“When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden.  It isn’t right, and we can’t afford it.” 
~Sen. Carl Levin (D-MI) 

This really should disgust you.  We’ve written about how the corporate tax code is a clusterf#ck HERE and HERE.  Would you be surprised to hear that CEO’s are using their shares as collateral to finance hundreds of millions of dollars to themselves without ever having to sell ANY of their shares.  And without having to sell shares – they don’t have to pay taxes on those sales.

Steve Jobs at Apple did it.  Larry Ellison at Oracle did it.  And this is what Mark Zuckerberg at Facebook seems set to do.  But to add insult to injury…Facebook is going to use it’s IPO to avoid paying any taxes on it’s revenue AND get up to a $500 million REFUND from the taxpayer for prior year returns.  Seriously.

The #1 thing you need to remember here is that THIS isn’t by accident.  The game is rigged.

The Center for Tax Justice writes:

According to Facebook’s SEC filing, the company has issued stock options to favored employees, including Zuckerberg, that will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million in stock options to be exercised in 2012.

The tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.

When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.

The NY Times writes:

But how much income tax will Mr. Zuckerberg pay on the rest of his stock that he won’t immediately sell? He need not pay any. Instead, he can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax. That’s what Lawrence J. Ellison, the chief executive of Oracle, did. He reportedly borrowed more than a billion dollars against his Oracle shares and bought one of the most expensive yachts in the world.

If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death.

Consider the case of Steven P. Jobs. After rejoining Apple in 1997, Mr. Jobs never sold a single Apple share for the rest of his life, and therefore never paid a penny of tax on the over $2 billion of Apple stock he held at his death. Now his widow can sell those shares without paying any income tax on the appreciation before his death. She would have to pay taxes only on the increase in value from the time of his death to the time of the sale.

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