Trump Fact Check: Do Soros and Buffett Use "Massive Tax Deductions"?

Trump fact check
During last night's second presidential debate, GOP presidential candidate Donald Trump explained how he's not the only billionaire working the U.S. tax code.

Updated Oct. 11, 2016: After the second presidential debate on Sunday night, we ran a Trump fact check on a widely contested issue...

When moderator Anderson Cooper asked Donald Trump if he used his $916 million loss in 1995 to avoid paying federal income taxes for several years, the candidate replied, "Of course I did."

Cooper's question stemmed from an Oct. 2 New York Times story that revealed the billionaire businessman may have avoided paying taxes for nearly the past 20 years because of that large loss.

Trump justified to Cooper why he "carries his losses forward" - which means he could, and likely did, carry that massive 1995 loss sum forward onto his tax filings in subsequent years to lessen his financial burden. He said it was a common business move and that he's not alone in making use of the provision: both CEO of Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B)  Warren Buffett and Hungarian-born activist investor George Soros use it as well.

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It's true that Trump did nothing illegal. Money Morning Chief Investment Strategist Keith Fitz-Gerald explained to FOX Business' "Varney & Co." viewers on Monday that not only was Trump's decision to carry his $916 million loss forward "perfectly permissible," Fitz-Gerald explained, it's also "to be expected."

He continued, "Any taxpayer has an obligation to pay taxes, but that doesn't mean they have to pay as much taxes as they have to. In fact, according to the law, if you read it, [taxpayers have an obligation] to pay as little tax as possible. That's why things like [the carryforward law] exists."

Money Morning's Keith Fitz-Gerald on "Varney & Co.", Oct. 10, 2016.

However, in his response to Cooper, Trump went on to name two legendary investors as also using the U.S. tax code to their advantage. "Warren Buffett took a massive deduction," Trump explained. "[George] Soros, who's a friend of [Democratic presidential candidate Hillary Clinton], took a massive deduction. Many of the people that are giving [Clinton] all this money that she can do many more commercials than me took massive deductions."

Wealthy investors and businesspeople like Buffett and Soros rarely make their taxes a matter of public interest.

But some information about Buffett and Soros' past tax filings has been made public. And indeed, Buffett addressed Trump's comment head-on late yesterday afternoon.

Here's what we were able to dig up in our Trump fact check on whether Buffett and Soros have ever used the U.S. tax code to their advantage...

Trump Fact Check: Buffett and Soros Taxes

How Warren Buffett Games the Tax Code: In a statement Monday, Buffett said he had never taken advantage of the carryforward rule cited by Trump in the debate: "I have paid federal income tax every year since 1944, when I was 13. (Though, being a slow starter, I owed only $7 in tax that year.) I have copies of all 72 of my returns and none uses a carryforward."

The Berkshire Hathaway CEO said his 2015 federal income tax payment last year cost him $1.8 million after calculating gross income of $11.5 million. He said he had subtracted $5.5 million in deductions, which included $3.5 million in charitable donations.

"I have no problem in releasing my tax information while under audit. Neither would Mr. Trump - at least he would have no legal problem," Buffett said.

While the billionaire doesn't use Trump's carryforward tactic, we did confirm one instance in which Buffett used the tax code to his advantage...

In 2010 he outwardly admitted that he'd paid taxes just over 17% on his taxable income - only $6.9 million of $39.8 million. It's that last sum that's the real kicker - $39.8 million, which is actually only 0.05% of what the Oracle of Omaha is actually worth ($64.9 billion). But Buffett only pays himself a salary of $100,000 a year, which isn't an uncommon practice for some of the nation's richest taxpayers. This puts him in the 17.3% tax rate bracket (for taxpayers who earn between $100,000 and $200,000 a year).

The move is perfectly legal in whittling down the amount of taxes owed. And like Trump and Buffett, Hungarian-born hedge fund manager George Soros has used legal loopholes of his own...

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How George Soros Games the Tax Code: Up until 2008, 85-year-old Soros used a loophole in the U.S. tax code that allowed him to defer taxes on fees paid by his hedge fund clients and reinvest them into his own fund, where they continued to grow tax-free.

Before the loophole was nixed, however, Soros transferred assets to Ireland, a country seen by some U.S. businesses (ahem, Apple Inc.) as a possible refuge from the law. In doing so, Soros' filings showed for the first time the extent to which his almost $30 billion fortune came from finding ways to delay taxes and reinvest the money back to himself.

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Vyacheslav Fos, an assistant professor of finance at the University of Illinois at Urbana-Champaign, calculated for Bloomberg on April 30, 2015, that a "manager with Soros' track record who started with $12 million from investors, took 20% of the profits, and reinvested that money tax-free over 40 years, would end up with $15.9 billion. If that same manager paid federal, state, and local taxes on the fees and related investment gains before reinvesting them, that figure would shrink to $2.4 billion."

That's a $13.5 billion difference!

And to justify Soros' deferral strategy, the billionaire's lawyer told Bloomberg, "No person has a constitutional obligation to pay any more taxes than he is required to pay."

Up Next

Keith Fitz-Gerald knows a lot about the U.S. tax code and how big corporations exploit it all the time. He recently issued a warning to investors about the EU commissioners' ruling requiring Apple Inc. (Nasdaq: AAPL) to repay billions in back taxes.

You see, it's not just going to cost the massive computer company a pretty penny; it's gonna cost you some money, as well.

Here's more...

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