Gibson destroyed guitars for a tax write off?
Recently Gibson (the famous guitar brand) found itself in hot water after a video surfaced of an excavator running over around 400 guitars, intentionally destroying them. At the time, Gibson was rebuilding its reputation following a very public bankruptcy and leadership overhaul. Gibson’s future looked bright with a new CEO, a popular online “influencer” who was hired to oversee the company’s brand experience, and a well-received mid-year product launch.
Then, things got a little worse when Gibson uploaded and subsequently pulled a youtube video that many people felt threatened other manufacturers while scolding Gibson’s customer base. This video caused a controversial, years-old trademark infringement suit to garner a lot of attention online, and then the video dropped that showed an excavator running over what looked like perfectly good guitars. For a lot of people, this was the worst blow to Gibson’s reputation yet.
Many people asked why would Gibson do such a thing? These were (by appearances) playable guitars. They were completely assembled, with strings, tuners, and pickups, and yet Gibson ran over them, destroying them completely. The short answer is that Gibson destroyed the guitars because they wanted a big tax deduction, which I will explain shortly. Then I’ll tell you how they could have gotten the same tax deduction without damaging their goodwill with the guitar playing community (also known as their customer base).
A quick note: I don’t have access to Gibson’s current financials, and it’s possible that these strategies wouldn’t apply to them for myriad reasons. In general, however, these are solid concepts and I would be surprised if Gibson couldn’t have used them. Also, I’m going to simply make up some numbers to better illustrate these points, but if the real numbers are different it won’t change the principle of the tax strategy. Oh yeah, get with a good tax professional before you implement any tax strategy in your business.
Ok, first why would they destroy these guitars rather than donate them to a school or charity? Gibson released the Firebird X in 2011 for a price of $4000, and sales were disappointing. The guitar featured all of the things most people don’t want in an electric guitar, and that no one wants in a heritage brand like Gibson: Automatic tuners, a bunch of onboard effects, a USB jack to connect the guitar to your computer, and a really ugly paint scheme. Oh, and despite tons of features and even more knobs and switches, the guitar didn’t ship with a manual. Weird.
The result is that Gibson was stuck with a mass of unsellable Firebird X inventory taking up space in a warehouse. It’s understandable that Gibson would want to get rid of these guitars, and it’s understandable that they would want to get some benefit from doing so. That leaves a few options: Selling the guitars, giving them away, or throwing them away. Let’s look at each option.
If Gibson sold the guitars they might get a fraction of the original $4k price tag. For the sake of an example, let’s say Gibson could sell the guitars for $1000. Let’s also assume that Gibson’s basis in the guitars (basically what they spent to make each guitar, including raw materials, cost to manufacture and assemble, factory overhead, and more) is $1500. If they sold the guitars they would take a $500 loss on each one, plus they would incur selling expenses. Let’s not forget that their network of dealers wouldn’t want to stock these particular instruments (who would want to take a perfectly good Les Paul off the wall in order to try to sell a 2011 Firebird X?), and the Gibson brand would be tarnished at least a little from selling old, poorly-received guitars for a fraction of what a new Gibson usually commands. However, at least the $500 per guitar would be deductible, so Gibson would get that benefit.
If Gibson gave the guitars away to a charitable organization they would get a tax deduction of the lesser of the fair market value or the basis. In our example above, the $1000 FMV is lower than the $1500 basis, so Gibson’s tax deduction for donating the guitars would be $1000 per guitar. So at least in this example it is very likely that donating the guitars would be preferable to selling them.
Finally, there’s what Gibson did, which was throwing the guitars away. The tax code specifies that unsellable (often called “distressed”) inventory can be “written off” (deducted) for the basis of the inventory. In this example, that’s $1500 per guitar. The IRS is pretty clear about how this needs to be done – they want proof that the inventory was distressed, and they want proof it was destroyed. They’re the IRS after all – documentation is the name of their game, and they don’t want someone to claim they destroyed the inventory and then sell it out the back door. That’s why a video was made showing all of the guitars getting run over with an excavator – to document that the inventory was destroyed. Now, were the guitars really unsellable? Were they dangerous, as the company claimed? We’ll never know, because the guitars were destroyed and trashed. In the end, Gibson was able to write off the full basis of each guitar, or $1500 in our example.
Even though trashing the guitars provides the biggest tax deduction, it sure wasn’t good for public relations. So is there a better strategy? Yes! Is there one that would potentially allow Gibson to get a full deduction for the guitars, while also benefitting charity (and the brand’s goodwill)? Yes! How would such a strategy work? Let’s talk about it!
As we discussed, Gibson might get $1000 for selling each of these guitars, but they have an issue in terms of their network of suppliers probably not wanting to stock (ahem) a turd. Luckily, there exist plenty of outlets for selling gear online, from Gibson’s website to third party platforms like reverb.com and ebay. Gibson could have put together a press release stating that as part of their emergence from bankruptcy they would be liquidating some old gear through a reverb.com storefront. They could promote a contest or two, or maybe show some customers’ unique uses for this heavily discounted gear. And most important of all, they could announce that every cent of the proceeds from these sales would go to a charitable organization, perhaps one that funds after school music programs across the country. They might get ribbed a little for selling old, less desirable instruments, but the goodwill earned from sponsoring music-centered charities would be worth it.
But what about the tax deduction? By destroying the guitars Gibson got to write off the full basis of each guitar, which was $1500 in our example. Well, we already showed that if Gibson sold the guitars they would get to write off the difference between the basis of each guitar and the sales price, right? In our example that was a $500 write off per guitar ($1500 in basis minus $1000 FMV). To write off the rest of the basis of each guitar, Gibson could simply donate the $1000 revenue from each guitar sold, allowing them to deduct an additional $1000 per guitar. That’s a $1500 write off per guitar – the same as if they ran over them with an excavator – while gaining a truckload of goodwill with their customer base and benefitting worthwhile charitable organizations.
Too often the interplay between tax strategy and business strategy gets ignored, and companies make moves that benefit one while ignoring the other. A tax professional with experience in both disciplines can not only save you taxes, but do so in a way that aligns with the goals of your business. At Houston Tax Advisors this is our specialty – give us a call or send us a message today!