Why the Facebook dude expatriated


Posted by:
Phil Hodgen

Written on:
May 11, 2012

Posted in:
Expatriation

You’ve seen the articles.  Heard the rants on TV.  Seen my prior blog post.

Now here is the economic reason he gave up his U.S. citizenship last September, pre-IPO.

How he was taxed when he gave up citizenship

When you give up your citizenship, the IRS pretends that you sold everything the day before.  Let’s pretend Eduardo Saverin cancelled his citizenship on September 30, 2011.  That means the IRS pretended he sold everything he had on September 29, 2011.

Among other things he owned was a giant stack of Facebook stock.  Eduardo’s tax lawyer (if smart) went and bought a really expensive valuation opinion on what the stock was worth on that date.  Eduardo acquired the stock at as close to zero as you can be.  So the entire amount was capital gain.

Example.  Eduardo owned 100 shares of Facebook stock that he bought for $100 at founding.  On the day before he expatriated his stock was worth $1,000.  He has a really well-documented valuation opinion to prove it.  (Remember, at this point Facebook is pre-IPO.  There was a secondary market for this stuff so it’s reasonably easy to get reasonably close to what the stock was worth).

Eduardo has capital gain of $900.  He happily pays tax to the U.S. government on that $900 capital gain.

How he’s taxed after he gives up citizenship

Now Facebook goes all IPO ‘n stuff.  His 100 shares are suddenly worth $2,000.  Remember.  Eduardo is a nonresident alien — a noncitizen of the United States who also happens to not be living in the United States.  He sells the stock for $2,000.  He pays U.S. capital gain tax of ZERO.

Whaaaaaa?

Or as Reddit would say, ffffffffuuuuuuuuuuuuu!

Yep.  True story.  Zero tax in the USA.

A nonresident alien does not pay capital gain tax on stock sales of U.S. companies.  Not just Facebook.  It could be Google, Apple, anything.  Nonresident investors do not pay capital gain tax on their stock sales.  (Usual disclaimer – exceptions to the rule exist everywhere but for the well advised investor this is the result).

Example:  Eduardo owned 100 shares of Facebook stock that he bought for $100 at founding.  He cancels his citizenship and pays his $900 tax as described above.  The company goes IPO.  Now the stock is worth $500 per share.  His holdings are worth $50,000.  He sells.  Pays no capital gain tax.

This means that the total capital gain tax that he paid, as a founder of Facebook, was $900.

And if the price per share goes to $1,000, he has $100,000 in his pocket, on which he paid tax of $900.

Etc.

I don’t know the true numbers

I don’t know the true numbers that apply to him.  But that’s the tax game he played.  He only gets taxed on the capital gain up to the value of the stock on the day before he expatriated.  All future appreciation in value is forever tax-free to him.

I approve.

EDIT:  I’m quoted in an article on abc.com about this situation.

  • Don

    The IRS hassles middle class ex-pats and the IRS still has to live by the sword and die by the sword in this case and collect nothing. It’s just like the tax after foreign tax credits etc applied what the IRS would’ve collected from the middle class ex-pats. Well done sticking it to the US government.

  • Anon

    “Nonresident investors do not pay capital gain tax on their stock sales.”

    It’s not hard to imagine congress “remedying” this.

  • http://hodgen.com/ Phil

    @Anon,

    Unfortunately you are right.

    And then Congress will be puzzled as to why foreign investment capital flees from the US stock market.

  • Tim

    Phil,

    Interesting and real(someone I have talked to)scenario. Canadian citizen long Green Card Holder living in the US right now and fully US tax compliant. Returning to Canada shortly for really good job(as in job unlikely to leave for many years so probably not returning to the US). Has only US bank accounts right now again fully compliant(Checking, Savings, 401K). Has no Canadian bank or other Canadian financial assets. Worried like hell about what is going on with FBAR and FATCA and strongly considering getting her I-407(thus her 8854 filing of date would be before she earned any Canadian source income or assets) before she opens any Canadian bank or financial accounts.(Is okay with CRA for keeping accounts in the US for first year of Canadian tax residency). Should she be making a consular appointment before she even leaves the US. If she keeps the amounts in her Canadian accounts below 10,000 is that okay for a while for FBAR purposes. In this scenario is a little rash for a Green Card Holder to be worrying about getting an I-407 right away.

  • Tim

    The other possibility I was thinking of was you could as Green Card Holder but not a citizen make a treaty election on form 8854(I think its option 5-3) as the date of the start Canadian tax residency. In this case you wouldn’t have overlap between US and Canadian Source Income and returns. My sense you though need an I-407 to avoid having to file an FBAR(again you could stay under 10,000 until the I-407).

