In Taunting Trump on Taxes, Buffett Continues to Mislead

Warren Buffett's October 10th press release, issued in response to Donald Trump's assertion that Buffett had taken a "massive deduction", much like Trump's, is yet another instance of Buffett putting forth incomplete and misleading information relating to his federal tax situation for political purposes.

In this press release, Buffett provided snippets from his 2015 individual federal income tax return, including his adjusted gross income of $11.56 million and deductions (mostly charitable) of $5.48 million. From these numbers, his 2015 individual taxable income of $6.09 million can be deduced. As he disclosed in his press release, he paid federal income taxes of $1.85 million on this 2015 taxable income.

Thus, with much fanfare, adoration, and echoing from the press, Buffett claims to have fully demonstrated that he had not taken a "massive deduction" against his taxable income in one single year, 2015.

In reality, this claim was made based on his disclosure of information that represents only 0.06% of his 2015 federal tax activity. And what about previous years?

As he did when he wrote his famous 2011 New York Times OpEd piece (the one where he claimed his "federal tax rate" in 2010 was less than one-half that paid by his fellow office workers), Buffett disclosed information only from his individual tax return and conveniently ignored the massive amount of federal income tax he bore in 2015 as a one-third owner of Berkshire Hathaway, one of the largest corporations in the world.

There is no debate that corporate income is taxed twice, first at the corporate level (paid directly to the U.S. Treasury by the corporation) and then at the individual shareholder level (paid as personal income taxes) as dividend income is received. Moreover, shareholders bear these corporate income taxes, regardless of the level at which they're paid.

In 2015, Berkshire Hathaway generated taxable income of $34.95 billion. At a conservative federal corporate tax rate of 25%, the company will ultimately pay federal taxes of $8.74 billion on this income. As a one-third owner, Buffett's share of this income and federal taxes was $11.65 billion and $2.91 billion, respectively. This information does not flow to Buffett's individual income tax return (as noted above, it is reflected in Berkshire Hathaway's 2015 corporate tax return and paid directly by the company to the U. S. Treasury).

There is no way to know, looking at Buffett's individual tax return for a single year, whether or not Berkshire Hathaway, the entity that generates 99.94% of his economic activity, has ever utilized a "massive deduction" generated by a business failure. As such, offering up only his 2015 individual tax return to provide proof that he did not benefit from a "massive deduction" is nonsensical.

To the contrary, however, there is, in the public record, proof that Berkshire Hathaway has taken massive deductions in the past that resulted in large tax savings to the company (and hence to Buffett). This proof does not come in the form of a vague, unsubstantiated internet reference, but rather from Berkshire Hathaway itself. The company made this statement in a press release dated May 8, 2009, put out in conjunction with the release of its first quarter 2009 10-Q filing with the U.S. Securities and Exchange Commission:

"We sold 13.7 million shares of ConocoPhillips during the first quarter and additional shares were sold subsequent to the end of the quarter. Although we expect the market price of ConocoPhillips to increase over time to levels that exceed our original cost, we are likely to sell some additional shares prior to that time and generate additional capital losses that we can carry back to prior tax years when we generated net capital gains. In 2006, we paid about $690 million in federal tax on capital gains and that payment can only be fully recovered if capital losses of at least $1.98 billion are taken in 2009."

So there you have it. Berkshire Hathaway executed a tax avoidance strategy in 2009 to utilize a massive write-off to recoup $690 million in capital gains taxes it had previously paid. As a one-third owner of Berkshire Hathaway, Buffett benefited from this strategy to the tune of $230 million.

Given the complexity and magnitude of Berkshire Hathaway's holdings, it is almost certain that other write-offs and net operating loss deductions have been taken by the company over the years.

If Warren Buffett wants to influence the political process with assertions relating to federal taxation issues, he should do so without resorting to deceitful, inaccurate, and incomplete analyses and statements.