Facebook's Lower Stock Price Means Saverin Doubled Tax Bill By Leaving The Country

from the oops dept

Fri, Aug 24th 2012 6:36pm — Timothy Geigner

Back when Facebook first rolled out its IPO in the same smooth and easy fashion as an Olympic hurdler racing with his testicles twisted like a Navy Pier pretzel, Eduardo Saverin, Facebook co-founder, entered the crosshairs of some United States congressmen looking to make some noise. See, Eduardo decided that taxes suck and he wanted to incur as little of said suckiness as possible, so he renounced his American citizenship and declared his love for Singapore. This, according to Chuck Schumer and Bob Casey, made him evil personified.

Exhibit 1: Artist's rendering based upon Chuck Schumer's description

The argument was that Saverin had allowed this country to help make him rich and now, in an evil move that was completely legal, he was going to evade paying the full taxes of an American citizen by no longer being one. To combat this unholy act, Schumer and Casey unveiled the oh-so-cleverly named EX-PATRIOT Act, which would levy heavy taxes on Saverin and anyone else who thought they could escape the virtous clutches of the American tax system.

"This is a great American success story gone horribly wrong," Schumer told reporters Thursday. "Eduardo Saverin wants to defriend the United States of America just to avoid paying taxes. We aren't going to let him get away with it."

But, as fate would have it, Facebook's stock price dropped faster than a Righthaven lawsuit. And the result, according to Forbes, may be that Saverin paid more in taxation than he would have had he stayed in The States.

A couple of things got missed in the furore. The first was that he had to pay tax on his Facebook stock as if he sold it on the day of his citizenship renunciation. The value then was some $2.4 billion, leading to a $365 million tax bill. That tax bill is fixed of course: now that he’s no longer a citizen he doesn’t get any tax breaks or credits on losses he might make. Which of course he has done. Since he crystallised that tax bill his stock (assuming he’s still holding it and he would have been until just now because of the lock in around the IPO) has halved in value to about $1.2 billion. But he still owes that $365 million.

So, at least so far, the net effect of his renunciation has been to double his tax bill, not reduce it. Oh, and if he hasn’t paid the tax as yet then he has to pay interest to the IRS on it.

And there we have it. Schumer and Casey drafted legislation, which didn't pass, to combat a guy who did something legal because they insisted it was unfair that he escape full taxation by renouncing his citizenship. It turns out that Saverin's renunciation caused him to be overtaxed by a rather substantial rate. Any takers on whether Schumer and Casey would be open to Saverin claiming relief from this overtaxation?

Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.

Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis.

While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.

–The Techdirt Team

Filed Under: chuck schumer, eduardo saverin, stock, taxes
Companies: facebook

39 Comments

If you liked this post, you may also be interested in...

Reader Comments

Subscribe: RSS

View by: Time | Thread

Anonymous Coward, 24 Aug 2012 @ 6:45pm

claiming saverin left for tax reasons is speculation; the guy had been living out of the country for some time previously and wasn't planning on living here again. It does seem quite suspicious, yes, but I would expect a more nuanced explanation than just claiming it was all about taxes.
[ link to this | view in thread ]
Anonymous Coward, 24 Aug 2012 @ 6:48pm

Being a Pennsylvania resident, I am very ashamed of Senator Casey. With any luck, he'll be voted out of office in the next election.
[ link to this | view in thread ]
Dave Nelson, 24 Aug 2012 @ 7:18pm

Aren't election years fun? So many congresscritters clamoring for attention on any excuse. Too bad it's not recognised as such.
[ link to this | view in thread ]
Zos (profile), 24 Aug 2012 @ 8:28pm

last paragraph "wihch didn't pass"
[ link to this | view in thread ]
Muck Bulligan, 24 Aug 2012 @ 8:34pm

Re:
Are you saying that renouncing citizenship to avoid taxes on windfall stock profits is not a legitimate concern that should be addressed? Or are you saying Casey only sponsored the legislation for political reasons, and doesn't care one bit if people escape taxes by fleeing the country?
[ link to this | view in thread ]
Anonymous Coward, 24 Aug 2012 @ 8:57pm

Overtaxed?
"Saverin's renunciation caused him to be overtaxed by a rather substantial rate."

