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(July 25, 2005)

The Facebook Tax Avoiders

May 23, 2012 by Ugh
Facebook went public! And, so did the tax avoidance strategies of some of its founders and Facebook itself! Comprehensive coverage is at the TaxProfBlog (scroll down to 21 May and keep going).

First up, Eduardo Saverin, who renounced his U.S. citizenship. According to this NYTimes article, he started the process in January 2011, was officially renounced in September 2011, and this fact was finally reported to the public by the IRS in April 2012, the last some unfortunate timing for him. What did he avoid? Maybe $100 million in capital gains taxes (per the NYTimes), but likely much more in estate taxes, since he's moving to Singapore which taxes neither. The NYTimes reports Mr. Saverin's claims that "This had nothing to do with taxes ... I was born in Brazil, I was an American citizen for about 10 years. I thought of myself as a global citizen" and that "Mr. Saverin said that becoming a Singapore resident enabled him to engage in more sophisticated financial activities within that country." But...I don't think you have to renounce your U.S. citizenship to become a resident of Singapore. Curious.

More generally, the only reason to give up your U.S. citizenship is because of the Internal Revenue Code (I suppose there may be cases where if you want to become a citizen of Country X, or live there on a more or less permanent basis, then Country X may require you to relinquish your U.S. citizenship). There are two tax reasons: (i) because of the amount of taxes you would save; and (ii) because of the tax compliance burden (or both). Mr. Saverin is in the former camp, while professing to (sort of) be in the latter, and thus is worthy of some scorn. As to the compliance burden on those Americans living abroad, it is large and carries potentially ruinous penalties for even inadvertent errors, and so there is good reason to give up your citizenship if you've decided to permanently live abroad, especially if you earn a more-or-less middle class salary, as opposed to Mr. Saverin who could pay someone to make him compliant.

There are also very sympathetic cases of people who did not even know they were U.S. citizens, e.g., born here to non-U.S. parents and then moved back to the home country while still children, all of a sudden finding out that the IRS demands they pay U.S. tax for the past X years (X being as long as they've earned income) plus interest and penalties, not to mention those U.S. citizens living abroad who now find it hard to open a checking account with their local (i.e., non-U.S.) bank due to the compliance costs.

In any event, I find the reactions on both the right (Saverin as "An American Hero" for giving up citizenship) and left (Chuck Schumer "Citizenship is not for sale" and Bob Casey "Mr. Saverin spits in the eye of the American people when he does this.") to be excessive and ill-informed. For some reason, the comments of Schumer and Casey especially piss me off - emigration is not the same as immigration, apparently; among other things.

Next up: Mark Zuckerberg. What did he do? A GRAT! That is, a Grantor Retained Annuity Trust. What does that mean? He can pass on lots and lots of Facebook stock to his heirs free of estate and gift taxes due to the nice combination of highly appreciating Facebook stock (he did the GRAT several years before the recent IPO) and low low applicable federal interest rates! How many heirs does Mr. Zuckerberg presently have, you might ask? None! Was he even married when he did this? No! But neither of those things stopped him from passing on massive amounts of wealth to the TBD Zuckerbergs.

Note that a GRAT, done correctly, is a perfectly legitimate estate planning technique that abolished by Congress, and the Obama Administration has proposed doing just that in its budget (IIRC). More generally, Congress needs to rethink the valuation methods applicable to estate and gift tax laws, and not only just the estate tax exemption and rate, to prevent this kind of naked tax avoidance. For example, disregarding things like trusts, or family limited partnerships, or any kind of legal form that masks the true value of underlying assets. Mr. Zuckerberg also appears to have engaged in what appears to be a rather bad example of marital asset planning. Really, Mark?

Finally: Facebook itself! Actually, I don't think Facebook is engaged in any kind of tax avoidance here. But Sen. Levin seems to think so. To wit, Facebook gets to deduct the cost of its employee/founder stock option plan, which...uh, I'm not sure why that's so bad. To be sure, this is not consistent with the GAAP treatment of such stock options, but it's an actual cost to the company and income to its employees/founders, generally offsetting the corporate deduction, and may in fact be more favorable to the government; which Sen. Levin acknowledges but then he goes off on irrelevant tangents. If anything Sen. Levin's beef should be with the accounting rules, not the tax code, though I suppose an objection could be made to the NOL carry-back provisions. But hey, why not jump in the pool while it's warm!


