On eve of Facebook IPO, Sunlight exposes $3 billion tax break

On eve of Facebook IPO, Sunlight exposes $3 billion tax break

Summary: Facebook's IPO lets it use a tax loophole to get up to $3 billion in tax breaks; no need to pay taxes for the forseeable future.

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The Sunlight Foundation published an expose revealing, among other things, that Facebook's IPO exploits a tax loophole to avoid paying taxes for years: an estimated $3 billion tax break.

That's right: the company estimated today to be worth $104 billion and the largest IPO in history is all set to get out of paying taxes.

It's a perfectly legal tax move that feels... somehow criminal.

Senator Carl Levin (D-Mich) feels the same way. For months, Senator Levin has been campaigning the Senate against the deplorably enormous tax break Facebook is set to receive with its IPO.

According to Senator Levin, Facebook will put a low stock value on the books (Facebook's filings state 6 cents). It will file losses later for their actual worth (just announced at $38/share).

Facebook says it will, as allowed by law, later claim deductions on the difference. Then, further claim a refund on this "loss" two years back for taxes it already paid. Facebook has said they will carry this so-called "loss" 20 years ahead.

Facebook gets a hefty tax refund and avoids taxes for years, potentially decades to come.

All told, Senator Levin says the loophole will put an estimated $3 billion tax break in Facebook's coffers.

Again I restate: this is legal and Facebook's actions are within the law. Those 1% are some pretty slick players.

This is all why for Senator Levin, Mark Zuckerberg is the poster child for U.S. tax reform - and Facebook is a textbook example of America's unfair and unjust corporate tax loopholes.

In his speech from the Senate floor Senator Levin explains in detail:

According to its filings, when Facebook goes public, Mr. Zuckerberg plans to exercise options to purchase 120 million shares of stock for 6 cents a share.

Mr. Zuckerberg’s shares, obviously, are going to be worth a great deal more than 6 cents, a total of about $7 million; they will apparently be worth more than 600 times as much, something in the neighborhood of $5 billion.

Here’s where the tax loophole comes in. Under current law, Facebook can – perfectly legally – tell investors, the public, and regulators that the stock options he received cost the company a mere 6 cents a share – that’s the expense shown on the company’s books.

But the company can also – perfectly legally – later file a tax return claiming that those same options cost the company something close to what the shares actually sell for later on – perhaps $40 a share.

And the company can take a tax deduction for that far large amount. So the books show a highly profitable company – profitable, in part, because of the relatively small expense the company shows on its books for the stock options it grants to its employees.

But when it comes time to pay taxes, to pay Uncle Sam, the loophole in the tax code allows the company to take a tax deduction for a far larger expense than they show on their books.

In addition, Facebook is allowed by law to carry back the so-called “loss” arising from this deduction for two years into the past, which means it can claim a tax refund for the income tax that it has paid over the past two years – a refund the company estimates at half a billion dollars.

So instead of paying taxes to the treasury, this profitable company will claim a hefty refund on taxes already paid.

But that’s not all.

The company says it will, as allowed by law, also carry forward the so-called losses arising from this tax deduction up to 20 years into the future, thereby reducing any tax it owes in the years ahead. Altogether, this loophole could give Facebook a tax break of up to $3 billion.

Now, the end result is that a profitable U.S. corporation – a success story – could end up paying no taxes at all for years, even decades.

Do you feel like this shouldn't be legal?

Senator Levin doesn't think it should be, and considers Facebook's IPO - its $3 billion tax break - to be the sharpest example as to why this corporate tax loophole needs to be closed, ASAP.

This information comes through an expose published today by the Sunlight Foundation on the eve of Facebook's history-making IPO, published as an expose on the company's significant activities in Washington D.C.

Also according to the expose, Facebook's activities in D.C. include a small PAC, yet over $650K was spent lobbying Congress - and an astonishing $4 million to political campaigns and candidates since 2006.

Topics: Banking, Government, Government US, Legal, Social Enterprise

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18 comments
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  • Two words. Tax reform. Messing around with individual rates or loop holes

    in an 80 thousand page tax code is inconsequential at best and harmful more often than not. Radical simplification and complete reform is what's needed.
    Johnny Vegas
  • Zuckerberg's taxes?

