Paul L. Caron

Thursday, December 13, 2012

The Day After Calling for Higher Estate Taxes on the Rich, Warren Buffett Helps Billionaire Save Millions in Taxes

Reuters:  Berkshire Buyback Seen Clashing With Estate Tax Push:

Warren Buffett's $1.2 billion share buyback from a single unnamed investor likely helped that person's estate save substantially on taxes, just one day after the Berkshire Hathaway CEO said the rich should actually be paying more, not less, when they die. With the "fiscal cliff" looming and ... taxes set to rise dramatically in less than three weeks, the timing was seen as advantageous -- and, according to Berkshire watchers, also out of place in the context of Buffett's recent tax activism. ... Berkshire said it bought 9,200 Class A shares from "the estate of a long-time shareholder," whom it did not name, at $131,000 per share, a price in line with where Berkshire has traded in recent weeks. ...

Yet given his wealth and his own self-professed low tax rate, Buffett has been called out in some quarters for not practicing what he preaches.

Update:  Wall Street Journal:  Berkshire, in Rarity, to Buy Holder's Stock:

The estate that sold the shares did so at a time when many investors are unloading some of their winning stocks to avoid an increase in the capital- gains tax next year, and the sale should qualify for this year's top tax rate of 15% on long-term capital gains. Next year the top rate will be at least 18.8% for wealthy Americans, because of a new 3.8% tax on net investment income.

In addition, as part of the debate in Washington over taxes and spending, President Barack Obama has called for a five-percentage-point increase in the 15% rate, so the top rate could be 23.8%.

Exactly how much a difference the coming tax increase would make is unclear. One thing is certain: Even though the Berkshire shares were longtime holdings, the estate appears unlikely to pay tax on all of the stock's rise over the decades that Mr. Buffett has run the company. Estates that sell shares pay tax only on increases in the value of shares after the date of death, according to tax experts.

Mr. Buffett has been a vocal advocate for higher taxes on the wealthiest Americans, arguing that the most affluent people in the country should pay a minimum tax of 35% on taxable incomes over $10 million.

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The prime suspect here seems to be Malcolm Chace Jr., a former BRK board member who died June 23, 2011. On that date BRK.A closed at $113,415. Chace's paid obituary in the NY Times identifies him as a philanthropist. He was survived by his wife and the Chace Fund, which distributes funds to community organizations with which he was involved, so I don't know that he paid any estate tax.

In recognition of his dedication to Rhode Island education, he received honorary degrees from Brown University, Bryant University and Johnson and Wales University. The Chace Fund has been paying out more than half a million dollars a year to various charities for at least the last five or six years, according to its Form 990.

The Providence Journal reported when Chace died:

Kim Chace took his father's position as member of the board of directors of Berkshire Hathaway Inc., in 1992, at the time his father decided to retire from that seat.

In 2007, he stepped down from the board of Berkshire Hathaway Inc., the company that served as the investment vehicle for Buffett.

Reached by phone at Berkshire Hathaway headquarters in Omaha, Neb., Buffett recalled Kim Chace as a capable adviser.

"Both he and his father [Malcolm G. Chace Jr.] were closely identified with Berkshire Hathaway for decades and decades," Buffett said. "They were enormously supportive for a period of over 40-plus years."

Buffett once described Chace as a "warm gentleman and helpful partner."

Posted by: Bob | Dec 13, 2012 9:12:26 AM

Average daily volume for BRK-A is 720 shares, so this is a chunk that the market would find hard to swallow. The missing fact here is the estate's basis in the shares. How do we know that the decedent's date of death was not September 21, when the shares were trading at 135K ?

Posted by: Bob | Dec 13, 2012 8:47:16 AM


That's kinda what I was thinking too. But even that seems weak, as BERK A's are a pretty liquid security (I think) in a very liquid market (I know).

Should have been able to feather out the sale over a few weeks and accomplished more or less the same thing with minimal price disruption.

