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Saturday, May 12, 2012

Will Facebook Co-Founder's Renunciation of U.S. Citizenship Increase His U.S. Tax Bill?

FacebookFollowing up on yesterday's post, Facebook Co-Founder Renounces U.S. Citizenship in Advance of IPO, Saving Millions in U.S. Taxes:

Tax experts say it’s a shrewd move. ... “It's definitely savvy tax planning,” said Edward D. Kleinbard, a professor of law at USC who specializes in federal tax policy and international taxation. “He can argue that the value of the Facebook shares in September, when he gave up his citizenship, were significantly less than the value that will be set at the IPO next week.” ...

Reuven Avi-Yonah, director of the international tax program at the University of Michigan's law school, said it was likely that Saverin and the IRS will disagree on how much exit tax Saverin owes, but it could be as much as $150 million. That's a big number, but it might still be less than the taxes Saverin would owe if he stayed in the country.

“It definitely is going to reduce his tax burdens,” said Edward Kleinbard, a professor at the University of Southern California’s Gould School of Law who specializes in tax law. Saverin won’t be able to duck all of his taxes, Kleinbard said, but he will be able to avoid paying some charges he would have picked up if he had stayed a U.S. citizen. He said that Saverin will have to pay taxes on the value of the company before he switched his citizenship, while company was still private. Saverin could argue that the value was lower before it was publicly traded.

[C]ontrary to many media reports this is not going to reduce his current tax bill: far from it it will increase his current tax bill. It will obviously reduce his future bills, but he has to pay tax as if he liquidates his entire portfolio on the day of his renunciation. ...

Now, it is true that there may well be future savings on his tax bills. Any profits or income he makes from the date of citizenship renunciation onwards will obviously be free of US taxation. And by timing his renunciation well before Facebook’s IPO he will also be taxed not on the IPO value of his stock, but on whatever was the value in the private, secondary, markets for Facebook stock at that time. But his tax bill will be based upon a calculation of his selling his entire estate and booking the profits. This obviously includes his entire Facebook stake: something that it doesn’t appear that he is selling in the IPO.

So, in current terms, the net effect of his citizenship renunciation on his immediate tax bill is to increase it, hugely. For it will, at minimum, start with the idea that he’s just made a $3.5 billion or so profit (adjusted downwards for the difference between the private market value of Facebook last fall and the IPO price) on his Facebook stock which he got originally for minimal amounts of money. At the standard 15% long term capital gains rate that’s near $500 million right there. In the long term, yes, almost certainly a reduction in his tax bills, but at the cost of pushing up his current tax payment.

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Comments

Facebook founder, Saverin, apparently attempted to accelerate gain. Why? (a) he is minority shareholder so valuation will use minority discounts (including lack of marketability even with a "potential" IPO); (b) historically low cap gain rates; and (c) enterprise value (starting point for mark-to-market) of Facebook much lower in Sept., 2011.

Don't agree that triggering tax and non-payment with interest on tax deficiency is a good investment arbitrage. And failu;re to pay penalties? Better arbitrage is to borrow against Facebook holdings (interest rates low these days) and invest the pre-tax cash. Jack Butler, Columbus, Ohio

Posted by: Jack Butler | May 13, 2012 12:40:20 PM