A Donation Without Calculation

It's almost Labor Day, the end of vacation season. But before fall sets in, 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.

Berkshire is famous for being smart about minimizing its tax bill, including some moves so clever that I've written about them throughout the years. But Buffett isn't doing anything like that with his donations.

Here's why you should care: When you compare Buffett's current tax-inefficient behavior with Berkshire's tax efficiency, you can see the man is sincere about giving his wealth away because he thinks it's the right thing to do -- not to get some hidden tax break. Buffett joked that if he wanted to spend all his money, he had at least two choices: "I could hire 50,000 people to paint my portrait until I got a perfect one." Or, "I could really outdo the Egyptians and build a tomb that would make everyone forget the Sphinx."

I write frequently about people and corporations ducking taxes but couldn't discern any tax dodging when I read the terms of Buffett's gift. Yet I found myself deluged with e-mails claiming that Buffett, a prominent opponent of the push in Washington to eliminate taxes on estates and income from investments, was a tax-dodging hypocrite.

So to see if I'd missed something, I asked Buffett about his taxes. No, I'm not looking to be nice to a guy who's on the board of Newsweek's owner, The Washington Post Co. If anything, I'd be harder on him than on someone who's not important at my place of employment. Did I find a hidden tax agenda? Nope.

Buffett has pledged to give 12.05 million Berkshire B shares to the Gates Foundation and four Buffett family foundations. This year's donation is worth $1.9 billion at current prices. Each year, he'll donate 5 percent fewer shares, but I'm assuming for simplicity's sake that Berkshire's stock will rise just enough -- 5.3 percent a year -- to make each annual donation the same as this year's. (Disclosures: I own Berkshire stock through Newsweek's 401(k) plan, The Post Co. owns a significant Berkshire stake, and Melinda Gates sits on The Post Co.'s board.) So how much will Buffett save on taxes this year from his whopping donation? Nothing, he said, because his taxable income this year and next will be offset by tax losses from previous years.

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.

Even though Buffett has committed to giving away all his Berkshire stock, including about $7 billion worth not covered by his recent pledges, he said he still expects his estate to pay about what his wife's estate paid after she died two years ago: $80 million to $90 million.

The Buffetts could have deferred that bill by having her leave everything to him -- spouses can pass on unlimited assets, tax-free, to each other. But they chose not to do that, presumably because they believed that minimizing taxes isn't the most important thing in the world. If all he cared about were saving taxes, Buffett, 75, could have waited to see if the estate tax passes away before he does. But, of course, he's not waiting.

Fine, you say. But isn't Buffett avoiding an enormous potential estate tax by giving away so much wealth? Sure. But look at the big picture, folks: He's giving the money away. As far as his family's wealth is concerned, that's like paying a 100 percent estate tax.

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.

Sloan is Newsweek's Wall Street editor. His e-mail address issloan@panix.com.