Buffett's Favorite Tax Trick to Save Billions
More Warren Buffett Hypocrisy; Restructures Deal To Avoid $400 Million In Taxes
Warren Buffett epitomizes everything that is wrong with the global economy, and the U.S. economy specifically. He is the consummate crony capitalist, a brilliant yet conniving oligarch who intentionally plays on the gullibility of the masses to portray himself as one thing, when in reality he is something else entirely.
He publicly talks about how rich people need to pay more in taxes, then turns around and pioneers new ways for his company Berkshire Hathaway to avoid hundreds of millions in taxes. He thinks that by going on television stuffing ice cream cones and hamburgers in his mouth and acting all grandfatherly that no one will notice who he is really is and the incredible hypocrisy of his actions.
Berkshire's deal with Graham Holdings is structured in a way that may allow the Warren Buffett-run conglomerate to exit a multi-decade investment in Graham Holdings without paying any capital gains tax, Robert Willens, an independent tax expert, said in a Friday telephone interview.
And Berkshire certainly gained from its Graham Holdings investment.
The cost-basis for Berkshire's 1,727,765 million shares was $11 million, Warren Buffett said in Berkshire's 2000 annual letter to shareholders. Now, Berkshire is seeking to exit Graham Holdings at a value in excess of $1.1 billion.
Applying a 38 percent tax rate (federal plus state and local taxes) would bring Berkshire to about $400 million in tax liability, Willens said. The swap orchestrated between Berkshire and Graham Holdings, however, is likely to reduce Berkshire's tax liability to $0.
On Wednesday, Berkshire Hathaway and Graham Holdings agreed to a deal where the Warren Buffett-run company will acquire WPLG, cash and Graham Holdings shares in Berkshire Hathaway in exchange for Berkshire's 1.6 million share stake in the former owner of The Washington Post.
The Miami TV station will be valued at $364 million, and Graham Holdings will fork over $327.7 million in cash and $400.3 million worth of Berkshire shares, as part of the deal, according to an 8-K filing with the Securities and Exchange Commission. Berkshire Hathaway will retain between 91,490 and 111,716 shares in Graham Holdings depending on the trading prices of both firms as the exchange closes.
"The story here is that Berkshire is avoiding about $400 million in tax liability they would have incurred if they had done a direct swap," Willens said.
The mechanics of Berkshire's maneuvering are arcane, especially since both Berkshire and Graham Holdings hold large investment gains on each other company's shares. Berkshire holds 1,727,765 Graham Holdings shares, while Graham Holdings owns 2,214 shares in Berkshire's Class A stock.
To unwind each other's investment, Berkshire and Graham Holdings devised what amounts to a stock swap, although not a direct swap that would have locked in capital gains on both companies' respective investments.
"[W]hen the dust settles, the parties will have accomplished their unwinding objectives, but will have done so without tax consequences," Willens said in a Thursday note to his clients.
Berkshire and Graham Holdings will effect what is called a "cash rich split off" by creating a subsidiary, called "NewSub," that will execute the exchange of the TV station, hundreds of millions in cash, and stock between both parties.
Eventually, Berkshire will control 100% of NewSub's assets, and Graham will receive 1.6 million of its shares from Berkshire.
Normally, both corporations and investors must recognize taxable gains on appreciated assets, even if they transfer shares for assets such as cash or business lines.
But Berkshire isn't directly taking the TV station from Graham, and Graham isn't taking Berkshire's stock. NewSub is doing all of the stock, TV station and cash swapping. As such, the swap may meet Sec. 355 of the federal tax code that exempts capital gains.
"The Exchange is intended to qualify for non-recognition of gain and loss to Graham and to BH under Sections 355(a), 355(c), 361(a) and 361(c) of the Code," Berkshire Hathaway said in a filing with the SEC.
The most important element to qualifying for Sec. 355 in the case of Wednesday's deal is that the Internal Revenue Service won't see NewSub's assets as being comprised two-thirds or more of investment assets, a disqualified investment corporation. Investment assets in the swap would include the $327.7 million in cash and the $400.2 million in stock Graham will transfer to Berkshire by way of NewSub.
Because Graham and Berkshire will place a $364 million value on WPLG and the value of the stock and cash that comprise the rest NewSub won't exceed $728 million, investment assets are unlikely to exceed the IRS's the two-thirds threshold.
"The I.R.S. certainly has an interest in showing that the value of the TV station is less than $364 million. If it is less than $364 million, NewSub might be treated as a disqualified investment corporation," Willens said.