FWIW I think overtaxed is the wrong word here. He is taxed on what he owes by statute. He may be paying more than his Loyal american brethren and sistern at Facebook who kept their citizenship but they didn't take the risk of renouncing their citizenship. Saverin may not have believed it was a risk but that's the breaks.

It was a bet, a very bad one as it turns out and Saverin lost. No sympathy for this loser here. Be glad there are fools like him to pay off the deficit.
[ link to this | view in thread ]
Anonymous Coward, 24 Aug 2012 @ 9:06pm

Re: Overtaxed?
You are correct. He likely should have gotten better financial advice, which would have lead him to pay a lower tax rate, then he could have renounced his citizenship and it's all good. Renouncing citizenship in the middle of a tax year isn't exactly a wise move, as far as I am concerned.

The funny part? Depending on how it all works out, he might end up getting taxed in his new home country as well, as the capital gains happened in this tax year.
[ link to this | view in thread ]
FuzzyDuck, 25 Aug 2012 @ 2:24am

Re: Re:
Are you saying that renouncing citizenship to avoid taxes on windfall stock profits is not a legitimate concern that should be addressed?

Did you read the article?
[ link to this | view in thread ]
Haywood (profile), 25 Aug 2012 @ 3:08am

Re: Re:
"Are you saying that renouncing citizenship to avoid taxes on windfall stock profits is not a legitimate concern that should be addressed? "

I'll say it. The entire system is screwed up, & if someone can beat the system, more power to them.

"When injustice becomes law, then resistance becomes duty."
T. Jefferson
[ link to this | view in thread ]
Josef Anvil (profile), 25 Aug 2012 @ 4:43am

Sick
This is an example of how sick greed can make a human being. $365 million subtracted from $2.4 billion or $1.2 billion STILL leaves you with an EXCEPTIONALLY large amount of cash.

Renouncing your citizenship over taxes on these sums of money doesn't make someone evil, it makes them idiotic or borderline insane.
[ link to this | view in thread ]
gorehound (profile), 25 Aug 2012 @ 5:03am

There is such a thing as Karma.That is what I have heard over the years.
What comes round goes round.
[ link to this | view in thread ]
bwp (profile), 25 Aug 2012 @ 5:37am

Re: Re:
No, renouncing citizenship to avoid taxes IS NOT a legitimate concern that should be addressed. Other than this instance, how many times have you heard of someone renouncing their citizenship to avoid paying taxes? Congress should not be wasting time on legislation that MIGHT affect a handful of people per year. They have 330 million+ other people to worry about.

And yes, if the OP wasn't saying it then I am - Casey only sponsored this to get a sound bite/news clip and he doesn't give a rat's ass about someone renouncing their citizenship to avoid taxes.

PS - He didn't "flee" the country. He hasn't lived here for a while.
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 7:23am

Up front, I am not a lawyer, accountant, of financial professional.

The statement "A couple of things got missed in the furore."

Well first that is not how you spell furor.

Besides that, that is the only true sue and correct statement is this rank.

If you have the king of money at stake that is being discussed here and you were savvy enough to make that kind of money then it stands to reason that before you commenced any action you would have a team of legal experts look at the ramification from all perspectives including taxes.

Which brings up back to not being a tax avoidance professional but there must be a hundred ways to avoid paying taxes with one of the simplest being to not own what is being taxed.

Lets fantasize that I was in Saverin position and had his Facebook position, I can dream too, before the IPO and his renouncing US citizenship.

It would have been simple to set up a (lets say Panamanian) company. Then to transfer all, most, part, or some of my Facebook interest to that company by simple giving the new company such shares at cost. It would be even better if this were a non-profit religious charity. My tax bill on that transfer would be zero or nearly zero as my income from the sale would be zero.

Now comes the cute part. Since I control the Panamanian company I still control the money.

Facebook goes public.

