KING WILLIAM –   In the April 13 edition of Barron’s is a story titled  ” The Buffet Loophole” ,  and regardless of what one’s opinion is of the masters investment skill you have to read this and absorb just how convoluted the tax codes are, and why they need scrapped for a simpler , more equitable design. While Buffet has built a fantastic track record as an Investor, one comes away from this story with a diminished level of respect for him and his hypocrisy of constantly calling for higher taxes on the wealthy, when the reality is he avails himself to paying miserly amounts of taxes by utilizing the Buffet Loophole & the Buffet Model , detailed in this piece .  Sections 531 & 532 of the Federal code for those of you who like reading tax code ( I personally don’t ) will go into detail , for our purposes, I will summarize how the scheme works.

3 examples cited in the article lay out specific acquisitions his company has made in the last 5 years and the tax revenue that had previously been paid to shareholders  receiving dividends from these 3 companies, and how after the acquisitions they stopped ,( the dividends & the tax revenue).

In 2012 before he acquired H.J. Heinz for 28 billion H.J. Heinz paid 600 million in dividends. Those dividends were then taxed and provided revenue to the U.S. Treasury. After the acquisition the dividends were halted–and so were the taxes that had been previously collected.  In 2010 Lubrizol, another acquisition paid 90 million in dividends to shareholders who paid the tax , after the acquisition the same thing occurred, the dividends were halted, with the ensuing lost tax revenue. In 2009 Burlington Northern Santa Fe Railroad , which the year before the acquisition had paid some 546 million in dividends ( once again distributed and taxed ) the dividends stopped as occurred in the other two examples, along with the tax revenue that had previously been collected.

Section 531 of the Tax Code imposes a 20% tax on accumulated , but undistributed income of a corporation. Section 532 essentially states that the ” tax shall apply to every corporation …availed for the purpose of avoiding of the income tax with respect to its shareholders…by permitting earnings & profits to accumulate instead of being divided or distributed”.

  In summary the halting of the payment of dividends,  is referred to as the ” Berkshire Model” in the article. The model is to buy companies rich in cash flow with histories of paying dividends, then cancel the dividends  and retain the cash flow going forward for future acquisitions . The key question then becomes : is it being retained for legitimate future acquisitions or simply a clever manner with which to circumvent Section 531 and avoid distribution and hence the past taxes that had been collected on that same revenue ?

In 2014 Berkshire itself recorded a provision for $7.9 billion in taxes, most of which was “deferred” . This is money it acknowledges it owes the government but has yet to pay.  The article also states that enforcement of Sections 531 & 532 has been sporadic subject to the judgment of the I.R.S. The ambiguity is in their ( the I.R.S ) having that wide of a discretion in who and when they chose to enforce this , in a more literal sense.  
  
  Had Berkshire paid out dividends ( following the S & P 500 dividend yield of around 2% ) Buffet himself would have received around $1.2 billion in dividends , and at a tax rate of 23.8% his tax bill would have been $280 million or 40 times the taxes he actually paid in 2010, $6.9 million. 

  President Obama and Warren Buffet play to the “wealth distribution crowd” every chance they get. As Barron’s points out  ” how strange that it is it isn’t his wealth they are spreading around”.

  Taxes are indeed a necessary evil, made worse by this type of absolute and clear evidence of how the tax code , at all levels is now nothing more than the dirty currency of corrupted politicians.

Bob Shannon      King William