H. Jacob Lager

The top four tax rumors about the Facebook IPO: Busted!

In Business entities, Business entity, Offshore Accounts, Tax rumors on May 23, 2012 at 6:50 am

Facebook tax

I love it when current events make my job easy.

To wit: the recent Facebook IPO, Ed Saverin’s expatriation, and Sen. Chuck Schumer’s legislative reaction thereto.

In case you live entirely off the grid, chances are you’ve heard about a little company called Facebook that went public this past Friday, making a lot of people instant millionaires, and a few people billionaires.  One of those people, Ed Saverin reportedly ceded his US citizenship recently to avoid paying US taxes on his recent windfall.  In response, Sen. Schumer (D-NY) introduced a rather drastic piece of legislation that would ban Saverin from ever setting foot on US soil again!

So, with that in mind, I give you, the top four tax rumors about the Facebook IPO:  Busted! (Consider this the tax version of Snopes.com).

1.   Ed Saverin has sneakily avoided US taxes.

Status: False

By expatriating, Saverin has incurred what’s known as the “exit tax.” He will be treated as having sold all his US assets on the day of his expatriation, which will cause Saverin to owe a 15% a capital gains tax for 2012 on the appreciation of his Facebook shares.  Although his exact stake in Facebook is unknown, Saverin himself has issued statements indicating that his exit tax bill will exceed several hundred million dollars.

So why is Schumer so upset?

2.  Ed Saverin is paying less taxes than he would have without leaving the US.

Status: True

The date of Saverin’s exit is key.  By leaving prior to the IPO, Saverin effectively “sold” his Facebook shares at a value that is far less certain (and likely less rich) than it’s opening $38/share value.

Saverin’s early exit also opens the door for some valuation discounting.  At the time of his expatriation, Saverin owned a non-controlling minority position in a company that was not publicly traded.  Also, as famously depicted in The Social Network, Saverin had long ago been pushed out of any management role at the company.

“So that means that it is highly likely that Saverin applied one or more significant discounts to the value of his shares due to the lack of any open market for his shares and  the lack of company control that his minority stake would impart a willing buyer,” notes Barbara Barschak, CPA a partner with the Los Angeles firm of Katz Cassidy.

So, if we assume Saverin’s shares had a book value of $20/share at the time of his exit, a 40 percent discount would further reduce his per share value to $12.   Compared to today’s $34 trading value, Saverin would be paying $1.80 of capital gains tax on each share instead of $5.10.  That’s 35.3 percent of what he would pay today.

But wait!  There’s more!

3.  Ed Saverin is avoiding future US taxes.

Status: True

In general, proceeds from the sale of intangible property is sourced to the seller’s tax residence.  This means that when Saverin does decide to sell his shares, the resulting proceeds will be subject to the prevailing capital gain tax rate of Singapore.

If Singapore had a capital gains tax.  It does not.

When you consider the likelihood of higher US capital gains rates in the future (at the very least, we know Saverin would be subject to next year’s extra 3.8% Medicare tax on high earners), expatriating this year ends up saving Saverin even more money.

“Good for him, but bad for the US,” says Barschak.

4.  Ed Saverin will never be allowed to return to the US.

Status:  Highly Unlikely.

Because expatriation is perfectly legal, there is very little the federal government can do to thwart Saverin’s savings.  The IRS could dispute Saverin’s per share value or his applied discounts, but those are just factual disputes.  The concepts underlying Saverin’s tax savings are legal and somewhat vanilla.  At the end of the day he will realize a significant tax savings from this move,

So  what’s a lawmaker filled with righteous fury to do?

Why, ban Saverin from ever visiting the US again, of course!  That’s what Senators Chuck Schumer and Robert Casey (D-Pa) have proposed for any US citizen who expatriates to avoid taxes.

In the unlikely event this legislation actually becomes law, such a retroactive application would be vulnerable to constitutional attack as a targeted bill of attainder.  So why would a US Senator waste his time pushing such a bill?

Oh, right.  Election year.

  1. The Facebook IPO looks like it may not be nearly as successful as originally thought. However, if the past is any indication of the future, I’m sure Facebook will end up coming out on top. As far as Mr. Saverin, he probably made a good decision. One billion is great in the US — in Singapore his great-great-grandchildren will be living like royalty.

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