When Warren Buffett disclosed information from his own personal tax returns and stomped Donald Trump so skillfully a few days ago, the stories just wrote themselves.
Buffett, who has called early and often for tax increases on America’s biggest earners, punched out the tax-dodging Trump for saying during Sunday’s presidential debate that Buffett “took a massive tax deduction” and that he was dodging taxes the same way Trump was.
Buffett emerged triumphant.
However, if Trump had done some homework, he could have said that Buffett, like Trump himself, has pursued aggressive, money-saving tax strategies.
Which, in fact, Buffett has.
But Buffett has pursued these strategies not for himself, but for the company he runs: Berkshire Hathaway.
In transactions in 2014 and last year, Berkshire did three “cash-rich split-off” transactions that allowed it to end up with lots of cash and assets while avoiding what I estimate to be a total of about $2.5 billion in capital gains taxes.
Berkshire did what amounted to complicated trades with three companies whose shares it had owned for years, swapping those holdings for a combination of cash and operating assets. The transactions are treated by the IRS as tax-free trades, rather than sales.
For example, Berkshire got $450 million in cash and a business valued at $900 million from Phillips 66 in return for its Phillips 66 shares, which were valued at $660 million in 2012 when ConocoPhillips (a stock Berkshire had bought in 2008) spun off Phillips 66 to Berkshire and its other shareholders.
Berkshire did similar stock-for-cash-and-assets swaps with Graham Holdings (former owner of The Washington Post) and Procter & Gamble.
By my count, the three transactions that yielded cash and assets were worth $6.2 billion more than Berkshire’s $1 billion total cost for its stock in the companies, which in the case of Graham Holdings dated back more than 40 years.
At a combined state and federal tax rate of about 40 percent—there is no special capital gains rate for corporations—selling its holdings in those three companies for cash would have triggered a $2.5 billion tax bill.
But because Berkshire (whose shareholders include me) swapped shares for cash and other assets in split-off transactions, it realized major gains but didn’t have to pay gains tax.
I’ve previously written about these three transactions, as well as a fourth one that Berkshire did in 2008.
I emailed Buffett’s assistant Thursday seeking comment but did not receive a response. I had tried to speak with Buffett about these deals last year, but he said wouldn’t talk with me because he didn’t like the way I had written about a different tax-aggressive transaction that Berkshire was involved in. To wit, that was the 2014 deal in which Berkshire helped Burger King desert to Canada for tax purposes by buying the Canadian-based Tim Horton restaurant chain.
A trademark of Buffett’s tax-minimizing deals for Berkshire is buying new issues of preferred stock rather than common stock. That's what happened when General Electric, Bank of America and Goldman Sachs turned up on Buffett’s doorstep seeking both capital and Buffett’s imprimatur during and after the financial crisis. Dividends, you see, are partly tax-free for corporate recipients, even though they’re generally fully taxable for individuals.
I’m not trying to imply that Berkshire’s transactions are either illegal or unethical. They’re not.
The point I’m trying to make is that there’s a huge difference between the way Buffett the person handles his personal income taxes and the way Buffett the CEO handles Berkshire’s corporate income taxes.
Buffett the person’s tax practices qualify him for sainthood, because among other things, his generous donations of Berkshire stock to charitable causes generate billions of dollars more in tax deductions than he will ever use.
Buffett the CEO’s tax practices qualify him … to be a CEO, trying to maximize profits for his shareholders.
His behavior is much better than Trump’s, because Berkshire is highly profitable and pays substantial income taxes. But Buffett the CEO is no saint — and it’s a mistake to think of him as one.