Warren Buffett's Graham swap is latest deal to limit IRS's take

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Posted: Thursday, March 20, 2014 12:00 am

Warren Buffett, who has criticized businesses for complaining about tax rates, showed last week how adept he is at lowering his company's payments to the United States.

Omaha-based Berkshire Hathaway Inc. plans to limit taxes on more than $1 billion of gains in Graham Holdings Co. stock by swapping the shares for assets owned by the former Washington Post publisher, according to a March 12 regulatory filing outlining terms. Either side can cancel the agreement if lawyers determine it doesn't qualify for the intended tax treatment.

The deal highlights how Buffett works to reduce obligations to the government at Berkshire. The billionaire chairman and chief executive officer has used Internal Revenue Service rules to benefit his shareholders in other transactions, including a swap with White Mountains Insurance Group Ltd. and the sale of ConocoPhillips stock.

“He has been a student of the tax code really all his adult life,” said Jeff Matthews, a Berkshire shareholder and author of books on the company. “His knowledge is encyclopedic, and he's always used it to his financial advantage.”

While companies typically seek to limit their tax burden on deals, Berkshire stands out because of Buffett's public posture on paying one's fair share of taxes, Matthews said.

“If it were anybody but Warren Buffett, there'd be no story,” Matthews said. “But this is a guy who takes companies to task for going to great lengths to minimize their tax burdens, and he's been doing it all his career.”

Buffett, 83, didn't return a message left with an assistant seeking comment.

Buffett has cited Berkshire's tax bill as a point of pride. The billionaire wrote a decade ago that he hopes “the rest of Corporate America antes up along with us,” and he continued his critique as his company's contribution climbed. Its effective tax rate was 31 percent last year, according to data in the most recent annual filing.

“American business is complaining enormously about the level of the corporate income tax,” Buffett said at Berkshire's annual meeting in Omaha last year. “I would have you take that with a grain of salt.”

In the Graham deal, known as a “cash-rich split-off,” Berkshire agreed to hand over about $1.09 billion in shares of Graham, which rose more than 100-fold since Buffett bought the stake in the 1970s. Graham will give up a Miami television station, stock it holds in Buffett's company and about $328 million in cash.

Berkshire owns 1.7 million shares in Graham's publicly traded Class B stock, more than triple the stake of any other investor. Selling the holding on the open market would trigger capital gains taxes at a 35 percent rate.

Instead, Graham is putting together a package of assets in a new subsidiary that it could trade for its own shares. By including WPLG, the TV station valued at $364 million, the companies plan to meet a requirement that at least one-third of the value be contained in an active business.

Graham also will give Buffett's company about $400 million in Berkshire stock. Either company may terminate the deal if it doesn't qualify for “non-recognition of gain and loss,” the filing shows.

After selling the Washington Post last year to Amazon.com Inc. CEO Jeff Bezos, Graham is focusing on businesses including its Kaplan education unit and a cable provider. Rima Calderon, a spokeswoman for Washington-based Graham, declined to comment.

In 2006, the U.S. Congress loosened rules that define active businesses, and lawmakers also set the one-third standard. Those changes followed complaints from businesses, and concerns that companies such as Janus Capital Group Inc. were structuring deals that were effectively disguised sales.

The revision was estimated to raise $65 million for the government over a decade.

Split-offs are a mainstay of corporate tax practice, and allowing companies to break apart makes sense as policy, said Lawrence Zelenak, a tax law professor at Duke University in Durham, N.C.

Transactions like the Berkshire-Graham deal don't push the envelope, Zelenak said.

“It's more the avoidance of a bad result than getting a wonderful result,” he said. “I don't think he's ever suggested that he's not going to take advantage of things that work under current law because he thinks they're bad policy.”

Said Robert Willens, an independent tax consultant, “He does do things that are tax efficient for the corporation. No question.”

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

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