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Ousted Secretary of State Rex Tillerson may have gotten more than he bargained for in his 14 months trying to keep up with a president full of surprises in Donald Trump. But the former Exxon Mobil CEO leaves the top diplomatic post with his beneficial tax deals on stock holdings that amounted to more than $200 million.
Tillerson, like other Trump officials with large financial holdings, was required to avoid conflicts of interest in stocks when assuming office because of federal law. There’s nothing untoward about it — the law is designed to allow private citizens to assume important public roles without conflicts of interest related to their personal wealth. It gives Cabinet members the option of selling stocks on a tax-deferred basis as the cleanest way to remove conflicts, and then they can invest those proceeds in diversified holdings such as mutual funds or Treasury bonds.
In the case of Tillerson, a large piece of his stock holdings were a little different than the norm. Typically, private citizens who sell stocks to serve in federal office defer any capital gains until such time as whatever replacement investments they bought are sold and subject to taxes.
The former oil CEO had a huge stake in Exxon Mobil stock available to him as an executive compensation reward that accrued over four decades with Exxon Mobil but had not yet been granted and would normally be paid out in retirement over a decade. The New York Times estimated in January 2017 that Tillerson’s Exxon stake of roughly 2 million shares was worth $174 million.
But Tillerson could not be paid in stock and without potentially running afoul of government ethics laws. The oil giant agreed to sell the stock and set up a cash trust for Tillerson that would be invested in securities such as Treasury bonds, and pay Tillerson regularly over a decade. Tillerson would only forfeit the right to payments from the trust if he took a job with a competing oil company. Bloomberg estimated last year that the plan would save Tillerson from an immediate federal income tax bill of as much as $72 million.
Tillerson also had an estimated $54 million in directly owned Exxon Mobil shares he had to sell.
The State Department’s legal team also outlined Tillerson’s plans to divest Exxon shares in an ethic letters sent to the government in early January 2017. All of Tillerson’s public company holdings were outlined in a financial disclosure report he filed last March with the government and include stock holdings he would have had to divest separate from the Exxon retirement plan.
State Department and Exxon Mobil did not immediately return requests for comment.
Robert Willens, a New York-based tax and account expert, said all of these stock sales to meet government ethics requirements are designed to not require reporting of income and defer taxes. The tax “home run” Willens said, is if Tillerson holds the investment accounts that replaced the stock holdings until death, at which time the value would pass to his heirs on a “stepped up” basis. That means they would not be required to report a gain or loss based on the value at the time Tillerson sold.
For example, instead of a stock sold at $1,000 and that had gained in value to $10,000 — a $9,000 tax basis — the heirs’ value is based on the day that it is transferred, at $10,000, so there is no gain to report. In that case, the tax deferral is likely to become a situation in which the holdings are never subject to income tax, Willens said.
There is nothing to suggest Tillerson took the job to get the tax deal or even, at this time, wanted to leave it. But the tax accountant wasn’t sure it was worth it. “Maybe he would not go through the year he spent, but he benefitted. Probably if he had to do it over again he might have declined,” Willens said.
The tax windfall issue received some scrutiny as Trump’s Cabinet took shape early last year with so many posts being filled by extremely wealthy individuals, including Commerce Secretary Wilbur Ross, who has a net worth nearly 10 times that of all of President George W. Bush’s Cabinet in 2001 combined, Bloomberg data show. But it’s not uncommon for these situations to exist among Cabinet members. Henry Paulson, one-time chief executive of Goldman Sachs, sold roughly half a billion dollars’ worth of Goldman shares when he became Treasury secretary, a move The Economist estimated was worth $200 million in taxes.
In a few cases there have been minor conflicts of interest that have erupted related to public stock holdings and Trump confidantes, such as Carl Icahn, who bowed out of a role as adviser over concerns that his interest in shares of a refining company were wielding suspicious influence on energy policy. Icahn last week released a rare public statement denying more recent allegations that he sold shares in a steel-affiliated company ahead of Trump’s tariff announcement with insider knowledge.
To be sure, some press reports have indicated that a federal official would have to serve at least one year to receive the tax benefits of stock sales, but there is no such requirement, according to government ethics laws. They also noted that while Tillerson may receive favorable tax treatment regardless of how long he served, the most important point is that he did follow the law and divest.