If Warren Buffett's tax lawyers and bankers earn their fees, NewSub won't be considered a disqualified investment corporation that would be liable for capital gains tax.
"This particular cash-rich split-off breaks new ground since, to our knowledge, it is the only one in which the investment assets of the distributed subsidiary consist, at least in part, of the stock of the very shareholder to whom the subsidiary's stock is being distributed," Willens wrote on Thursday.Love this. Billions. Damn. Just 1% of what he saves in taxes....
Love this. Billions. Damn. Just 1% of what he saves in taxes....
That is just what is known
What about his company selling data before the official news release (http://www.ft.com/intl/cms/s/0/6cdf6a90-9a7f-11e3-8232-00144feab7de.html#axzz3JMO24d5D ).
Warren Buffett, whose conglomerate Berkshire Hathaway owns Business Wire, stepped in personally to examine the direct sales, fearing that recent publicity around the practice could hurt the company’s reputation.
Should we believe that he had the information before the others and that he did not use it (that he "only" sold that information to others)? Why of course. For gods sake, they are even stating a PR reason for alleged news selling stop, without any fear that insider information misuse law could apply to them
And the guy is still free ... even though he bought that news selling troyan horse 8 years ago - the time that strangely coincides with buffets "undisclosed forex investments" (all he ever told that he is "investing" in forex but did not want to tell in which symbols)
That is just what is known
What about his company selling data before the official news release (http://www.ft.com/intl/cms/s/0/6cdf6a90-9a7f-11e3-8232-00144feab7de.html#axzz3JMO24d5D ).
Should we believe that he had the information before the others and that he did not use it (that he "only" sold that information to others)? Why of course. For gods sake, they are even stating a PR reason for alleged news selling stop, without any fear that insider information misuse law could apply to them
And the guy is still free ... even though he bought that news selling troyan horse 8 years ago - the time that strangely coincides with buffets "undisclosed forex investments" (all he ever told that he is "investing" in forex but did not want to tell in which symbols)He will never get punished
His employees are running the state
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
You agree to website policy and terms of use
Forget corporate inversions -- Warren Buffett's Berkshire Hathaway is saving billions of dollars in taxes by making big deals financed with asset swaps.
In April, Buffett swapped about $1.1 billion of stock Berkshire owned in Graham Holdings , formerly The Washington Post Company, for a Miami television station it owned. In doing so, Berkshire Hathaway avoided paying taxes on the more than 100-fold increase in the shares since its initial purchase. If the company had sold the stock, Berkshire Hathaway would have been on the hook to pay taxes of up to 35% on its gains.
Now Buffett's back at it. In a deal with Procter & Gamble , Berkshire Hathaway will swap shares it owns of P&G for ownership of the company's Duracell battery unit. Once again, Berkshire Hathaway will avoid taxes on the capital gains on its Procter & Gamble stock.
Nothing new, just bigger
Buffett's tax trick isn't anything new. Close observers have watched Buffett perform the maneuver time and time again. He did it in 2008, when Berkshire bought two insurance units from White Mountains Insurance Group.
As recently as 2013, the company swapped a stake in Phillips 66 for control of a pipeline business in a $1.3 billion deal, again avoiding taxes on its capital gains.
And going back to his early years, Buffett's had a penchant for tax-friendly acquisitions. Berkshire Hathaway purchased 90% ownership in Nebraska Furniture Mart in 1983. The deal was designed to cross the 80% threshold at which Berkshire could consolidate the company into its financials, and divide up its earnings to the corporate parent without any tax consequences.
Size is no disadvantage for taxation
Berkshire Hathaway is the fourth largest business in the world by revenue. Many believe that its size may limit the company's ability to generate excess returns over the market average in the future.
And while size may hamper its investment opportunities on the front end, it isn't hampering the company's ability to generate tax savings on the back-end. At the time of each tax-friendly deal, Berkshire Hathaway was one of the largest investors in Graham Holdings, Philip 66, and Procter & Gamble.
Its outsized stakes, combined with the company's historical capital gains, give it a unique edge as a bidder for units on the chopping block. By making deals through asset swaps, Buffett's effectively bidding with some of Uncle Sam's money -- call it just another benefit to the long-term, buy-and-hold investing process.
Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. Buffett's fear can be your gain. Only a few investors are embracing this new market, which experts say will be worth over $2 trillion . Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a free investor alert on the company we're calling the brains behind the technology.
source