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Tuesday, August 29, 2006

Buffett's Tax-Unwise Giving

Interesting article in today's Washington Post:  A Donation Without Calculation, by Allan Sloan:

I'd like to revisit one of this summer's biggest financial stories: Warren Buffett's decision to donate $38 billion of his Berkshire Hathaway stock to charity, most of it to the Bill & Melinda Gates Foundation. A fascinating aspect of this gift is that the folksy Buffett, usually a cold-eyed tax whiz, isn't being at all tax-efficient. He's saving a relative pittance in income taxes, he told me last week, and expects his estate to pay an eight-digit tax -- even though he'll have given all of his Berkshire stock away....

In 2008, he estimated, he'll save $500,000 to $1 million. Call it one-twentieth of 1 percent. "I can get the same benefit by donating $4 million" as by giving almost $2 billion, he said. His savings are so small (by billionaire standards) because he's donating so-called appreciated property -- stock worth more than he paid for it -- to private foundations. You can offset only 20 percent of your income with this kind of donation, as opposed to the 50 percent you can save by writing checks to public charities....

To be sure, Buffett is being tax-efficient by donating Berkshire stock on which he has huge gains and will pay no capital-gains tax. But anyone with paper profits on a stock portfolio can do this and get a bigger break than Buffett is getting. So if you want to go after Buffett for his tax opinions (which I share), go right ahead. But don't accuse him of giving away his fortune to duck taxes. At a rate of 0.05 percent, his tax savings aren't even a rounding error.

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Comments

While his income tax savings will be relatively small, isn't he trimming his estate tax bill from tens of billions, to a fraction of that (even if it were in the high eight figures)

Posted by: Doug | Aug 29, 2006 5:08:35 PM

Alan Sloan doesn't give Buffett's lawyers enough credit for their advice. According to what I have read in the press, Buffet's gift requires that the Gates Foundation spend the amount of the gift in the same year that the gift is received. Presumably, those expenditures will be qualifying distributions and therefore the Gates Foundation will be an organization described in section 170(b)(1)(E)(111) and therefore Buffett will be in the same position as if he had made a gift of the Berkshire Hathaway stock directly to a public charity--deduction based on FMV and subject to a 30% limitation.

Whether it would be tax-efficient to sell the Berkshire Hathaway stock and donate the proceeds to a public charity is a much tougher question. Presumably such a restructuring would increase the value of Buffett's total deductible contributions by 35% of the sum of (a)20% of his pre-sale AGI plus (b)50% of the gain recognized on the sale of the stock. The detriment would be at 15% of the gain However, the actual tax benefit would depend on whether Buffett is currently making significant cash contributions to public charities, and how much value he attributed to the five year carryforward of excess contributions. Moreover, Buffett trusts the Gates Foundation to spend the money wisely, and may not have enough confidence that the same result would follow if he wrote a check to one or more public charities. Also the effect of a massive sale of Berkshire Hathaway stock undoubtedly was taken into account in structuring this gift. We just don't know enough facts, but I assume that Mr. Sloan doesn't either. I would give Buffett's lawyers the benefit of the doubt.

Posted by: William Golden | Sep 1, 2006 8:42:39 PM