    What about Zuckerberg's taxes on that money? When he sells he has to declare nearly the entire amount. So will the taxes still be paid but from his end?
    Tom Foremski
    • False Argument

      Even if this philosophy applied here (and I don't think that it does, given that Facebook is claiming this as an operating loss) the whole "but you should only pay taxes on money once" is a horrible argument anyway. It's been used in the Capital Gains tax discussion for years--"the company paid taxes on these profits" (unless of course they've had an IPO in the last few decades apparently, or found some other way to game the system) "so the people who actually get the profits shouldn't have to pay taxes again!" If that were the case, should I pay income tax on my salary, since the company was presumably taxed (at least on paper) for the revenue that covers it? Should landlords pay tax on rental income since the renters were taxed? It falls apart pretty quickly.

      Even if the taxes on Zuckerberg's and the other instant millionaires offset this windfall given to Facebook, you end up with no net taxes off of all this money changing hands. Which is not the way the system is supposed to work.
      jbhelfrich
      • the company DOES NOT pay taxes on the revenue that covers your salary

        there is no double taxation here. the companies do not pay taxes on revenue. they pay taxes on income, which is calculated as their revenue minus their expenses. your salary is their expenses. so it is your responsibility to pay taxes for your salary
        vpupkin
  • Will Facebook Soon start to go UNDER

    Will Facebook soon start to go under from another new rival soon to be. Facebook looking for suckers to lose their money or should i say give their money away to them, THE WICKED. Sounds just like another Big Bank Scam. Selling to slow in the head investors soon to be a lot of Worthless Paper.

    The wise and smart will read the bible and get to know our Lord and Savior Jesus Christ.

    The Lord's Little Helper
    Paul Felix Schott
    Paul Felix Schott
  • On eve of Facebook IPO, Sunlight exposes $3 billion tax break

    my classmate's sister-in-law makes $84 hourly on the laptop. She has been fired for 7 months but last month her income was $9078 just working on the laptop for a few hours. Go to this site[N][u][t][t][y][R][i][c][h].[c][o][m]
    ArmandoWhite
  • Nice to see the propagandists at work

    Tax loophole is an emotional trigger word to get you to think that someone is somehow cheating on their taxes. What Facebook is doing is following tax law and taking advantage of deductions to reduce their tax burden. Just like you do when you deduct your home mortgage or dependent care expenses or charitable contributions. But, of course, because your personal loopholes aren't worth billions, you are simply a prudent taxpayer, while the evil filthy SOB rich are thieves.
    baggins_z
    • Entirely missing the point

      Which is hard to understand, being that the author directly addressed your point several times throughout the course of the article.
      The point is not that these tax loopholes are legal, the ENTIRE point of the article is that they should NOT be.
      And being that they ARE loopholes, what else would you have the author call them?
      .DeusExMachina.
    • clueless

      When something is legal, it doesn't make it right! If you allow a class of people to avoid paying taxes, then obviously it must be made up by those that do. In the 50's half of the federal income revenue came from corporate income taxes, it's less than 10% now! And FYI, I'm not very happy subsidizing people's choice to have children or house either! However, in those cases you deduct money you ACTUALLY spend, instead of money that you NEVER had.

      In fact, if you paid attention to the IPO itself, it was price fixed, a bottom of 38 dollars was established by the companies representing facebook.
      shiitaki
  • This is funny......

    Maybe we should look at it like this: With the highest corporate tax rate in the world and an administration and majority of senate hell bent on spending, with little to no success showing for it even the most liberally influenced businesses are afraid of investing in the United States of America.
    partman1969@...
    • No success?!?

      WTH are you talking about?!?
      Like the Wall Street banking industry or not, their continued solvency most certainly can be counted as a success, as that was their intended aim.
      Likewise the resurrected Detroit auto industry.
      More importantly, the economy is doing EXACTLY what Keynesian economic theory predicted, given the anemic <4 trillion dollar stimulus a timid Congress allowed to pass. Most economists of ANY repute made clear that a stimulus of at least DOUBLE that amount would have been needed to readily pull the US economy out of the recession caused by idiotic, trickle-down, supply-side, discredited economic policies first put in place during the reign of the neo-cons.
      More to the point, there is NO proof that our supposedly (though not in reality) high corporate tax rate has had ANY effect on corporate investment or output. The same can be said of the individual tax rate.
      But feel free to completely ignore the entire decade of the nineties in order to continue to believe in farcically fanciful economic theories that have NEVER panned out in practice. And yes, that includes Reaganomics and the faux success of the 80s.
      .DeusExMachina.
      • Liberal Tool..

