Secretary of State Rex Tillerson’s pride might be hurt by his forced ouster on Tuesday, but his pocketbook won’t be. The former Exxon Mobil CEO will still get to enjoy the millions of dollars in tax deferrals he got when he joined the Trump administration in the first place, even though he spent just a little over a year on the job.
Tillerson and Exxon reached an agreement when then-President-elect Donald Trump tapped Tillerson to head the State Department. The deal outlined steps for Tillerson to sever all ties with the company to comply with conflict of interest requirements while at the same time defining what he was to do with his multimillion-dollar retirement package and hundreds of thousands of Exxon shares.
As a result, Tillerson got a major tax break — and is one of several Trump Cabinet appointees with immense personal wealth who did so. He’ll continue to benefit from that arrangement even after he leaves the public sector.
Tillerson agreed to sell off the more than 600,000 Exxon shares he owned at the time, valued at about $54 million, and place the proceeds in a trust prohibited from investing in the company. Thanks to a federal ethics law that allows executive branch appointees and employees to defer taxes when they are forced to sell certain assets, he was able to avoid paying taxes on the immediate sale — saving himself what experts could say is about $13 million.
Even though Tillerson was fired by the president on Tuesday, that tax advantage still sticks.
Per the agreement with Exxon, the value of more than 2 million deferred Exxon shares that Tillerson would have received over the next 10 years as part of his compensation were put into an independently managed trust. That money will become available to him gradually over the course of a decade. It is also subject to the capital gains tax deferrals for executive branch officials and employees.
That agreement doesn’t change because Tillerson was fired. Even though he spent just a year at the State Department, he still gets the tax benefits for 10.
“The deferral won’t terminate or won’t be affected in any way, shape, or form in his leaving,” Bob Willens, a New York-based tax analyst and former managing director at Lehman Brothers, told me. “This is probably a non-event for him from the point of view of his financial arrangements.”
To be sure, Tillerson’s decision to join the government wasn’t all a financial win. Tillerson lost out on $7 million he would have gotten had he simply retired. (And he would have retired had he not joined the State Department, as Exxon has a mandatory requirement age of 65, which Tillerson reached on March 23, 2017.)
It’s not quite a golden parachute, but it’s not a bad deal either. If Tillerson had not joined the Trump administration and just sold some of his Exxon shares to diversify as a private citizen, those sales would have been subject to capital gains taxes, meaning he’d only have about 75 to 80 percent of his Exxon shares’ value to invest, Willens estimates.
“This way, he had 100 percent of the proceeds to reinvest, because the proceeds weren’t diminished by taxes,” Willens said.
And in the year Tillerson was in office, his diversified non-Exxon investments probably did better than his Exxon investment would have: The company’s stock price has declined by about 7 percent over the past year, while the S&P 500 has gained about 18 percent.
“He sidestepped a pretty big slump in Exxon’s stock. It probably worked out pretty well for him just out of chance,” Steve Rosenthal, a senior fellow at the Tax Policy Center, said. “His biggest savings were just market timing — as they say, it’s better to be lucky than good.”
There is a chance Tillerson could lose his tax advantage — per his agreement with Exxon, he is barred from working in the oil and gas industry for 10 years, and if he does so, the money from the unvested shares would go to charity. But given the amount of money at stake, it’s unlikely he’ll go back to work for an Exxon competitor.
The ultrawealthy people populating Trump’s administration have put the spotlight on what is normally an unnoticed tax break
Section 2634 of federal ethics law, known as a “certificate of divestiture,” allows executive branch officials and employees to defer taxes on the divestitures they are forced to make when they take their posts to avoid conflicts of interest. They are able to sell their holdings and put them in diversified investments such as mutual funds and treasuries without paying capital gains taxes. Only when they sell those second investments does the tax bill land.
The Washington Post explained how it works:
While officials who are forced to sell will be able to avoid capital-gains taxes, they will have to pay them at a later date if they sell the new securities, such as Treasury bonds and mutual funds, approved by federal ethics officials. Still, the benefit offers strong advantages for the officials, including allowing them to cheaply rebalance their holdings and delay their tax burden on any investment gains. That delay could also permit them to pay a lower capital-gains tax rate in the future, as many Republicans favor.
The rules are designed to entice people to join the public sector without paying an enormous cost, including folks like Tillerson. “They are intended to help rich guys serve in government,” Rosenthal said.
The Trump administration isn’t the only one to be subject to such rules — Obama, Bush, and Clinton officials were too. But because there are so many very rich people in Trump’s Cabinet — Commerce Secretary Wilbur Ross, Education Secretary Betsy DeVos, Treasury Secretary Steven Mnuchin — the amount of taxes being deferred is unique.
Moreover, there’s no requirement for how long officials remain in their posts to enjoy the tax benefit. National Economic Council Director Gary Cohn, who is soon headed for the exit, will still have it. And so will Tillerson.
“People seem to feel like the minute he leaves office, the tax deferral is reinstated or lost, but of course that’s not true at all,” Willens said. “There’s no requirement that he remain in the post for any particular period of time. Even if he’d left after a week, it would have stuck.”