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The Unintended Tax Consequences of High Dollar Divorces

Before your eyes glaze over, this story isn’t about the deductions and income reporting requirements you’ll deal with in a divorce.

Those are real issues, and you should talk to a good lawyer about them, but this is the story of how a hedge fund manager’s big ticket divorce cost the State of New Jersey $140 million in lost tax revenue in one fell swoop.

It all began when Appaloosa Management founder David Tepper’s marital separation from his wife of 28 years, Marlene, became public knowledge in 2014.

David had reportedly been living at the couple’s Hamptons estate – more on that later – for as long as a year when the news broke.

While the pair reportedly sought to have a quick, quiet, and amicable split, divorce changes a person’s life in unexpected ways, and those changes ended up taking a big toll on the state where David had lived and made his fortune over several decades.

David Tepper is 58 years old, and while he has a reputation for extreme discretion about his own life, he has considerable power over the financial markets when he talks to the business press.

He grew up in Pittsburgh, the son of an elementary school teacher and an accountant, and studied economics in college, eventually earning his master’s degree from Carnegie Mellon University.

In 1984, he took a job at Keystone Mutual Funds in Boston, and soon after, landed in New York as a highly sought after Goldman Sachs recruit.

Six months later, the young man was in charge of the high-yield desk at the firm, and the next eight years of his life were spent working his way up at Goldman.

In 1992, Goldman’s CEO Jon Corzine passed David over for a partnership role for the second time, and that was enough for David.

In 1993, he founded Appaloosa, which would go on to become one of the most successful, and profitable, hedge funds and make him one of the richest men in the world.

Back in 1986, he and Marlene had married, and the couple was living a comfortable life in Livingston, New Jersey.

They would eventually raise two daughters and a son, treating one of their daughters to a personal performance by singer Ashlee Simpson at the girl’s 2005 bat mitzvah.

It was an extremely comfortable life, with Appaloosa producing returns of up to 61% by focusing on long-shot stocks and distressed bonds.

Famously, David took a big risk when the financial crisis hit, betting heavily that the government would step in and prevent the big banks from collapsing.

In that single trade, he turned a $7.5 billion profit, more than $4 billion of which went into his own pockets.

These acts of daring have generally been prescient, and his willingness to take risks has turned him into a king in the hedge fund world, where he is routinely the highest-paid hedge fund manager alive.

He’s listed as the 166th richest person in the world by Forbes, and his annual income routinely exceeds one billion dollars.

He’s had some fun with that money over the years. In 2011, David learned that Jon Corzine’s old waterfront estate in the Hamptons was on the market, and he apparently purchased the property from Corzine’s ex-wife Joanne with some glee, paying a mere $43.5 million.

After David and Corzine’s falling out over the missed Goldman promotions, and Appaloosa’s wild success, David had plenty of room to figure out how best to stick it to his old boss.

Deciding that Corzine’s old view of the water was insufficiently spectacular, David bulldozed the entire estate, replacing it with a bigger, better property where the ocean and the sunset can be viewed from every room.

In the dining room, the exterior wall is now a window, and the house features an oversized swimming pool with a pool house, a tennis court, a multiple car garage in a separate building, and a giant second floor deck with a Jacuzzi.

It probably wasn’t much of a hardship to relocate to New York for a while, while Marlene stayed in Livingston and his company’s headquarters remained in Short Hills, New Jersey.

The separation itself only made news as a fact of his enormous wealth – estimated to be somewhere around $11 billion – but if there loud arguments or broken dishes, they all happened in private.

No drama ever hit the papers between the pair, and the markets didn’t tremble with a long string of salacious stories playing out over months, and their children didn’t have to live in a public swirl of scandal and accusation.

It appears that the terms of the divorce were worked out over the next couple of years, and as they wished, were handled with great discretion.

David, the richest man in New Jersey, the man who routinely brings home $1 billion in income per year, decided in 2015 to move to Florida, a state that notably doesn’t have an income tax on residents.

He bought a beachfront condo in Miami, registered to vote, and filed court documents declaring himself a Florida resident.

New Jersey, where David had paid 8.97% of his income to the state every year, reportedly lost out on something like $140 million in tax revenue with the move.

Marlene, still living at their home in the state, reportedly purchased the mansion where they raised their kids for one dollar at the end of 2016. Odds are that she’s living off of investment income, and isn’t overly burdened by taxes.

Most divorces don’t end up forcing states to choose which priorities can be safely put off for a few years, but all divorces change both spouse’s lives forever.

An experienced Brooklyn divorce attorney can help you navigate the process and come out in the best shape possible at the end of your marriage.

When you’re considering divorce in Brooklyn, call the attorneys at Zelenitz, Shapiro & D’Agostino today at 718-725-9601 for a free consultation with an experienced divorce and child custody attorney.

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