Posts Tagged Mark Zuckerberg citizenship

Expatriate Facebook Founder’s “Take the Money and Run” Pre-IPO Scheme is Legal, Experts Say

Eduardo Saverin will probably generate more tax revenue taking his billions to Singapore than he would’ve paid if he’d stayed. Should Mark Zuckerberg be forced to leave too? 


Moral outcry is one thing, but high-powered attorneys tell me the now-infamous Facebook co-founder was well within his rights giving up his U.S. passport late last year.

“What he did was perfectly legal,” says Gideon Rothschild, offshore trust planning guru at New York firm Moses & Singer.

“There’s no question,” he adds. “When someone renounces, they’re finished with the U.S. Good-bye.”

That no-nonsense opinion pours a little cold water on rhetoric from legislators like House Speaker John Boehner, who grandly call Saverin’s decision to renounce his U.S. citizenship “against the law.”

The only “law” that Boehner seems to be referring to doesn’t actually restrict Saverin’s — or anyone’s — financial planning one bit. All it does is authorize the Department of Homeland Security to refuse to let anyone who expatriates for tax purposes back into the country.

Since being signed in 1996, it hasn’t been enforced once.

Otherwise, under current law, as long as the Facebook billionaire paid the “exit tax” on everything he owned when he left the country, the IRS can’t touch him.

A windfall for the IRS

If anything, that exit tax makes the U.S. government one of the relatively few clear-cut winners in the otherwise lackluster Facebook IPO.

When he turned in his passport in September, Saverin had to pay a straight 15% of the market value of all his assets, reportedly valued at roughly $2.1 billion. Call it a $300 million capital gains tax bill, give or take a few million dollars.

As it happens, Facebook shares were trading on the over-the-counter gray market at about $32 to $33 apiece back in September, a little higher than where they are now.

What this means is that by leaving the country, Saverin ended up locking in a slightly bigger tax liability than he would’ve gotten if he’d stayed and sold into the IPO. No win there.

Moreover, paying the exit tax locked him out of longer-term tax minimization strategies. He gave up his right to use gift allowances, estate tax exemption, capital loss credits and everything else when he gave the IRS its cut up front.

That might not seem like a big deal to 30-year-old Saverin, who has no dependents to worry about yet in the United States or anywhere else. He has the rest of his life to amass wealth and responsibilities in Singapore at the island haven’s flat 20% income tax rate.

But for newly married Mark Zuckerberg, who still owns a staggering 503 million Facebook shares, staying in the country actually presents a huge opportunity to keep his money out of IRS hands, says tax lawyer Jim Duggan.

“Someone like Zuckerberg would pay a tremendous amount of tax to the U.S. government if he renounced his U.S. citizenship,” he points out. “Without renunciation, the United States will never collect income tax on Zuckerberg’s entire block of stock.”

Duggan’s suspicion is that Zuckerberg will end up paying “little to no” tax on his Facebook fortune as the money flows into trusts or is divided up among friends and family in small gift-tax-friendly amounts.

As yet, that hasn’t happened. Zuckerberg still owns his shares outright.

Saverin’s situation is harder to figure out, since he’s already sold enough of his stock to drop below the 5% level the company reports on its SEC paperwork.

However, if any of his Facebook stake had moved into a trust, renouncing his citizenship wouldn’t have done him any favors or cost the U.S. government any immediate revenue.

Gideon Rothschild warns future dot-com billionaires to set up their trusts when their companies are still in the incubator.

“Maybe it’s going to be another Google, another Facebook, you don’t want to hold it in your name,” he says. “You want to put in in a trust.”

Hitting future billionaires on the way out

For those who weren’t lucky enough to take Rothschild’s advice early on, expatriation is becoming an increasingly attractive option.

After the IRS started cracking down on U.S. nationals taking advantage of offshore havens in 2009, the number of Americans giving up their citizenship has more than doubled.

While tax planning is probably not the main concern for most of these people, it’s prevalent enough that Congress is looking a little desperate as it tries to close the loopholes.

Rep. Boehner’s grandstanding aside, most of the grousing has come from the Democrats.

Stung by the perception that Eduardo Saverin was effectively defecting, Senators Chuck Schumer of New York and Bob Casey of Pennsylvania have floated what they call an “Ex-PATRIOT” bill that will double the exit tax on future millionaires who leave.

So far, the bill has gotten a lot more buzz in the press than it’s gotten traction on Capitol Hill, where only two other lawmakers have signed on as co-sponsors.

Schumer says it’s “infuriating” that Saverin — who came here from Brazil when he was 11 with his already-rich family to avoid kidnapping threats — took advantage of U.S. security and business-friendly climate, then “defriended” the country.

Saverin says he paid his check on the way out, rather than passing the liability to future generations.

“It might arguably be better for the IRS and the United States if more shareholders were to renounce their citizenship,” Jim Duggan somewhat ruefully sums up.

Scott Martin, senior editor, The Trust Advisor. Steven Maimes contributed to the research.

Permalink: http://thetrustadvisor.com/news/expat

 

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