Skip to main content

Zuck never has to pay taxes again

By Edward J. McCaffery, Special to CNN
updated 7:50 AM EDT, Tue April 9, 2013
Facebook CEO Mark Zuckerberg introduces the company's new
Facebook CEO Mark Zuckerberg introduces the company's new "Graph Search" tool at a press event in California.
STORY HIGHLIGHTS
  • Mark Zuckerberg will pay between $1 billion and $2 billion in taxes for 2012
  • Edward McCaffery: But he never has to pay taxes again for the rest of his life
  • He says Zuckerberg can hold on to assets as they appreciate without paying tax on them
  • McCaffery: Like other tech titans, he can build wealth by using stock and stock options

Editor's note: Edward J. McCaffery is Robert C. Packard Trustee Chair in law and a professor of law, economics and political science at the University of Southern California. He is the author of "Fair Not Flat: How to Make the Tax System Better and Simpler."

(CNN) -- So, you think you have it bad this tax season. Have you heard that Facebook founder Mark Zuckerberg will pay between $1 billion and $2 billion in taxes? That sounds like a tough pill for anyone to swallow.

But it is premature to start a pity party for Zuckerberg. The twenty-something billionaire reaped large financial gains from exercising the stock options that triggered his tax bill, and he has benefited from favorable tax rules along the way. Even better, Zuckerberg will survive his encounter with the tax man in a position to never have to pay taxes again for the rest of his life.

You heard that right.

Edward J. McCaffery
Edward J. McCaffery

Let's start with the tax bill. According to media reports, Zuckerberg reported $2.3 billion income from Facebook's IPO in May 2012. How did that happen?

By contract with his own highly controlled company, Zuckerberg has many stock options. The options give him the right to buy shares for a preset price: 6 cents, to be exact. So on the day of Facebook's IPO, with shares trading as high as $42, Zuckerberg bought 60 million shares for 6 cents each: a great way to net a cool $2.3 billion.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



The IRS views that money as compensation -- wages -- taxable at "ordinary" income tax rates, the same that most of us pay on our regular salaries. This means, for 2012, Zuckerberg will have to pay tax on the $2.3 billion at close to a 50% rate, federal and California taxes combined. The resulting whopping $1 billion to $2 billion tax bill continues a theme, evident in my CNN.com columns on Warren Buffett, Mitt Romney and Phil Mickelson, that wage-earners are highly taxed, but not the wealthy.

So should we feel sorry for Zuckerberg? Before we start crying, let's step back a bit.

As soon as Zuckerberg exercises any of his stock options he triggers a tax hit. He did just that when he bought the 60 million Facebook shares for 6 cents each. But from that moment forward, Zuckerberg is responsible only for any further rise in the value of the stock, and only when he sells it, and, even then, only at the far more favorable "capital gains" rates.

Zuckerberg's $2.3 billion payday also came after years of building up value in Facebook, meaning that he was deferring paying taxes for years. This is considered a financial benefit: It is better to pay taxes later rather than sooner, all things being equal.

Zuckerberg to pay $2 billion in taxes

It also bears mention that all things were not equal, because 2012 featured one of the lowest top ordinary tax rates in a century of income taxes, at 35%. Most observers were assuming that rates would increase in 2013, as they in fact did. Zuckerberg cashed out at both a high market price and a low tax rate.

One puzzle to tax experts is why Zuckerberg waited so long to cash out, causing that large ordinary income tax hit. The answer likely has several parts. One, Zuckerberg's timing almost certainly played a role in boosting Facebook's stock price at the IPO stage, when it peaked. Two, it is obvious that Zuckerberg had indeed cashed out, in large part, before the IPO. How else did he get to a net worth of more than $11 billion, according to media reports, with a (mere) $2.3 billion payday, roughly cut in half by taxes, further reduced by a falling stock price?

At a minimum, buying shares during the IPO allowed Zuckerberg to cash out at the market top, and then to sell off shares -- as he did "for tax purposes" -- without any additional tax hit. Indeed, Zuckerberg now holds shares with tax losses built into them, which he can sell to offset capital gains elsewhere in his portfolio.

Zuckerberg also has plenty of other shares (and still more options), rising in value as we speak. He is playing what I call Tax Planning 101, simply holding onto assets as they appreciate without paying tax on them.

Zuckerberg's tale is really just another story about stock options, the coin of the realm in Silicon Valley. They can be tricky and easy to manipulate. Remember the backdating scandals? Those were about the timing of the exercise of stock options by highly paid executives.

After his big stock option exercise, Zuckerberg can walk in the footsteps of hi-tech icons such as Bill Gates and Steve Jobs. These entrepreneurs built up vast fortunes using stock options with great savvy and then, after they made it to the levels of the super-rich, simply got rid of their ordinary income salaries.

Jobs, famously, got paid $1 a year to run Apple. Gates one-upped that by stepping down altogether from his day job as CEO of Microsoft. The really rich leave wages and the W-2s that go with them to the little people, like us.