Guess what my tax bill on the capital gains are.

Zero as I do not own the shares. The capital gains accure to the Panamanian company which of course was set up as a charity so even if it were not a Panamanian company the taxes would be zero.

If I then wanted money for person usage there must be a thousand ways of transferring funds from the Panamian charity to me.

Lets see. I could direct the Panamanian company to buy 1000 Peee computers at 3 times manufacturers supply cost from another company I own. I could then have the Panamanian charity give them away to the underprivileged. Meanwhile I could take the 2 times profit and declare a dividend. Now I have a small amount of pocket money in my pocket while protecting the larger fortune in a safe place outside US control.

If I wanted a house in the US I could simply have another company buy it and provide it to me rent free in money all the while paying US income taxes on the free rent.

And, I can do all that without renouncing US citizenship.

Ans, that is from a non tax avoidance professional. Just think of what a real professional in tax avoidance could accomplish any can see why discussion of his tax status with out facts is pointless.
[ link to this | view in thread ]
zegota (profile), 25 Aug 2012 @ 12:20pm

This story makes me laugh all around, mainly because the legislation is stupid, but Savarin is also a dick and I'm glad to see a tax-avoidance scheme backfire.
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 1:34pm

So, why is it OK for corporations to leave the country to avoid taxes?

Why don't they penalize the corporations in like manner?
Not only do they not pay the taxes they should but they take away the jobs and therefore those income taxes, too, while still enjoying the benefits of being an American company.
[ link to this | view in thread ]
nospacesorspecialcharacters (profile), 25 Aug 2012 @ 3:35pm

Geofacism
If the US was a little bit more gracious with their immigration rules and welcomed immigrants who want to legally pay taxes and invest (read: create jobs) in their country, they wouldn't have to worry so much about the odd rich guy fleeing and giving up citizenship.

Me, I'm with John Lennon, I'm looking forward to the day we go back to the old system where you didn't require passports to travel the world freely.
[ link to this | view in thread ]
Dark Helmet (profile), 25 Aug 2012 @ 4:03pm

Re:
....and also because the humor in the writing was AWESOME, yes?

You people don't appreciate me... :)
[ link to this | view in thread ]
Haywood (profile), 25 Aug 2012 @ 4:14pm

Oh, and if he hasn�t paid the tax as yet then he has to pay interest to the IRS on it.
Why would he ever pay it at all? They can cry all they want, but being owed a debt and collecting on it are 2 entirely different things.
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 5:09pm

Re: Re:
Honestly, There's only one thing I can state to that level of inconsideration:
shocked
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 6:20pm

But I assume it's okay in their book if you remain a US citizen and just keep your money offshore?
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 6:21pm

Re:
As a child my father called them varmints.
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 6:23pm

Re: Re: Re:
They need to address the issue of offshore holdings.
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 6:24pm

Re: Re: Re: Re:
...but that might upset such upstanding citizens as the catcher's Mitt.
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 6:25pm

Re: Overtaxed?
you really think that thing's gettin' paid off?
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 6:27pm

Re:
"king" of money? Freudian slip, or are you too not immune from the keyboard error generator oh grammer cop?
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 6:33pm

Re:
Because it is more important to look concerned than to act concerned.
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 6:34pm

Re: Re:
Foreigners with large holdings overseas move here for the tax breaks while still doing business as usual overseas.
[ link to this | view in thread ]
Anonymous Coward, 25 Aug 2012 @ 9:59pm

Re: Re: Overtaxed?
Singapore is almost a tax haven. There is no tax on capital gains nor is there an estate tax. No surprise why Saverin chose to move to Singapore.
[ link to this | view in thread ]
ld, 25 Aug 2012 @ 11:16pm

Re: Overtaxed?
Eduardo Saverin was a naturalized US citizen, he was originally from Brazil and moved here when he was 11. He has lived in Singapore since 2009 and his US citizen ship was actually hindering his business career there because of US laws that went effect requiring banks that even pass transactions through the US to file paperwork reporting the account status of US citizens who have accounts with them, many of the foreign banks are now declining to hold accounts for US citizens. He ditched something he didn't need because it was becoming a problem.
[ link to this | view in thread ]
Anonymous Coward, 26 Aug 2012 @ 12:22am