        The auto industry save was faux. A large plot devised at getting the American taxpayer dollars (Democrat, Liberal and Conservative) into a DEMOCRAT voting UNION of the American auto industry. Billions of dollars thrown at GM and Chrysler and within months of the new Chevy Cruze they are solvent again! Yeah right. Sure!!! This was a grab for some of the largest money ever thrown at the DEMOCRAT election campaign. Now the American people are being conned of the millions thrown into failing GREEN energy programs such as Solyndra and others. Americans are being forced into one of the largest government power grabs of Obamacare (1/6th of the entire U.S. economy). Did I say "forced" a word we were guaranteed not to be used against a citizen of the United States of America as governed by the rule for law of the land: The CONSTITUTION., and this is only one example of the many power grabs King Obama has bestowed upon us in his 3.5 years at the throne. Oh and please don't parrot all the Bush rhetoric. I support the troops but not the wars which your King was supposed to stop in first or second year. Instead he has an Arab spring, a Libyan ruler assassination and continues to load Afghanistan with American troops. Good Job! As much as you know for economics much of it was also due to failure of unwarranted loans provided by Freddy Mac and Fanny Mae (all under the Clinton administration) and as managed by Rahm Emanuelle at the helm, but their and all the promises of Acorn had nothing to do with such bad loan practices or at least partial blame for the failing economy now. Did they? Oh and by the way I experienced good days from the early 80s all the way to 2006 when the economy was at its worst and liberals were in charge of congress.
        partman1969@...
      • Pablum

        @partman1969
        Faux? Again, WTH are you talking about? First, it was successful, and accomplished exactly what it set out to do. Please inform the CEO of GM that it was "faux" and that the company would have survived without it. Second, no American tax dollars went to the unions. In fact, the unions saw large cuts to worker salary. But feel free to ignore those pesky facts.
        Third, your timing vis-a-vis Chevrolet's solvency and the release of the Cruze is, shall we say, errant.
        As for your comment about Solyndra, that is old news, so using the word "now" to refer to it is disingenuous at best.
        In addition, Solyndra and WHAT others? Let's see your list of failing green programs.
        Now, as for your RIDICULOUS childish name-calling ("Obamacare") you might want to actually READ the law you are commenting on. It most certainly is NOT a "power grab" by the government. In fact, the only party that gains significant power is the insurance industry.
        Also, please do not refer to documents, such as the Constitution, that you clearly have NOT read, let alone understand.
        NOTHING in the Constitution prevents the application of provisions of the Affordable Care Act. Nothing.
        As to your status in the 80s, um, so what?
        .DeusExMachina.
      • Unions and other facts.......

        THEY ALL GOT 7000 DOLLAR BONUSES!!! You don't see that as a slap in the face to the American taxpayer?????, and were put on a tiered wage system based on seniority and overall production, about time some cutting measures were made. My timing for the Cruze comment was exaggerated and meant to be funny, I'm Sure most reading didn't have the blood pressure issues you seem to have. Ford survived, without adding to the federal deficit and I believe even benefited after the fact.(true patriots saw honor in their business decision) Solyndra was BIG old news that focused on Obama's irresponsibilities to the American taxpayer as well as his 5 year ban on offshore oil production, his closing of the Keystone XL oil pipeline and closure of coal based power plants, that all provided easily attainable and way more economical energy supply to the American people. Cheap attainable energy all flagged to endorse failing solar and wind projects that may only provide a HALF A PERCENT the energy America really needs. On Obamacare (NOT SO CHILDISH or RIDICULOUS, nice try though) as almost every media (even liberal) source "playfully" calls it: PLEASE READ I have read understand the Constitution and also nowhere does it state that the federal government can mandate purchasing requirements on any Americans. I would debate you on any public forum (or podium) and chances are high, you would leave crying for Mommy. I write on many TRUE conservative sights and have even had Congress members contact me to quote some of my comments. As to my status through the 80s 90s and even into the 2000s it was all hard work and good investments. The dividend checks looked pretty good until about 2010 (not bad now) but the libs certainly didn't help. My how your comments show your hot under the collar attitude you have. Please remember were a lot of his (Obama's) legislation not so controversial it wouldn't be decided at the Supreme Court. (probably another liberal shame)
        partman1969@...
      • You quite simply do NOT know what you are talking about

