Why Warren Buffett’s tax tactics are less outrageous than Apple’s

April 26

Warren Buffett and taxes are two hot-button items, especially when you combine them, as I did in my recent column about how Berkshire Hathaway and Graham Holdings (the former Washington Post Co.) are saving a total of $675 million or so in taxes by using something called a cash-rich split-off.

So I’d like to share some of the reader reactions to this column, and give my responses to them. When I do this, I usually cite from several letters or posted comments. This time, the major issues that people seemed to have with my column (and with Buffett, who says tax rates should be raised on the rich) were summarized in an
e-mail from one reader: Joe Boccuzzi of Stamford, Conn.

I asked Boccuzzi for permission to share edited excerpts of his e-mail with you, and he graciously agreed. You’ll see them — and my answers — below.

At the end of this piece, I’ll explain how Congress could (and should) close the time-honored but ridiculous loophole that Berkshire and Graham used.

And here we go.

Allan Sloan’s disdain for Apple’s tax policies and admiration for Berkshire Hathaway’s tax policies are hard to understand. Both companies find legal holes in the tax code to avoid paying the U.S. Treasury. The major difference is Warren Buffett’s very public backing of higher taxes on “the rich.” Buffett presents the all-American boy image and is a believer in more taxes — but every Berkshire deal maximizes “tax efficiency.”

There’s a big difference between doing something specifically permitted by the tax code — such as deducting interest costs, as many of us do, or doing a cash-rich split-off, the way Berkshire does — and doing what Apple does: going to extraordinary lengths to create ways to siphon profits out of the United States via foreign subsidiaries that pay little or no tax to any country anywhere.

The Apple tax games exposed last year by the Senate’s Permanent Subcommittee on Investigations were outrageous. That the games aren’t illegal doesn’t make them right. Apple and its ilk are mooching off people, including me, who believe in helping support the country that helps make our success possible.

I don’t admire Berkshire’s tax practices — but I respect them as being honest, honorable and mainstream.

Buffett has donated billions to the Bill & Melinda Gates Foundation, and will avoid the inheritance taxes that hit the rest of us.

Sure, Buffett is avoiding estate taxes by giving away essentially all his Berkshire stock. But he’s making donations because he wants to be generous — not to avoid estate taxes.

It’s simple math. If you donate 100 percent of your assets to charity, your heirs are left with zero. If your estate pays 40 percent of its value in estate taxes, your heirs have 60 percent. Which is a lot more than zero. You don’t give away 100 percent to save 40 percent.

And only a few of us have to worry about federal estate taxes, which kick in only when a married couple’s estate is worth more than $10 million. It’s a problem I wish I had.

If you want to avoid estate taxes by donating everything you own to charity, be my guest.

If Buffett espouses higher taxes, then he should set the example. There is no ethical difference in the methodology you use to legally avoid taxes; Buffett is just another Bad Apple.

He espouses higher rates, but has never said people should pay more than is legally required.

And get this: Buffett’s donations of Berkshire stock are wildly tax-inefficient. Because he’s giving away “appreciated securities” worth more than he paid for them, he can’t use the deductions he creates to offset more than 30 percent of his income. I estimate that he has created $10 billion of charitable deductions that he’ll never use. That doesn’t strike me as bad-apple behavior.

As for the loophole: It would be simple for Congress to close the cash-rich split-off loophole that Berkshire and Graham Holdings are using, by amending Section 355 of the tax code. Instead of requiring that Company A contribute a business worth “somewhat more than a third” of what it’s trading to Company B, you require the business to be “somewhat more than three-quarters.” If that happens, “You’ll be taking the ‘cash rich’ out of cash-rich split-offs, and you’ll never see another one,” says Robert Willens of Robert Willens LLC.

But I’m not holding my breath waiting for that to happen.

Sloan is Fortune magazine’s senior editor at large.

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