Re: Re:
Well a provincial grammar cop maybe. Furore is a more international spelling for furor. I always wondered how the Brits got that pronunciation out of the word.

furore [fjʊˈrɔːrɪ] esp US, furor [ˈfjʊərɔː]
n
1. a public outburst, esp of protest; uproar
2. a sudden widespread enthusiasm for something; craze
3. frenzy; rage; madness
[from Latin: frenzy, rage, from furere to rave]
[ link to this | view in thread ]
Eric, 26 Aug 2012 @ 6:47am

Re:
My tax bill on that transfer would be zero or nearly zero as my income from the sale would be zero. Now comes the cute part. Since I control the Panamanian company I still control the money.

This doesn't work at all. If you're in control of the Panamanian company, it's a "Controlled Foreign Corporation". Look up "Subpart F" for all the gory details. In very simple terms, if a U.S. citizen has control of a foreign company (including a U.S. citizen living abroad permanently with a company in the country where he actually lives) and the foreign company earns certain kind of income (dividends, rents on property, profits from transacting with related companies, royalties on intellectual property), then the U.S. citizen owner must file a Form 5471 and pay tax on those profits without deferral (in tax parlance this is a "deemed dividend").
[ link to this | view in thread ]
abc gum, 26 Aug 2012 @ 7:12am

Re:
Corporations are people my friend,
or so we have been told.

Yes, these "people" would like another repatriation tax break or tax holiday so their foreign earnings can be imported. They claim many jobs would be created - that's not even funny anymore - what happened to all the jobs created by the 2004 tax holiday? And they claim opponents are being disingenuous.
[ link to this | view in thread ]
Chilly8, 26 Aug 2012 @ 10:27am

The only thing I dont like about ex-patriot act is that fact that foreign banks, even if they have otherwise have no association with the US becomes subject to US laws if they have US customers.

This is another form of overreach by the US government that is just as bad as ACTA or TPP.
[ link to this | view in thread ]
Anonymous Coward, 26 Aug 2012 @ 11:20am

Re: Re: Overtaxed?
A naturalized citizen giving up his citizenship makes me happier he got hit with a big bill for giving up his citizenship.
[ link to this | view in thread ]
Shotsie, 26 Aug 2012 @ 12:50pm

I would've thought short term capital gains would've applied in his case, since he sold his stock right away. In that case, he would've owed 35% of 1.1 B, unless he's holding onto the stock, and waiting a year to sell it officially. He better hope FB does something to improve it's price, or he may pay all of his earnings....
[ link to this | view in thread ]
Nash, 26 Aug 2012 @ 3:59pm

Is this a tech news site, or a political news site?

The only connection here is the field he worked in. This is not about tech law, it's about tax law.

I'm sure there's a ton of political news sites who would welcome this story.
[ link to this | view in thread ]
abc gum, 26 Aug 2012 @ 5:02pm

Re:
Newsflash - Happening Now - This Just In
Facebook IPO - has nothing to do with tech industry, film at eleven
[ link to this | view in thread ]
Anonymous Coward, 26 Aug 2012 @ 5:46pm

Re:
Consider too, that some of the extraterrorial provisions of the bill have overreach just as bad at ACTA, TPP or SOPA.

That fact that foreign banks would become subject to US laws could make them run afoul of US laws without knowing it. A dual national could be living in their other country of citizenship and their local might not even know they are American. Asking banks outside the USA to police this is much akin to the kind of policing of the internet that ISPs would be required to do under SOPA, PIPA, ACTA, or TPP.

So there is a comparison that can be made here.
[ link to this | view in thread ]
Tina Smith, 15 Jan 2013 @ 6:52pm

That is a really unfortunate event for him. If he wants to recover from that loss then I suggest he should ask for help from accountants in Perth Western Australia.
[ link to this | view in thread ]