        And that is putting it nicely. Item by item:
        1) "THEY ALL GOT 7000 DOLLAR BONUSES!!! You don't see that as a slap in the face to the American taxpayer?????"
        First, you are factually incorrect. Bonus amounts were not uniform, and were instead based on a number of factors. But you already admit you freely lie for the purposes of making your point. More importantly, however, the $7000 bonuses did NOT come from bailout funds, they were profit-sharing payouts, based on fairly negotiated contracts, and came ENTIRELY from company PROFITS. As the company had record profits in 2011 (another testament to the success of the bail out) but had underpaid workers, on the promise that if that pay cut lead to profits, those profits would be shared, this is exactly what SHOULD have happened, and the company did not "lose" this money, it just forestalled paying it.
        "... and were put on a tiered wage system based on seniority and overall production, about time some cutting measures were made."

        So?!?

        2) "My timing for the Cruze comment was exaggerated and meant to be funny.

        It was also made to support an erroneous contention. It was thus a lie.

        3) "Ford survived, without adding to the federal deficit and I believe even benefited after the fact."

        So? What possible relevance has Ford to this discussion? Ford was in an ENTIRELY different financial situation than GM or Chrysler. Claiming that is relevant is like claiming that Facebook's success proves that investing in Friendster was a good idea.

        4) "(true patriots saw honor in their business decision)"

        What the hell does patriotism have to do with anything, and what is the metric by which you measure "true" patriotism? Who says? You?!?

        5) "Solyndra was BIG old news"

        Try to let this percolate through that thick skull: the size of the Solyndra news is TOTALLY irrelevant. It could have been the biggest story of the century, and it would still be an example of your COMPLETE lack of intellectual integrity, trying to pass it off as a current event, using the word "now".

        6) "... that focused on Obama's irresponsibilities to the American taxpayer as well as his 5 year ban on offshore oil production, his closing of the Keystone XL oil pipeline and closure of coal based power plants, that all provided easily attainable and way more economical energy supply to the American people."

        You can't have it both ways. If you are going to count Solyndra as evidence of the Obama administration's supposed irresponsibility, it is more than made up for by the success of the aforementioned auto industry bailout, among others.
        More importantly, claiming that ANY project involving oil drilling, no matter how successful, would have ANY affect on the economics of energy supply is simply more evidence that you don't know what you are talking about. First, because of successful attempts at manipulating supply side parameters, in order to artificially increase profit, current gasoline refinery capacity is already at a maximum. No new refineries capacity has been added for decades, and substantial capacity was taken offline. Bringing more crude online will NOT increase supply, and thus decrease price, to any significant degree, other than its effects on speculators.
        More to the point, oil is sold on the global market. Adding supply will have little to no effect locally, in the U.S., unless you propose some new regulation requiring this crude only be sold in the U.S. market. In fact, almost all crude introduced into the system at this point will go entirely to fuel the growing demand in China, as that it where the market is growing.
        To make it clear, just because you drilled it here DOES NOT MEAN IT WILL BE SOLD HERE.

        7) "Cheap attainable energy all flagged to endorse failing solar and wind projects that may only provide a HALF A PERCENT the energy America really needs."

        What failing solar and wind projects? Solyndra and what else? For every small failure, there are twice as many alternative energy success stories. Not that you can even really make any accurate assessment at this point, as it is WAY too early in the game.
        But let's see your list. Don't just make categorical statements and think they'll fly under the RADAR. You have been called out.
        Citations.

