William Munoz / Flickr tillerson...
William Munoz / Flickr

Secretary of State Rex Tillerson is at Donald Trump’s mercy in more ways than one. Thanks to an obscure tax rule, the former Exxon-Mobil CEO faces a stiff tax on millions of shares of Exxon stock if and when he leaves the State Department, but the exact amount and the date due depends in part on when he gets the boot. If he officially leaves after the end of this year, or after he has served an entire year, he will buy some time and may owe millions less in taxes:

In the early 1990s, George H.W. Bush’s administration added a loophole to the tax code that allows political appointees to defer any capital gains taxes they would ordinarily have to pay on investments they’re required to divest to take a post in government. The main requirement is that the appointee reinvest the money immediately into a diversified mutual fund or U.S. Treasury Bonds. The $54 million worth of Exxon stock that Tillerson owns directly will squeeze through the Bush-era loophole. So the money Tillerson gets is tax-free for now as long as it stays invested.

There always seems to be some sweet, special convoluted rules giving the uber-rich mulligans and breaks that don’t apply to the rest of us, and that may well be the case here. The tax codes for us ordinary worker bees may not apply to someone in Rex’s rarefied tax bracket, particularly in an unusual situation like this one, But some accountant-types opine that that deferred tax liability falls under the same short-term gain vs a long-term gain brackets that apply to everyone, and that the applicable period of time would be determined by his length of service at State. If so, that’s a huge motive for Tillerson to suck up and brown-nose, and to do whatever it takes to stick around for at least a few more months. Long-term gains for top earners are taxed at 20%. But short-term gains are taxed at the individual’s income tax-rate. For a former CEO of Exxon, that almost certainly means the top marginal bracket of 39.6%. In other words, he might have to pay twice as much on the capital gains generated by selling millions of Exxon shares if he is separated from service sooner rather than later.

There’s another factor, and this one is easier for middle-class taxpayers to follow: canning Tillerson before year’s end could mean all or some of that liability would have to be paid by April 15th, 2018, whereas a later REXIT would postpone the day of reckoning for another year. Which has the added benefit of possibly saving him millions, depending on the details of whatever version of Trump’s tax-cuts for the super-rich ends up getting passed.

Given the big bundle of shares that would be affected and the complexity of the tax code, accepting the SecState job and divesting under the old Poppy Bush rule probably means a big chunk of Tillerson’s financial fate is now in Trump’s teeny-tiny hands to some degree. Which would give this Pr*sident enormous leverage over his Secretary of Sate in the one currency they literally both value above all others: US dollars.

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This is a Creative Commons article. The original version of this article appeared here.


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