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Giant Tax Loopholes and Tax Breaks: All About the Multi-Billion Dollar Facebook IPO

Shares of the social network go on sale Friday at an initial public offering expected to be one of the largest ever--so how's it managing to get a $3 billion tax break?
 
 
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By the time you read this, Facebook might have already gone public—not with your private information, but with its stock. Shares of the social network go on sale Friday at an initial public offering expected to be one of the largest ever from a US firm, raising billions of dollars to keep the company going.

They will have something of yours, though—your tax dollars.

Thanks to a loophole, Facebook (and other corporations) is able to issue stock options to its employees as part of their compensation, and then write them off on its taxes. That means that even though the company's expected to be worth around $100 billion after the IPO, its tax bill for this year will likely be wiped out—and it might even get a half-billion-dollar refund.

“For every dollar in stock options its employees take (which cost the company nothing to give out), Facebook can take a dollar of 'net operating loss' tax deductions,” wrote Dan Cantor of the Working Families Party. “So how much are taxpayers losing in this deal? At least $3 billion this year alone, plus hundreds of millions in retroactive refunds.”

Robert McIntyre of Citizens for Tax Justice explains further:

According to Facebook’s SEC filing (in connection with its upcoming initial public stock offering), the company has issued options to favored employees which will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million of these shares (worth $4.8 billion) are owned by [Facebook CEO Mark] Zuckerberg. The company indicates that it expects all of the 187 million vested options to be exercised in 2012.

Under current tax law, exercise of all of the options will generate $7.5 billion in tax deductions for Facebook, which will produce $3 billion in federal and state tax reductions for the company.

Just so we're clear: the company is issuing 421 million shares today—or possibly more if the " demand is high." Those shares will cost between $34 and $38 each, and be sold mostly to the posh clients of underwriters Morgan Stanley, JPMorgan Chase and Goldman Sachs, among others. Facebook will likely raise $16 to $18 billion in one day with this stock offering.

The IPO will be “one of the biggest transfers of wealth in market history,” Lee Munson, head of the asset management firm Portfolio LLC, told Forbes. Munson is warning clients away from purchasing Facebook shares because Zuckerberg will remain in control of voting rights, as he'll retain the majority of stock.

Zuckerberg, mind you, has publicly said that he's willing to pay higher taxes—even at a public event with President Obama. Yet his company is planning, according to its own Securities and Exchange Commission filing, to take full advantage of this tax write-off to pay no corporate taxes this year, claim a refund, and even push the write-off forward and cut into its future tax bills.

What can be done about it? Democratic senators Carl Levin and Kent Conrad introduced a bill in February that would close this loophole, as well as several others, estimating that they'd raise an additional $155 billion in tax dollars if the loopholes disappeared. In a floor speech, Levin invoked Facebook's IPO as a prime reason why his bill is necessary:

Madame President, our federal tax system is built on the principle that businesses, as well as individuals, ought to help pay our nation’s bills. Corporations impose plenty of costs on society – from environmental disasters, financial bailouts, product recalls, and more. Businesses also want and need government services, including efficient transportation systems, patent protections, even federal loan guarantees. Paying those costs is why we have a corporate income tax to begin with. Both businesses and individuals are required by law to contribute and ought to be willing to meet their civic obligations and pay their fair share.

 
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