Levin says Facebook's use of loopholes may amount to a tax break of $3 billion. | AP Photos Tax loophole for Facebook irks Levin

Sen. Carl Levin used Facebook CEO Mark Zuckerberg on Wednesday as the poster child to call for corporate tax reform that eliminates some of the so-called loopholes companies use to claim big tax breaks.

In a speech on the Senate floor, the Michigan Democrat pointed to how Facebook mapped out its intentions in an IPO filing to use various legal maneuvers within the Tax Code that Levin said could amount to a “tax break of up to $3 billion.”


“American taxpayers will have to make up for what Facebook’s tax deduction costs the Treasury,” Levin said. “That $3 billion will either come out of the pockets of American families now, or it will add to the deficit, which they will have to pay for later.”

Facebook did not return a request for comment. But Levin argued the company is using tax tricks that are “perfectly legal” to cheat taxpayers.

Here’s how it works: According to a company regulatory filing, Zuckerberg is planning to exercise options to buy 120 million shares at 6 cents apiece. He was granted those options as part of an “Officer’s Stock Plan” in November 2005, according to the filing. Analysts now put the value of Facebook shares at closer to $40 — and Zuckerberg’s profit from selling those shares is already estimated to be in the range of $5 billion.

However, under the corporate Tax Code, Zuckerberg will be able to tell investors and regulators the stock options only cost the company 6 cents each, which is the figure that will be reflected in the company’s books. But Facebook can also file a tax return later on claiming those options at the price the shares actually sell for during the expected IPO.

Adding insult to injury, Facebook will be eligible to take a federal deduction on the larger amount, Levin said.

Additionally, he highlighted how Facebook is legally allowed to carry back any tax loss stemming from the deduction and claim a “hefty refund” on taxes already paid.

The company said in its filing that losses can be carried back for two years to “offset taxable income for U.S. federal income tax purposes … which will allow us to receive a refund of some of the corporate taxes.” Facebook estimates this refund could total $500 million and will be paid out during the first six months of next year.

Levin added the company also plans to carry forward the tax losses for up to 20 years so that it will reduce taxes the company owes in the future.

“Altogether, this loophole could give Facebook a tax break of up to $3 billion,” Levin said. “Facebook’s use of this loophole is the most pointed illustration yet of the cost of this loophole.”

Levin used the floor speech Wednesday as an opportunity to pump up a bill he and Sen. Kent Conrad (D-N.D.) are pushing that would eliminate a variety of so-called tax loopholes.

Specifically, portions of the bill are aimed at closing the stock option loophole that allows companies to “compensate their executives with stock options, report a specific stock option expense to their shareholders and then later take a tax deduction for typically a much higher amount.” The bill would also clamp down on provisions in the corporate Tax Code that multinationals use to generate tax breaks on foreign earnings.

Zuckerberg’s stock options are expected to beget a huge tax bill that will be a windfall for the feds and California. Most estimates put the tax bill in the neighborhood of $2 billion, with Treasury netting about $1.5 billion and California keeping roughly $500 million in tax revenue during 2011 and 2012.

Levin addressed that point, saying some will argue that Facebook’s tax break will be offset by the taxes paid by Zuckerberg and other company executives. However, he said it is unlikely those individual taxes would offset tax revenue lost under the loophole.

“What the Treasury receives from Mr. Zuckerberg on the one hand, it will return and then some to his company with the other hand,” he said. “Put simply, some of that big tax bill he faces right now will come back to him through the corporation that he will still own a huge part of and will control.”