Nicolas Cage: Paying Millions in Back Taxes, Happy At Last?

Nicolas Cage: Paying Millions in Back Taxes, Happy At Last?

Notoriously high-living star broke every rule in the financial planning book and it literally cost him his fortune. Maybe next time he’ll listen to his advisors instead of suing when things go wrong.

So Nicolas Cage is stunning the world with confessions that he’s happier living a relatively modest life in Las Vegas than he was collecting mansions.

On the surface, his newfound peace seems rooted in a sincere desire to spend more time with his family and “reflect” without the paparazzi in his face.

But let’s face it, you’d be eager to keep a low profile too if you still were still paying off a $14 million IRS bill.

It could all have been avoided if he’d listened to his financial advisor in the first place. The next time your clients start behaving badly, it might help to give the Cage’s story – not as a tribute to simplicity, but as a cautionary tale.

And if they don’t get the point, it might be time to let them go.

Anatomy of a failed client

Cage was already a top-earning action hero in 2001 when he hired Los Angeles accountant Samuel Levin to manage his money and his business affairs.

He was earning $7 million a movie. But he was also deep in debt and even then owed the IRS more than he could pay out of cash on hand.

At the time, he needed $30 million a year just to support his lifestyle.

Levin says he did what any financial advisor would do when confronted with a client whose spending was out of control: establish a firm income-to-outflow regime and lobby to liquidate a few of the comic books and other non-core assets.

Cage says he didn’t get the memo, and everyone agrees that the message didn’t sink in. As the movies did better and better box office, his average paycheck tripled and his cash flow soared along with it.

By 2008, the star had accumulated 15 mansions, including a 24,000-square-foot Vanderbilt-era mansion near Newport’s yacht clubs, a Gulfstream jet and endless cars, boats and knicknacks.

His tax bill wasn’t getting any smaller. And right after the real estate market started to crater, the IRS slapped a lien on the mansions and Cage fired his own manager for filing the returns.

That’s when things got ugly. Cage sued Levin for negligence and breach of contract in order to play out the familiar “my manager cheated me, I didn’t know” storyline. Levin fired back with his own lawsuit seeking $128,000 in back fees.

Confirm everything in writing

Since then, Cage has new management and has finally made a deal with the IRS. He’s working a lot to pay the bills and most of the mansions are gone.

Levin has been relatively quiet, but if he’s still up for working with high-net-worth celebrities, he’s probably doing things differently now.

First, he only had a verbal agreement with Cage in the first place. While he didn’t have any kind of discretionary power over the accounts – Cage always wrote the checks – it’s still good practice to draw up formal papers you may need to show a judge some day.

Second, he knew this relationship was going to need tough love. Cage was already out of control. If Levin truly believed he could have reined him in, great. Otherwise, limit the relationship and the liability to what you can handle.

Finally, Levin wrestled with Cage for years about the spending, the extreme concentration on luxury real estate and the taxes. In 2007 alone, Cage bought $33 million worth of mansions and shorted the IRS by well over $6 million.

After six years, you can tell you’re not making much headway. As accountant, you can see when the tax checks never actually go out. And then it’s probably time to fire the client and move on.

It will probably be a relief. Near the end, Levin was having to run all 15 mansions and incidentals for no more than 5% of the gross, and even then, he had to go back to Cage to approve every migraine-inducing detail.

Finding the right levers to pull

Because Levin had all of the insight and none of the power to force his client to shape up, he had to rely on his power to make a convincing argument. When that failed, the client not only refused to accept personal responsibility – he blamed the advisor.

But Levin’s arguments don’t seem to have resonated with Cage. Levin says he tried the stick approach by talking about other celebrities who went bust. It didn’t work.

He tried the carrot approach by pointing out that a better balance sheet would let Cage avoid “film roles that would be detrimental to his career.” Anyone who knows Cage’s body of work can tell you that’s never been a motivating factor here.

Cage likes working. He likes weird work. He works a lot. The power to suddenly become picky about roles is probably not going to excite him much.

Eventually, Levin tried logic. He saw the housing bubble on the way and begged Cage to sell some properties or at least stop buying them.

That one failed too, because these weren’t investments for Cage. It was a multi-million-dollar collection and he didn’t even care about fixing them up, much less reselling them.

But he had collector fever and you can’t really cure that by talking about asset allocation and diversification. All you can really do is set a hard budget and get the authority to enforce that budget.

And if you can’t do that, once again, it’s time to cut your losses and bid that client good luck and good-bye.

Scott Martin, senior editor, The Trust Advisor

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