Vincent J. Curtis
4 Oct 2016
With all the breathless speculation about Donald Trump
declaring a $916 million tax loss twenty years ago, and who allegedly could
have avoided paying incomes taxes for eighteen years, it might be worthwhile to
gain perspective on the issue by looking at how a number of very famous rich
people deal with income taxes.
This is not to disparage these individuals or to accuse them
of being unpatriotic. These are just
examples of how multi-billionaires can make use of the tax code to avoid
exposing themselves to the unproductive predations of the IRS. The people I’m going to mention are Larry
Ellison of Oracle, Warren Buffett of Berkshire-Hathaway, and Mark Zuckerberg of
Facebook. I’m going from memory here, so
all the details may not be accurate.
Larry Ellison is the co-founder of Oracle, and owns billions
of dollars of its stock. He is said to
be worth about $52 billion. Until his
retirement, he used to be a dollar a year man, meaning he took a mere token of
salaried compensation from the company.
When Ellison needs some cash, to buy another house or another yacht, or
pay the property taxes on his dwellings, he doesn’t have to sell stock. He can go to the bank and borrow the money he
wants using Oracle stock as collateral.
This method has profound tax implications.
If Ellison sold stock, he would have to pay capital gains
tax; and, in addition, he would lose control the company to the extent of the
value of the stock that he sold. By
using the shares as collateral on a loan, he is not selling them and therefore
doesn’t owe capital gains tax; and, in addition, he retains the voting rights
vested in those shares. Lastly, he is
not adding to the volume of tradeable shares by selling them on the open market,
which tends to depress the share price. Because
of his vast holdings, Ellison can keep this up until the time he cashes in his
chips for good. At that point, the bank
can call the loan, sell the shares, and recoup the loans, and the only thing
affected is Ellison’s estate.
Berkshire Hathaway started as a closed-end fund in the
1960s. By the early 1980s, Warren
Buffett had brought the share price into the $200 range. By the middle 2000s the value of the shares
had risen to over $100,000. The reason
Warren Buffett was able to make the shares of Berkshire-Hathaway so valuable
was, partly because of his shrewdness as an investor, and because he always
re-invested the returns back into the business.
He issued no dividends, in other words.
To Buffett, issuing a dividend was tantamount to saying that the
investors in Berkshire knew how to invest their money better than he did. If an investor thought he knew better than
Buffett, he was free to sell his shares in Berkshire Hathaway and do with his
money as he saw fit. In all of this,
because Berkshire Hathaway never declared a dividend, its investors were never
confronted with capital gains tax, and the fund never deprived itself of
investable cash.
Buffett himself, now said to be worth about $63 Billion, has
advice for family owned businesses. His
advice, in general, is not to sell. If
you sell, then you are on the hook for large capital gains taxes, and then you
have all this cash that needs to be reinvested, and generally it will go into
something you don’t know intimately. Buffett
advises that you undertake no activity that enables Uncle Sam to dip his hand
into your fortune.
Mark Zuckerberg is said to be worth about $55 Billion. I recall seeing a story on the CNBC website
discussing his tax situation when Facebook went public. It said that Zuckerberg would likely be on
the hook for about $1 billion in tax liabilities, but by playing the same game
as Ellison, he would only have to pay taxes once. If so, any increase in the value of his
wealth, i.e. in the value of the shares in Facebook, will not translate into
taxable income unless he sells shares.
But he doesn’t have to sell shares or take pay from Facebook in order to
enjoy any lifestyle he wanted.
The purpose of this was to show how it is possible for
billionaires to avoid giving the IRS any more than is necessary, and generally
that amount is none. The best
businessmen recommend against giving the IRS any money because that money is
lost permanently as investible cash in the business. The business can’t grow at maximum speed so
long as the lamprey eel is sucking the life out of it.
Do business practices such as these make the practitioners
bad people? Certainly not! They are acting within the law. They are powerful stimulants to the economy,
and as employers they keep people off the welfare rolls. Their businesses have contributed to the
general welfare of America.
But when Hillary calls into question Trump’s patriotism
because twenty years ago he claimed a tax loss, she also implicitly calls into
question the patriotism of these extremely wealthy supporters of hers and for the
same reason.
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