Facebook Won’t Friend the Internal Revenue Service: Zuckerberg to Lawfully Avoid Taxes

The world’s biggest business phenomenon, and its founder, plan to go public to rake in billions of dollars in new wealth. But Facebook is likely to get tax refunds for years, and its founder Mark Zuckerberg should avoid taxes on most of his new-found wealth. Heck, he may even qualify for a partial refund of his salary as an earned income tax credit beneficiary from his publicly pronounced $1 salary. How? Because the tax law allows exactly that. How much tax will Mr. Zuckerberg pay on the stock that he won’t immediately sell? None. Instead, he can simply use his stock as collateral to borrow against his tremendous wealth and may be able to avoid all tax. That’s partially what Lawrence J. Ellison, my Malibu neighbor and 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, building homes and restaurants in Malibu.

What if Mr. Zuckerberg never sells his shares? He can avoid all income tax on his newfound wealth. Consider the case of that other whiz-kid phenom — Steven P. Jobs. After rejoining Apple in 1997, Mr. Jobs never sold a single Apple share for the rest of his life. Consequence? Jobs 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.

Why is this? Because the Constitution allows and Congress incentivizes different forms of holding wealth for avoiding taxes lawfully. There is no federal “property tax” due partially to the apportionment and uniformity limitations on the power of Congress to tax. Hence, shifting receipts into property can be an effective means to lawfully avoid taxes, even if the Internal Revenue Service doesn’t like it. Remember the IRS, or it state equivalent, the Franchise Tax Board and Board of Equalization, can only try to bring civil and court actions. The IRS cannot write the law itself nor even have final say to interpret it.

So be like Zuckerberg, and don’t friend the IRS with money the IRS is not entitled to when lawful means exist to avoid taxes.