The truly rich do not have to pay any tax once they have their fortunes in hand. They can follow the simple tax planning advice to buy/borrow/die: Buy assets that appreciate in value without producing cash (like shares of Internet stocks), borrow to finance lifestyle, and die to pass on a "stepped up" basis to heirs wherein the tax gain miraculously disappears.

Zuckerberg now has $11 billion or more with which to play this game. He can live off money borrowed against that huge sum (rest assured, he can get good interest rates), never having to sell any asset at a gain, and never having to get an "ordinary" salary again.

As is so often the case, the real wizard here is Buffett, who got into the game in the early 1960s, buying up a company, Berkshire Hathaway, that pays no dividends. Buffett was able to amass his fortune, well north of $50 billion, without ever incurring a tax bill nearly as large as Zuckerberg's.

We cannot all be Warren Buffetts, of course, but being Mark Zuckerberg isn't too shabby, even with that more than a billion dollar tax bill coming due. Zuckerberg can rest peacefully knowing he won't have to worry about paying taxes again. The rest of us aren't quite so blessed.

Follow @CNNOpinion on Twitter.

Join us at Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Edward J. McCaffery.

ADVERTISEMENT
Part of complete coverage on
updated 8:37 AM EDT, Tue October 28, 2014
Errol Louis says forced to choose between narrow political advantage and the public good, the governors showed they are willing to take the easy way out over Ebola.
updated 2:03 PM EDT, Mon October 27, 2014
Eric Liu says with our family and friends and neighbors, each one of us must decide what kind of civilization we expect in the United States. It's our responsibility to set tone and standards, with our laws and norms
updated 7:45 AM EDT, Mon October 27, 2014
Sally Kohn says the UNC report highlights how some colleges exploit student athletes while offering little in return
updated 3:04 PM EDT, Sun October 26, 2014
Terrorists don't represent Islam, but Muslims must step up efforts to counter some of the bigotry within the world of Islam, says Fareed Zakaria
updated 9:02 AM EDT, Fri October 24, 2014
Scott Yates says extending Daylight Saving Time could save energy, reduce heart attacks and get you more sleep
updated 8:32 PM EDT, Sun October 26, 2014
Reza Aslan says the interplay between beliefs and actions is a lot more complicated than critics of Islam portray
updated 7:19 AM EDT, Mon October 27, 2014
Julian Zelizer says control of the Senate will be decided by a few close contests
updated 8:12 AM EDT, Fri October 24, 2014
The response of some U.S. institutions that should know better to Ebola has been anything but inspiring, writes Idris Ayodeji Bello.
updated 5:01 PM EDT, Wed October 22, 2014
Paul Callan says the grand jury is the right process to use to decide if charges should be brought against the police officer
updated 12:19 PM EDT, Thu October 23, 2014
Theresa Brown says the Ebola crisis brought nurses into the national conversation on health care. They need to stay there.
updated 6:35 PM EDT, Tue October 21, 2014
Patrick Hornbeck says don't buy the hype: The arguments the Vatican used in its interim report would have virtually guaranteed that same-sex couples remained second class citizens
updated 12:30 PM EDT, Fri October 24, 2014
The Swedes will find sitting on the fence to be increasingly uncomfortable with Putin as next door neighbor, writes Gary Schmitt
updated 12:32 PM EDT, Fri October 24, 2014
The Ottawa shooting pre-empted Malala's appearances in Canada, but her message to young people needs to be spread, writes Frida Ghitis
updated 9:48 PM EDT, Sat October 25, 2014
Paul Begala says Iowa's U.S. Senate candidate, Joni Ernst, told NRA she has right to use gun to defend herself--even from the government. But shooting at officials is not what the Founders had in mind
updated 6:08 PM EDT, Thu October 23, 2014
John Sutter: Why are we so surprised the head of a major international corporation learned another language?
updated 5:54 PM EDT, Thu October 23, 2014
Jason Johnson says Ferguson isn't a downtrodden community rising up against the white oppressor, but it is looking for justice
updated 12:21 PM EDT, Fri October 24, 2014
Sally Kohn says a video of little girls dressed as princesses using the F-word very loudly to condemn sexism is provocative. But is it exploitative?
updated 4:06 PM EDT, Tue October 21, 2014
Timothy Stanley says Lewinsky is shamelessly playing the victim in her affair with Bill Clinton, humiliating Hillary Clinton again and aiding her critics
updated 10:14 AM EDT, Thu October 23, 2014
Imagine being rescued from modern slavery, only to be charged with a crime, writes John Sutter
updated 12:00 PM EDT, Tue October 21, 2014
Tidal flooding used to be a relatively rare occurrence along the East Coast. Not anymore, write Melanie Fitzpatrick and Erika Spanger-Siegfried.
updated 7:35 AM EDT, Tue October 21, 2014
Carol Costello says activists, writers, politicians have begun discussing their abortions. But will that new approach make a difference on an old battleground?
updated 9:12 AM EDT, Tue October 21, 2014
Sigrid Fry-Revere says the National Organ Transplant Act has caused more Americans to die waiting for an organ than died in both World Wars, Korea, Vietnam, Afghanistan and Iraq
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT