Monday, June 4, 2012

The Death Star

Facebook co-founder citizenship stunt costs an extra $43 million.

June 4, 2012 8:00am EST New York, NY – When Facebook (NASDAQ: FB) co-founder and Brazil native Eduardo Saverin controversially renounced his United States citizenship in September 2011, ahead of Facebook's IPO, most Americans were up in arms. Americans accused Saverin, a 4% owner of Facebook, of permanently exiting the United States to avoid the hefty tax bill associated with Facebook’s upcoming 2012 IPO and all but guaranteed subsequent stock price pop.

In response to the public outcry, Senators Schumer and Casey quickly proposed the “Ex-PATRIOT Act”, a 30% exit tax (compared to the current 15% capital gains tax) on those the IRS deemed to have renounced their U.S. citizenship to avoid U.S. taxes.

However, angry Americans need not rage much longer, as Saverin's tax avoidance has actually backfired, now costing him an extra $43 million in taxes per PrivCo calculations of Friday's fallen price of $27.72/share. Saverin’s tax savings were contingent on the “sure thing” that Facebook, the most overly hyped and now most disappointing IPO of the decade, would rise sharply. By renouncing his U.S. citizenship in September 2011, PrivCo calculates that Saverin’s tax bill locked in at $461 million, as it is permanently tied to the September 2011 FB price of $30.58/share (according to Facebook internal third party valuation measure used for its RSU issuances to employees).

While Saverin initially appeared to “save” $112 million in capital gains taxes based on the $38 IPO price, he is actually paying $43 million more in taxes per PrivCo calculations as of Friday's fallen share price of $27.72. Since Saverin’s tax liability is permanently fixed at $461 million based on the September 2011 price, PrivCo calculates that he will overpay the United States Treasury $15 million for every dollar Facebook sinks below $30.58 than he otherwise wo uld have owed to the IRS had he stayed an American.

"With so many Americans agreeing that Eduardo Saverin's citizenship renouncement was a self-serving - and many feel downright disloyal - move, the fact that it has actually raised his tax bill, not lowered it, may be the ultimate Karmic Justice to many Americans," said PrivCo Founder & CEO Sam Hamadeh in a statement.

By giving up his citizenship, any future appreciation of Saverin’s Facebook stock beyond its September 2011 value of $30.58/share will be free of capital gains. However, as Facebook has fallen far below this price, that benefit proved illusory, and will remain so unless  Facebook rises above $30.58 by the time Saverin starts unloading shares after the lock-up expires late this year.

Additionally, Saverin, unlike many insiders, did not sell any of his 4% Facebook stake during the IPO at the $38 offering price, meaning his $461 million tax bill will have to be covered by liquidating Facebook shares at their current market price.

 

Saverin Could Theoretically Be Entirely Wiped Out:

 

Furthermore, Saverin could face a worse-case scenario if Facebook stock sinks to a low of $4.59/share, according to PrivCo calculations. At this price, Saverin’s fixed September 2011 tax liability of $461 million would equal his entire 4% ownership stake of Facebook, according to PrivCo calculations. At any price below $4.59/share, Saverin's ownership of Facebook is worth less than his tax bill, effectively wiping him out financially, and demonstrating the enormous risk of his citizenship gamble, which he clearly bel ieved to be a risk-free bet.

"Saverin's tax-move backfiring also shows that for newly public companies, the period between an IPO and its typical 6 month lockup expiration can be an eternity during which the company's value can easily fall, posing risks for the timing of tax-related actions like taxable stock options exercises, Restricted Stock Unit taxable vesting, and even renouncing one's citizenship on the expectation of tax avoidance, a lesson Eduardo Saverin just learned the hard way," Hamadeh added.

 

Mark Zuckerberg's Timing of Stock Option Exercise Also Backfires:

 

In related move, PrivCo confirms that Mark Zuckerberg will also be overpaying his taxes based on his poorly timed exercise of stock options on 60 million shares at the $38/share IPO price, as Facebook shares are now worth only some $27.72/share. By exercising his taxable stock options on the eve of the IPO when the share price was at the $38 IPO price, Zuckerberg stuck himself with a $342 million tax bill as opposed to a $250 million tax bill had he exercised based on the June 1 close of $27.72/share.  "By law, the taxable amount is determined on the date of exercise; as a result, the IRS and the State of California will share in the extra $92 million in taxes Zuckerberg will pay, according to PrivCo calculations," said PrivCo CEO Sam Hamadeh, also a corporate attorney and tax law expert.

"It confirms Benjamin Franklin's famous adage that Nothing can be said to be certain, except death and taxes," Hamadeh added.

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