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Berkshire May Avoid $400 Million Tax Bill In Graham Holdings Swap

Stocks in this article: BRK.B GHC

Buffett and The Tax Debate

Berkshire's swap deal with Graham Holdings and similar moves the investment conglomerate has made in exiting large investments in Phillips 66 (PSX) and White Mountain Insurance (WTM) indicate that Warren Buffett isn't interested in paying taxes on Berkshire's investment gains when cutting deals on behalf of the company's shareholders.

That comes as Buffett has placed himself front-and-center in a debate over taxation that has simmered in Washington for decades.

Buffett coined the so-called 'Buffett Rule,' which would create a flat tax for top income earners, after he famously noted that his secretary Debbie Bosanek often pays higher income tax rates than him. Buffett, as of Thursday was the second-richest person in the world, while Bosanek, by all accounts, makes a middle class salary.

Even in pursuing tax-free investment disposals, Buffett may buffer himself from accusations of hypocrisy. The Buffett Rule is intended to breed more progressive income tax rates, and has little to do with corporate taxation or capital gains.

A New Strategy for Berkshire

As TheStreet noted on Wednesday, Berkshire's deal with Graham Holdings may shed light on a new strategy that Warren Buffett may employ when exiting the firm's best investments. While Berkshire has taken assets from the likes of Graham, Phillips 66 and White Mountain, the company is yet to use a swap maneuver on its largest investments.

Were Berkshire to employ an in-direct swap as a means to exit any of Berkshire's big-four investments, it would be a major story for Corporate America.

As of 2013, Berkshire is sitting on over $12 billion in unrealized gains on its stake in American Express (AXP), over $15 billion in unrealized gains on its stake in Coca-Cola (KO) and about $10 billion in unrealized gains on its stake in Wells Fargo (WFC).

Maybe at some point in time, there will be parts of each of those businesses that Buffett would be willing to own in lieu of Berkshire's stockholding.

Berkshire's investment in Procter & Gamble (PG), Moody's (MCO), and Goldman Sachs (GS) and Bank of America (BAC) stock warrants also stand out as among Buffett's best returning investments.

Bottom Line: Warren Buffett is pioneering new ways to avoid capital gains tax, even as he is President Obama's richest spokesperson for progressive income tax policy.

-- Written by Antoine Gara

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