Double Taxation: A Take On All Things Taxes

Back in February, Facebook filed S-1 documents announcing its plans to go public and raise a cool $5 billion in cash. Today, the social media giant released a revised regulatory filing, clarifying that the offering will consist of 337,000,000 shares at a value from $28 to $35 per share, meaning the company’s haul could reach upwards of $12 billion. While many of the tax aspects of the IPO noted in our previous post hold true, there are a couple of changes worth noting:

• In the first filing, it was announced that CEO Mark Zuckerberg would be exercising 120,000,000 options to acquire Facebook with an exercise price of $.06 per share. Because Zuckerberg would be taxed upon exercise under Section 83 to the extent the FMV of the stock (assumed to be approximately $40 per share at the time) exceeded the exercise price, initial estimates put Zuckerberg’s compensation income resulting from the exercise at $4.8 billion, leaving him with a tidy federal and state tax bill of approximately $2.0 billion, which according to one CPA, was the largest single year tax bill they’d ever seen.

Today’s S-1 clarifies that the CEO will be exercising only 60,000,000 of his 120,000,000 options. Assuming each share is indeed worth $35 upon exercise, Zuckerberg will recognize compensation income of “only” $2.1 billion in 2012.

To pay the resulting $1.0 billion tax bill, Zuckerberg plans to immediately sell 30,200,000 of the shares. Since the shares will have a basis equal to the sales price courtesy of the step-up afforded to Zuckerberg after he recognizes compensation income on the bargain element at exercise, he will recognize no further gain on the sale. He will, however, generate $1.1 billion in cash from the sale, $1.0 billion of which he can use to settle the tax liability resulting from the exercise, and the rest he can just piss away on hats.

•  With the stock price a becoming more clear, today’s filing quantified the anticipated corporate level deduction related to employee option exercises and vested restricted stock units. Facebook expects to settle 280,000,000 restricted stock units in 2012 — meaning they will vest, and the company will be entitled to a deduction equal to the FMV of the stock[i] . An additional 185,000,000 shares of stock are expected to be issued upon the exercise of nonqualifed stock options, upon which the company will be entitled to a compensation deduction equal to the excess of the FMV of the stock on the exercise date over the exercise price. 

Based on the foregoing, Facebook anticipates deducting a staggering $14 billion in stock based compensation on its 2012 tax return,[ii]an amount that would, believe it or not, put a company with estimated revenue of $4 billion in 2012 in a net operating loss position. Facebook plans to carry back the NOL to recover $500 million in previously paid taxes, an act that is sure to command a lot of attention and really, really anger this guy.