Facebook’s Tax Dodge Stands to Make Billions for Company and Zuckerberg

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 U.S. Senator Carl Levin isn’t necessarily the man you’d look to for the latest news about Facebook. The 77-year old was described by Time magazine as “pudgy, balding and occasionally rumpled, and he constantly wears his glasses at the very tip of his nose.” However, today he broke some shocking news on the Senate floor about special tax favors that Facebook and its CEO, Mark Zuckerberg, will enjoy at great cost to the U.S. Treasury.

“I emphasize that Facebook’s actions are within the law,” said Senator Levin. “As with so much of our tax code, it’s not the law-breaking that shocks the conscience, it’s the stuff that’s perfectly legal.”

As described by the Senator, Facebook’s IPO filing outlines their plan to utilize one of our tax code’s most unjustified loopholes, the stock option tax loophole. When Facebook goes public, Zuckerberg will exercise his stock options to buy 120 million shares of the company’s stock at 6 cents a share, a cost of roughly $7 million. The current market value of those shares will be approximately $5 billion. Facebook will be able to declare $5 billion in deductible losses despite only having distributed assets that were valued at $7 million.

The stock option tax loophole is the only provision of the tax code that allows companies to deduct money for costs without actually spending any money. It allows Facebook to declare to shareholders and potential investors that their expenses remain low, while at the same time declaring to the IRS that those same shares cost them $5 billion and write those higher costs off as a tax deduction. To their shareholders and the stock market, Facebook will present itself as highly profitable, while their tax return will show the opposite. The $5 billion deduction can be used to make otherwise taxable income disappear  going two years into the past and up to twenty years into the future. The result: refunds of past taxes and future tax breaks for Facebook totally up to $3 billion. A hugely profitable U.S. company could end up paying no taxes at all for years to come, and everyday taxpayers will end up footing the bill.

 “This loophole lets Facebook present two different faces of its books to the world. They’re effectively keeping separate books for their shareholders and the IRS,” said Phineas Baxandall, Senior Analyst for Tax and Budget Policy at U.S. PIRG. “We’ll never know whether this was what Zuckerberg’s had in mind when he called the company Facebook, but we do know that the joke is on American taxpayers who will be forced to pick up the tab. Every tax dollar avoided by Facebook will need to be paid for through higher deficits, deeper program cuts or higher taxes for ordinary Americans.”

Senator Levin is one of the co-sponsors of a bill in the Senate, the CUT Loopholes Act, which would put an end to many unjustified corporate tax loopholes, including the stock option loophole. The bill would also help put an end to the offshore tax havens that many high-tech companies use to avoid paying U.S. taxes.

“We need to close the stock option loophole,” said Baxandall. “We shouldn’t be subsidizing companies’ bonuses to their billionaire CEOs, especially when doing so encourages top-level American managers to pump up short-term stock prices over long-term innovation and productivity. This scam serves no economic purpose and just leaves taxpayers holding the bag.”

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Senator Levin’s speech can be found online at: http://www.levin.senate.gov/newsroom/speeches/speech/senate-floor-speech-on-facebook-and-the-stock-option-tax-loophole

U.S. PIRG, the federation of state Public Interest Research Groups, is a non-profit, non-partisan public interest advocacy organization. Follow us on Twitter @USPIRG.