May 23, 2012, 22:46:14 libjpn wrote:

Incredibly timely as I am one of those middle class salary types who started the process, but is hung up in the middle for various reasons. This url might be of interest.

I'm getting ready for my yearly Vietnam seminar, but I'll try and get something about this up after that.

May 24, 2012, 02:44:50 Ugh wrote:

lj - not sure why I didn't realize that you are caught here.

I was at a hearing on the FATCA rules last week and there was a representative of Democrats Abroad testifying as to the unfortunate effects of the law (along with the FBAR form) on U.S. ex-pats. He made a compelling case in my opinion but unfortunately the IRS and Treasury Department (and Congress) don't appear to be listening.

May 30, 2012, 23:38:23 Slartibartfast wrote:

I'm a little disgusted by Saverin, but he has to abide by the same laws the rest of us do, even if his circumstances take him into portions of the tax code that most of us can only dream of having to deal with.

I don't know to what extent others are covering this, or even if it's a valid idea, but for next year the capital gains rate automatically shoots up to its pre-Bush values, which would likely cost Saverin a pretty piece of change.

As in all other things related to tax avoidance: if you build it (the tax avoidance mechanism), they will come.

May 31, 2012, 00:24:13 Ugh wrote:

Well, the cap gain rate for Saverin would have gone from 15 to 20%, not that huge an increase (and still well below the 28% it was after the Tax Reform Act of 1986); still a long way from the 0% that he'll be paying in Singapore, however.

May 31, 2012, 00:35:23 Slartibartfast wrote:

Some of the articles over at taxprof's seemed to imply Saverin would have to pay cap gains on his basis up to the time when he renounced his citizenship; that the real savings would be savings on gains after he moved. But I didn't read it all. It's all interesting; I just don't have time to read through the raft of tax codes that might apply.

May 31, 2012, 00:46:01 Slartibartfast wrote:

Also: did the IPO create a new basis? If so, he's avoiding a lot more than 15-20% of taxation if he wants to get out of FB altogether & quickly, because he'd be in short-term territory. Maybe. IANATA.

May 31, 2012, 02:07:37 Ugh wrote:

Yes, he has to pay an exit tax based upon his unrealized gains as of the date he expatriated, so as of sometime in September last year, well before the IPO at a time where the valuation was likely significantly below the IPO price. So yes, he would save the tax on any gains after the date of his expatriation.

I don't think the IPO creates a new holding period so his gains realized on shares he held before the IPO would be long term gains (if he received additional shares in the IPO, he may have had a short-term gain on those shares, but I think it depends on the terms of the deal; e.g., if he held preferred stock with a conversion into common stock feature, his holding period probably didn't start over upon the IPO).

The real tax savings is estate tax savings, since that's based upon the FMV of the stock at the time of death, no matter what your basis is.

May 31, 2012, 02:43:08 Slartibartfast wrote:

Ah. Good to know. Thanks for correcting me!

May 31, 2012, 23:05:19 John Thullen wrote:

" the time of death, no matter what your basis is."

One assumes Citizen of the World Saverin isn't so much of a tax coward that he would take instant depreciation and eternally delay his capital gains by consulting the H.R. Block of the Underworld, H.R. Charon, whose river brooks no paddles when you're up it.

Becoming Citizen of the Underworld might be too precipitate a step for the discerning reader of the tax code, although I'm pretty sure the River Styx runs through Singapore as well.

If Saverin is ever surveilled, arrested, and fined for not flushing in a Singaporean public bathroom, I expect he'll reconsider freedom's costs and benefits and move back to the U.S., where we institutionalize Greco tax avoidance into the tax code, the better to keep our public toilets unflushed.

The Toid Exemption, they call it in Joisey.

Funny, the ancient Greeks' conception of Death here, particularly given current events and the rampant tax avoidance in that country, which among other factors led to the coming economic debacle. It turns out their bureaucracy of the Death Code was a bit complicated too, what with the five Rivers separating us from the Underworld and such, though there was that single, ultimate Death bracket -- 100%.

Simplified. Certainly not Progressive. A Fair Tax, you could call it.

One wonders why Grover Norquist doesn't turn his formidable powers to eliminating Death, or at least giving everyone an extension, rather than f8cking with all of this temporal crap.

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