  • RN

    You approve.

    Another scumbag who think the rich should own everything and everyone else should rot.

    God save the world from people like you.

  • Bill H

    RN, I’m probably poorer than you are and I approve. Then again, it isn’t a matter of rich-vs-poor. It’s a matter of philosophy- he was active enough to make the money, you weren’t. Instead of raging about it, try creating a good or service everyone wants. It’s been proven time and again, ad infinitum, that it can be done.

    Saverin was just able to take advantage of laws in place, and issue a very open middle finger to the Obama administration in the process.

  • GR

    To RN,
    If I’m born in California but live in NY I pay taxes to NY. CA doesn’t tax me if I don’t live there.
    However, if I am born in the US (therefore a US citizen) and my parents take me to Canada while I’m still a baby I will owe taxes to the US (in addition to Canada) for the rest of my life, even if I no longer set foot on US soil.

    Also, if “the Facebook dude” had never immigrated to the US and had simply sent in a check to invest in Facebook, 100% of his gain would have been exempt from US taxes, as Phil pointed out.

  • RN

    I’m plenty rich, and I pay my taxes.

    He uses the strength of the US systems to make his money, then he refuses to pay his taxes on fair value of capital gains earned. Not to mention, the capital gains rate is ridiculously low anyway.

    Let him try to build Facebook in Singapore or the Caymans. Let’s see how that works out for him.

    GR, your point is completely irrelevant to the issue in question.

    Nice.

  • Bellis

    Phil: Thank you for an informative site. I’m been following your blog for almost two years now, since I discovered to my horror that despite paying over 40% taxes in the European country where I live , that I was also supposed ot be filing taxes, FBARS etc to the IRS. I’m all caught up now and thinking about expatriating, but I am worried about the “Reed Amendment”. Is this actually enforced (and how?) in your experience?

  • Tim

    Check out this NY Times article about another non citizen non resident alien who expects to make a bundle from Facebook. Why should he be treated any different from Severin.

    http://www.nytimes.com/2012/05/16/technology/a-russian-facebook-bet-pays-off-big.html?_r=1

  • http://hodgen.com/ Phil

    The government has never — to my knowledge — enforced this. Clinton’s Attorney General, Janet Reno, took a look at this and decided that it was problematic. At least that is my memory.

    That is not to say that the Reid Amendment is dead. The law exists, and there are certainly plenty of — shall we say, politely — enthusiasts on the left and right who think it is a good idea. Bruce Ackermann, a law professor at Yale is the latest in this parade. http://www.latimes.com/news/opinion/commentary/la-oe-ackerman-saverin-facebook-citizenship-20120516,0,973370.story

    These people seem to be captured by ideology and bitterness. Their arguments seem to start at the conclusion and knit together reasons to support the conclusion. Rarely does there appear to be a consideration of the knock-on effects of barring entry to former citizens.

    Common sense would say that Mr. Saverin (and his money) should be welcomed in the United States, even if he terminated his citizenship. He’s deliberately building wealth in the United States and helping to generate more tax revenues? Welcome to America!

    But I digress. :-)

    Back to your question. I can’t tell you whether the Reid Amendment will (or will not) be enforced in the future. Decisions made in Washington DC seem tethered firmly to re-election of politicians and untethered from the real world. If Janet Reno found constitutional difficulties with the Reid Amendment in the Time of Democrats, I would think this is a good sign. While the Republicans are every bit as capable of lunacy, people on the left seem more hell-bent on Red Queen decision-making on this issue.

  • Bellis

    Thanks for taking the time to answer, Phil. It will be interesting to see what happens now with the cheesily-named “EX-Patriot Act”. ;-)

  • http://hodgen.com/ Phil

    @Bellis,

    Yes, _WHY_ do politicians have such an affinity for cheesy acronyms?

    If they had a sense of humor we would know they are just having fun. I am at a loss. :-)

    Phil.

  • GetMikey

    RN,

    You’re not “getting it”. In today’s world, the US is not as relevant as it used to be back in the 50s and 60s and 70s. He probably CAN do what you are saying he should try doing in Singapore or elsewhere, and maybe even better than if he remained in the US. Skype and Vonage and a whole lot of other technologies can make that a distinct possibility, even if he had US employees. Not that he WOULD hire in the USA, considering the US is putting out an army of lawyers while China is putting out an army of engineers!

    As a matter of fact, should he decide to head to Chile instead, the gov’t of Chile has a program where they will put up to $40,000 of THEIR money into his company coffers to bring his business into the country! See, in Chile they recognize that you have to give a little in order to get. Yet in the United States, all the gov’t wants to do is take, and take, and take . . .