Rex Tillerson May Seek Unusual Tax Strategy
11 Janvier 2017 - 3:18AM
Dow Jones News
By Richard Rubin
Rex Tillerson, President-elect Donald Trump's pick as secretary
of state, aims to use an unusual interpretation of U.S. tax law to
spread out taxes owed on his retirement package over the next
decade instead of paying more than $70 million immediately.
That deferral could save Mr. Tillerson more than $10 million if
Mr. Trump and congressional Republicans follow through on their
plans to cut individual tax rates.
Mr. Tillerson, 64, whose confirmation hearing is scheduled for
Wednesday, was owed roughly $170 million when he left Exxon Mobil
Corp. in December, but now the company and its former chief
executive are breaking financial ties.
Exxon plans to put the cash owed to Mr. Tillerson into a trust
that will pay him on the same deferred-compensation schedule on
which the restrictions on his Exxon holdings were slated to
lift.
Normally, the creation of such a trust for Mr. Tillerson's
benefit outside Exxon would create immediate taxable income on the
full $170 million.
But, the trust for Mr. Tillerson is designed to match the
economic and tax treatment he would have gotten had he retired from
Exxon as scheduled in March, with payments and taxes spread over a
decade, according to Exxon and a person familiar with Mr.
Tillerson's thinking.
To defer tax payments on the package, Mr. Tillerson must argue
there is a substantial risk he will never collect the money.
Forfeited payments would go to charity, according to the terms of
the trust.
His claim will hinge on an argument that Mr. Tillerson himself
could end up violating a noncompete agreement in the trust
agreement and forfeit what has been set aside for him, the sources
said.
The transition team, representing Mr. Tillerson, declined to
comment.
Robert Jackson, director of the program on corporate law and
policy at Columbia Law School, described the tax strategy as "one
of the most aggressive and least successful tax positions
executives have taken over the past two decades."
If Mr. Tillerson's position survives any scrutiny from the
Internal Revenue Service, then he may benefit from the Republicans'
proposed revision in the tax code to lower individual top tax rate
to 33% from 39.6% and Medicare tax to 2.9% from 3.8%.
Mr. Tillerson and Exxon faced several challenges working out his
separation. Exxon sought to preserve as much of its existing
long-term compensation agreement with Mr. Tillerson as possible,
which involved deferring pay for up to a decade. They also needed
to delink those future payments from the value of Exxon stock so
that Mr. Tillerson wouldn't have a conflict of interest while at
the State Department.
Mr. Tillerson's tax deferrals go beyond the normal practice for
corporate executives entering government service. Normally,
executives can sell shares and reinvest in cash, Treasurys or some
mutual funds while deferring capital-gains taxes they would
otherwise owe.
Mr. Tillerson can do that with Exxon stock he already holds
without restrictions. But most of his Exxon holdings are in
restricted stock and restricted stock units that are scheduled to
be fully available to him over the next decade.
The question of whether Mr. Tillerson must pay taxes now turns
primarily on whether there is a substantial risk that he may
forfeit some of the payments from the trust.
IRS rules under Section 83 of the tax code say noncompete
clauses themselves generally don't amount to a substantial risk of
forfeiture, said Thomas Cryan, a lawyer at Buchanan, Ingersoll
& Rooney PC in Washington.
But the rules also say that presumption can be overcome by
looking at the person's age, skills, the availability and
likelihood of other employment and the employer's likelihood of
enforcing the clause, factors that could work in Mr. Tillerson's
favor.
The former Exxon executive might become more valuable to
oil-and-gas companies after being secretary of state, leading him
back into the industry and in violation of his noncompete.
He might also have opportunities outside the industry that would
lower the risk of triggering the noncompete clause, including paid
speeches and service on corporate boards.
"He's going to be much sought after," said Gregg Polsky, a tax
law professor at the University of Georgia. He called Exxon's
argument that the taxes can be deferred aggressive but not
frivolous.
--Bradley Olson contributed to this article.
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
January 10, 2017 21:03 ET (02:03 GMT)
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