        8) "On Obamacare (NOT SO CHILDISH or RIDICULOUS, nice try though) as almost every media (even liberal) source "playfully" calls it"

        First, claiming "everyone does it" as an excuse is equally childish, and all the more ridiculous, as it is an attempt to defend yourself against claims of childishness! Nice try though.
        Second, the name of the act is the Affordable Care Act. "Playfully" calling it something else in an attempt to be derogatory is not only childish, it is a logical fallacy, rhetorically dishonest, and morally bankrupt.
        Third, was that supposed to be a sentence? 'Cause it wasn't.

        9) "PLEASE READ I have read understand the Constitution and also nowhere does it state that the federal government can mandate purchasing requirements on any Americans. I would debate you on any public forum (or podium) and chances are high, you would leave crying for Mommy."
        (And again with the incoherent non-sentences?!?)

        You are 100% wrong. Both in the specific as well as the general.
        The very first Congress, in 1790, a Congress that included 20 of the ORIGINAL framers of the Constitution mandated that ship owners purchase health insurance for their sailors. This bill went into effect after being signed into law by another framer you may have heard of, George Washington. Not a SINGLE peep was made by ANY of the framers regarding its Constitutionality.
        Further, two years later, in 1792, Congress went on to require all able-bodied men to purchase firearms. In 1792, there were still 17 of the original framers sitting as Congressmen. Only four voted against this bill, NONE of whom did so on Constitutional grounds. When an attempt was made to later repeal this bill, only one framer supported this move, and NONE did so on Constitutional grounds. Furthermore, in 1798, Congress, still containing five members who framed the original Constitution, crafted a bill to deal with a problem with the original health insurance mandate from 1792. As this law covered drugs and doctor's services, but did not cover hospital stays, they enacted a new law requiring the sailors themselves to purchase additional hospital insurance. This bill was signed into law by yet another of the original framers, John Adams.
        Now, you might try to weasel your way out of this by crying that these do not apply, by claiming that, for instance, the requirement to purchase firearms falls under the rubric of the militia clause, not the commerce clause. But problem for you is, first, that does not address the issue that clearly the framers did NOT have a problem with Federal purchase mandates, and second, you SPECIFICALLY stated that "nowhere does it state that the federal government can mandate purchasing requirements on <b>any<b> Americans". This is CLEARLY false.
        FTR, my mom would be laughing right now.

        10) "I write on many TRUE conservative sights and have even had Congress members contact me to quote some of my comments."
        Not surprising, as conservatives, both "true (whatever that means) and not so much so, are all but universally monumentally misinformed.
        And who are you to decide who to decide who the true ideologues are?
        But are you seriously expecting me to be intimidated by your absurd, and logically fallacious appeal to your own authority and your bald-faced bullying? Really?!? You really don't know me very well.
        But for the record, I am not particularly intellectually cowed by people who don't even know how to spell the word "cite".


        11) "As to my status through the 80s 90s and even into the 2000s it was all hard work and good investments. The dividend checks looked pretty good until about 2010 (not bad now) but the libs certainly didn't help."

        First, funny you should include the 90s in there. How conveniently you forget who was President then. And while there was at times a Republican majority, I suspect that you might consider many of them NOT "true" conservatives, and, more importantly, the policies that were enacted were decidedly liberal.

        12) "My how your comments show your hot under the collar attitude you have. Please remember were a lot of his (Obama's) legislation not so controversial it wouldn't be decided at the Supreme Court. (probably another liberal shame)."

        A lot of non-sentences in that tangled mess. Perhaps you need to up your meds. But funny you should make those comments about the Supreme Court. It belies a complete failure to understand the fundamental structure of your government, the purpose of separation of powers, and a failure to understand even basic historical facts, both in context as well as out. But, FTR, these issues are being decided by the Court not because they are "so controversial", but because the Court has taken a decidedly political stance over the last two decades, something that, ironically, the conservatives have railed against as "judicial activism". Funny how they are all for legislators doing the legislating until the laws made don't suit them, then go running to the courts for redress. Hypocritical much?
        But more to the point, I would be VERY interested in you providing citations and other proof that the number of policies enacted by the current administration that have come under judicial review, in ANY court, is significantly higher than past administrations.

