Elon Musk – Love Him or Hate Him

Allan Rolnick, CPA

Love him or hate him, everyone’s favorite richest man on the planet, Elon Musk, keeps racking up the headlines. Is he a twenty-first-century Edison or Ford, hurtling towards the first trillion-dollar fortune? Will he change the world with his genius for cars, batteries, rockets, and satellites? Or is he a cranky, drug-addled narcissist, costing himself millions every time he tweets or alienates the advertisers rapidly fleeing his social network? It’s not an either/or question. People are complicated. And Musk is certainly more complicated than the average bear. Last week, a fun video started circulating on YouTube that adds a new twist to the Musk saga. The narrator started out by boldly asserting, “I know why Elon Musk bought Twitter, changed the name, and lost $25 billion, on purpose.” We’re all ears! Are you? It turns out that, under this theory, Musk bought Twitter specifically to wreck its value – for taxes. Cratering the company’s value would let him quietly sell the smoking ruins of the old business to a different company he owns, then book a capital loss on the sale. That, in turn, would let him sell Tesla or SpaceX stock with an equivalent amount of gain without paying tax on it. Genius, right? (Except for the fact that you wrecked the company!) Except, not really. The video says nothing about something called the “related party” rules. Those rules say that if you trade business or investment property to a related party – including a close family member, a business entity you own or control, or a nonprofit you control – you don’t recognize any gain or loss on that sale. That means that if Musk sells Twitter to another company he owns, the loss is suspended until that company sells it to an unrelated party. The theory ignores another attractive reality of controlling a billion-dollar fortune. Tech moguls like Musk can realize billions from their company stock without ever selling – and thus, avoid tax on capital gains – simply by borrowing against it and taking tax-free loan proceeds instead.

When the borrower dies, the stock’s basis is “stepped up” to its fair market value as of the date of death, and the gains during their lifetime escape tax forever. Yes, it means paying ongoing interest instead of a one-time tax. But, as long as the stock continues to grow faster than the debt, the billionaire borrower actually comes out even richer. It’s called the “Buy, Borrow, and Die” strategy. And Musk can tap it any time he wants without the controversy and embarrassment involved in cratering a social network. Having said that, there’s one potential benefit to be gained by slashing Twitter’s value. Musk borrowed $13 billion from seven lenders to take Twitter private. Now, based on Twitter’s current losses, that debt is estimated to be worth just $11 billion. This creates the opportunity for Musk to buy it back from the lenders at a discount. If he were to do so for, say, $11 billion, he would come out $2 billion ahead by avoiding repayment. Buying the debt like that also avoids the possibility of owing tax if the banks forgive any portion of the debt. Still, it’s a stretch to believe Musk would jeopardize his reputation like he has to save such a tiny fraction of his $200+ billion fortune. Musk has enough money that he can afford to torpedo a company or two. But that won’t help him with taxes, not in the way this particular conspiracy argues. Fortunately, you don’t need to wreck your company to save big. Call us to learn more! And while we’re on the subject of conspiracies, birds aren’t real.

Allan J Rolnick is a CPA who has been in practice for over 30 years in Queens, NY. He welcomes your comments and can be reached at 718-896-8715 or at allanjrcpa@aol.com.

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