Posted by: Jay | Dec 13, 2012 8:02:42 AM

Despite speculation for the non-tax reasons of the transaction, Buffett knew that the purchase would substantially avoid taxes for a one-percent investor, and that went against his historical reluctance on share buybacks and, especially, went against his public "moral convictions" on paying a "fair share" of taxes, despite whatever impact on his personal wealth on paper, which isn't exactly causing him to join the food stamp explosion. He should have said, "Others may, I cannot." Yeah, right.

Buffett says and does what is best for Buffett, and he doesn't do something for someone else, like Obama, unless he's getting something better in return. BTW, when will he pay his own back taxes? Warren Buffett Owes 1 Billion in Back Taxes

Posted by: Woody | Dec 13, 2012 7:59:09 AM


That's the only thing that I could come up with too. But even that seems weak to me. BERK A's are still pretty damn liquid securities (I think) in a very liquid market.

Seems like the seller could feather out the sales over a few weeks and not disrupt the pricing much.

Posted by: Jay | Dec 13, 2012 7:38:29 AM

You expect dumbass Reuters "Skool of Journalism" grads to know tax lawz? Jay is right. This has no impact on the estate tax this rich person will pay. It does greatly impact the INCOME TAX they'll pay since they recognized it this year with them lower cap gain rates. Dumbass Reuter mockinkbirds need to write about things they know, like Danze with da Star winners and loosers and not tax lawz!

Posted by: TaxDudeSC | Dec 13, 2012 7:25:57 AM

I think Jay is right, and the report is wrong. BH as purchaser is not relevant to the future estate tax liability. BH facilitated the sale by making a block purchase. No doubt this benefited both buyer and seller by avoiding the large sale moving the market.

BH has made a lot of money off of the estate tax, both by selling insurance and by buying family owned businesses that were forced to sell to manage estate tax liability. This article is not relevant to either of those situations.

Posted by: j | Dec 13, 2012 7:04:17 AM

Jay - I'm just speculating here but 1) the transaction is valued in excess of $1.2 billion so that cuts down on number of potential buyers (I left my check book at home unfortunately) and 2) a sale that big to outsiders could potentially drive share price down - particularly if seller wanted to sell before year end to avoid tax bump. Number 2) would also help other BH shareholders by maintaining value of the shares - so WB benefits as well (at least on paper).

Posted by: Stealthpundit | Dec 13, 2012 6:56:40 AM

Berkshire/Buffett and their friend's estate are acting within the law. The trick is to have the laws written to your benefit. Taxes are for the little people. 9,200 Class A shares at $131,000 per share does not qualify as little people. Pity the single person, making $210k income annually, who has scrimped together a single share of BRK.A (hopefully, in a Roth IRA). For estate tax smarts, you can't beat George Steinbrenner.

Posted by: fit2post | Dec 13, 2012 6:49:03 AM

Whoa whoa whoa. There are many reasons why this transaction could have occureed. Oftentimes, shareholders' agreements require estates of deceased shareholders to offer shares back to the issuing company before distributing them to heirs or selling them to a third party. The estate plan of the deceased shareholder could have directed his executor (or trustee) to sell the shares.

Suggesting that Warren Buffet wanted to buy back the shares because it would help a billionaire's estate is just silly. Buffet's personal opinions probably have very little to do with this transaction.

Posted by: Skeptical | Dec 13, 2012 6:46:03 AM

Would you please expand on how this particular transaction will substantially reduce the estate's tax burden. I get the advantage of taking the gain this year as opposed to next, but how does BH being the purchaser ( as opposed to any other purchaser) benifit the estate's tax liability. Apologies if this is a REALLY dumb question.

Posted by: Jay | Dec 13, 2012 6:20:43 AM

Warren's is not a sage. He is a crony capitalist whose capital returns are tied to his public policy positions driven by politics.

Berkshire owns GEICO which sells discounted insurance policies if you are a government employee.

Divorce Warren from government and his capital returns are well below the rates the S&P500 will yield.

Posted by: wtfci | Dec 13, 2012 6:15:29 AM

Buffet is sucking up. He promotes something for Obama; he gets something from Obama. Maybe it is simply to be left alone, maybe it is something more. But he gets something, no doubt about it.

Posted by: marie | Dec 13, 2012 5:37:53 AM