I don’t admire Berkshire’s tax practices -- but I respect them as being honest, honorable, and mainstream.
FORTUNE — Warren Buffett and taxes are two hot-button items, especially when you combine them, as I did in my recent column about how Berkshire Hathaway brk.a and Graham Holdings GHC (the former Washington Post Co.) are saving a total of $675 million or so in taxes by using something called a cash-rich split-off.
So I’d like to share some of the reader reactions to this column, and give my responses to the reactions. When I do this, I usually cite from several letters or posted comments. This time, the major issues that people seemed to have with my column (and with Buffett, who says tax rates should be raised on the rich) were summarized in an e-mail from one reader: Joe Boccuzzi, of Stamford, Conn.
I asked Boccuzzi for permission to share edited excerpts of his e-mail with you, and he graciously agreed. You’ll see them — and my answers — below.
At the end of this piece, I’ll explain how Congress could (and should) close the time-honored but ridiculous loophole that Berkshire and Graham used.
And here we go.
There’s a big difference between doing something specifically permitted by the tax code — such as deducting interest costs, as many of us do, or doing a cash-rich split-off, the way Berkshire does — and doing what Apple AAPL does: going to extraordinary lengths to create ways to siphon profits out of the U.S. via foreign subsidiaries that pay little or no tax to any country anywhere.
The Apple tax games exposed last year by the Senate’s Permanent Subcommittee on Investigations were outrageous. They are, in a word, shameful. The fact that the games aren’t illegal doesn’t make them right. Apple and its ilk are mooching off people, including me, who believe in helping support the country that helps make our success possible.
I don’t admire Berkshire’s tax practices — but I respect them as being honest, honorable, and mainstream.
Sure, Buffett is avoiding estate taxes by giving away essentially all his Berkshire stock. But he’s making donations because he wants to be generous — not to avoid estate tax.
It’s simple math. If you donate 100% of your assets to charity, your heirs are left with zero. If your estate pays 40% of its value in estate taxes, your heirs have 60%. Which is a lot more than zero. You don’t give away 100% to save 40%.
And only a few of us have to worry about federal estate taxes, which kick in only when a married couple’s estate is worth more than $10 million. It’s a problem I wish I had.
If you want to avoid estate taxes by donating everything you own to charity, be my guest.
He espouses higher rates, but has never said people should pay more than is legally required.
And get this: Buffett’s donations of Berkshire stock are wildly tax-inefficient. Because he’s giving away “appreciated securities” worth more than he paid for them, he can’t use the deductions he creates to offset more than 30% of his income. I estimate that he’s created $10 billion of charitable deductions that he’ll never use. That doesn’t strike me as bad apple behavior.
LOOPHOLE CLOSER: It would be simple for Congress to close the cash-rich split-off loophole that Berkshire and Graham Holdings are using, by amending Section 355 of the tax code. Instead of requiring that Company A contribute a business worth “somewhat more than a third” of what it’s trading to Company B, you require the business to be “somewhat more than three-quarters.” If that happens, “You’ll be taking the ‘cash rich’ out of cash-rich split-offs, and you’ll never see another one,” says Robert Willens of Robert Willens LLC.
However, I’m not holding my breath waiting for that to happen.