March 21, 2014

Do As I Say

Do As I Say

What are we to make of Warren Buffett’s latest tax parlay in a stock-for-active-assets deal between Berkshire Hathaway and Graham Holdings Co.? The man who has lectured corporate America about companies’ obligations to pay their fair share is a mastermind at minimizing his own tax exposure using every legally available means in the U.S. tax code. Now in the spirit of full disclosure, before I go any further I need to let you know that I am, in fact, a Berkshire Hathaway shareholder with a slightly smaller stake than Warren himself.

On Wednesday, it came to light that Berkshire Hathaway, of which Buffett is famously chairman & CEO, notified regulators of the company’s intent to swap about $1 billion of Graham stock that Berkshire owns for a package including a Miami television station, Berkshire Hathaway shares (that Graham owns) and cash. The transaction will enable Buffett to limit his company’s tax liability in cashing in the wildly appreciated Graham stock (which he has held since the 1970s), avoiding a capital gains tax that would have applied to a straight sale.

The package deal, which is essentially a company split-off, is allowed under a 2006 change to U.S. tax laws intended to tighten a loophole that enabled companies to hide tax events inside certain sales transactions. Interestingly, the government expected the change to generate $65 million in new corporate taxes over a decade. But in the Buffett deal, it has the effect of strictly limiting what would otherwise have been a tax bill to Berkshire Hathaway of nearly $350 million – more than five times what the government projected as its 10-year net gain on all corporate tax revenues under the provision.

Certainly, Buffett has an obligation to his shareholders (thank you Warren, much appreciated!) to be as tax efficient as possible. They invest with the Oracle of Omaha because he is a genius, not because he is righteous. But he certainly has taken a righteous tone in castigating a system that lets corporations use a “Cayman Islands mail drop” as a tax strategy. Whether you agree with him on this or not, you have to admit that Buffett’s Graham Holdings position is not exactly sympatico with his often-cited New York Times op ed of 2012.

Buffett has also been known to criticize the individual tax rates and on many occasions has stated that his Federal income tax rate is lower than that of his secretary.

On the corporate side and as a Berkshire shareholder, I applaud his efforts. As a personal taxpayer, rather than complain that his tax rate is too low, Mr. Buffett could always write a voluntary check to the US Treasury so he doesn’t feel so badly about paying so little tax.

Is it a case of do as I say, not as I do? I have no idea. All I know is that smart companies leverage whatever tax strategies are legally available to them to lower their tax bills. It’s the American way.

Jay Nisberg & Julie Gross Gelfand contributed to this posting.