point out a mistake included confirmation bias, a gross exaggeration to expand confirmation bias into “ideology”, wrong to claim the error was *because of* it rather than sloppiness. Confirmation bias and lack of rigor go hand in hand.

It still doesn’t excuse it, but it seems David isn’t looking for an excuse. He retracted, admitted his mistake, and apologized. That’s integrity, especially where so many “news” organizations do none of these.

Posted by Daniel.Schegh | Report as abusive

[...] and combining years, or something along those lines. You can read his explanation of events here: http://blogs.reuters.com/mediafile/2011/ 07/14/how-i-misread-news-corps-taxes/ Regardless of how it happened, NPR had Johnston on this morning to explain the mistake, because as [...]

[...] if you prefer, David Cay Johnson’s terribly amusing error over the accounts of News Corporation. Readers, I apologize. The premise of my debut column for Reuters, on News Corp’s taxes, was [...]

[...] and combining years, or something along those lines. You can read his explanation of events here: http://blogs.reuters.com/mediafile/2011/ 07/14/how-i-misread-news-corps-taxes/ Regardless of how it happened, NPR had Johnston on this morning to explain the mistake, because as [...]