        Good luck with that. Oh, and my mommy says "hi".
        .DeusExMachina.
  • Hey Deus.. We just have different beliefs

    1.Bonuses and profit sharing are risky words to talk of 3 years after an 80 billion dollar taxpayer provided bailout. Ford's successes even barring the fact they never used taxpayer money to stay solvent only further prove the mass bailouts to GM and Chrysler were an election campaign bonus for Obama. I spread no lies, I as many other Americans truly feel profit sharing and massive bonuses should be impossible and uncalled for. 2. Massive endowments to green energy, failing or not, while shunning economical and plentiful carbon based sources (not just oil) are in direct relation to what consumers pay on their utility bills and certainly affected the employment rates for those who mine coal and drill oil. These taxpayer paid endowments even when successful still only amount to roughly a percent of what the country actually uses. This is poor economics so much investment for so little return. can you really argue this to your viewpoint? 3. I seriously meant no disrespect with the Affordable Care act. I and many others really believed Obamacare was a term for endearment to the policy. Every media source calls it Obamacare. I would have assumed the same for all named presidential libraries. 4. the examples you quoted are not anywhere in the Constitution. NOWHERE in writing is there any form of mandatory purchases in the Constitution, not even insinuated. PERIOD!!! I have a copy on the wall to my left and reference information to each article, which help me on local political talk radio. Insurance for seafaring vessels and mandatory purchases for firearms are not mentioned in the Constitution, and any legislation under the first congress of 1790 has nothing to do with the Constitution created in 1787 and ratified in 1788, and even if it were not everyone would have a ship that required such insurance. You're so willing to change the Constitution as written. I bet you'd dance a jig if Obama somehow managed to amend it as often that happens on Wikipedia (sign of a true liberal), however the framers you refer to would spin in their graves at the current misuse of its writing, and a few would probably disagree with some of the 27 amendments. Your examples are tripe!! Even car insurance is a choice, if you drive a car and no government forces you behind the wheel. Please reference at what article and section you perceive this misinformation. I and others are interested. 5.Unless you live under a rock, you've heard of right leaning Democrats or left leaning Republicans, hence my terminology "True Conservative" someone who may actually care for the deficit and impending financial disaster and unfortunately either rare or non-excistent. You also probably meant "SITE" in your correction (we were both wrong). My finances throughout the 80s, 90s, and new millennium were all due to smart investments. I credit myself and my broker. No seated president including Clinton will get credit for my money. In fact were it not for a moderate to conservative thinking congress his health care agenda and liberal policies would have started our deficit to the red even sooner. Clinton's lax policies, with Rahm Emanuel at Freddy Mac and Fanny Mae dolling out bad loans didn't catch up to us until we had that bumbling W. Bush in the White house, but those bad loans, Acorn, free cigarettes, fraudulent registrations based on social security numbers of the recently deceased certainly established a larger liberal voting base
    partman1969@...
  • I am surprised that a congress critter is against corporate welfare!

    Generally, it is these guys pushing for the tax loopholes to help themselves and their buddies. (Maybe the young snot-nosed guys at Facebook didn't know they were supposed to contribute to campaign funds? Ignorant New Money vs Experienced Old Money...)

    Still, closing the loopholes will (rightly) hurt existing corporations (by making them pay their fair share,) so I am surprised that anyone in gov't is trying to close the loopholes. I will be doubly surprised if it gets any traction beyond election hype. (After all, we have the best government money can buy!)

    I would like to see a lot of tax reform. Close the loopholes! Stop the book-cooking by corporations, raise the capital gains tax to a rate comparable to other tax rates, tax companies that outsource (instead of giving them tax breaks which is what we do now,) and exclude mortgage deductions on any homes after the primary residence. (Everyone needs a home, but a second (third, fourth, eighth,) home should be a luxury you pay taxes on, not a tax shelter!)
    mlashinsky@...
  • I'm not falling for it

    Senator Levin is a lawmaker, and has been for decades. He passes these laws, tells his business buddies that he's looking out for them so they should donate to his campaigns, and then turns around and tells "journalists" that these laws are "loopholes" and Oh So Bad. Ms. Blue falls for it, and riles up everybody here.

    Not me. What riles me is the duplicity of people like Senator Levin.

    These deductions are legal. That means the legislators put them there. So when the legislators tell you to throw tomatoes, make sure to get some stains on the legislators.
    Robert Hahn