By Richard Rubin
Rex Tillerson, President-elect Donald Trump's pick as secretary of state, aims to use an unusual interpretation of U.S. tax law to spread out taxes owed on his retirement package over the next decade instead of paying more than $70 million immediately.
That deferral could save Mr. Tillerson more than $10 million if Mr. Trump and congressional Republicans follow through on their plans to cut individual tax rates.
Mr. Tillerson, 64, whose confirmation hearing is scheduled for Wednesday, was owed roughly $170 million when he left Exxon Mobil Corp. in December, but now the company and its former chief executive are breaking financial ties.
Exxon plans to put the cash owed to Mr. Tillerson into a trust that will pay him on the same deferred-compensation schedule on which the restrictions on his Exxon holdings were slated to lift.
Normally, the creation of such a trust for Mr. Tillerson's benefit outside Exxon would create immediate taxable income on the full $170 million.
But, the trust for Mr. Tillerson is designed to match the economic and tax treatment he would have gotten had he retired from Exxon as scheduled in March, with payments and taxes spread over a decade, according to Exxon and a person familiar with Mr. Tillerson's thinking.
To defer tax payments on the package, Mr. Tillerson must argue there is a substantial risk he will never collect the money. Forfeited payments would go to charity, according to the terms of the trust.
His claim will hinge on an argument that Mr. Tillersonhimself could end up violating a noncompete agreement in the trust agreement and forfeit what has been set aside for him, the sources said.
The transition team, representing Mr. Tillerson, declined to comment.
Robert Jackson, director of the program on corporate law and policy at Columbia Law School, described the tax strategy as "one of the most aggressive and least successful tax positions executives have taken over the past two decades."
If Mr. Tillerson's position survives any scrutiny from the Internal Revenue Service, then he may benefit from the Republicans' proposed revision in the tax code to lower individual top tax rate to 33% from 39.6% and Medicare tax to 2.9% from 3.8%.
Mr. Tillerson and Exxon faced several challenges working out his separation. Exxon sought to preserve as much of its existing long-term compensation agreement with Mr. Tillerson as possible, which involved deferring pay for up to a decade. They also needed to delink those future payments from the value of Exxon stock so that Mr. Tillerson wouldn't have a conflict of interest while at the State Department.
Mr. Tillerson's tax deferrals go beyond the normal practice for corporate executives entering government service. Normally, executives can sell shares and reinvest in cash, Treasurys or some mutual funds while deferring capital-gains taxes they would otherwise owe.
Mr. Tillerson can do that with Exxon stock he already holds without restrictions. But most of his Exxon holdings are in restricted stock and restricted stock units that are scheduled to be fully available to him over the next decade.
The question of whether Mr. Tillerson must pay taxes now turns primarily on whether there is a substantial risk that he may forfeit some of the payments from the trust.
IRS rules under Section 83 of the tax code say noncompete clauses themselves generally don't amountto a substantial risk of forfeiture, said Thomas Cryan, a lawyer at Buchanan, Ingersoll & Rooney PC in Washington.
But the rules also say that presumption can be overcome by looking at the person's age, skills, the availability and likelihood of other employment and the employer's likelihood of enforcing the clause, factors that could work in Mr. Tillerson's favor.
The former Exxon executive might become more valuable to oil-and-gas companies after being secretary of state, leading him back into the industry and in violation of his noncompete.
He might also have opportunities outside the industry that would lower the risk of triggering the noncompete clause, including paid speeches and service on corporate boards.
"He's going to be much sought after," said Gregg Polsky, a tax law professor at the University of Georgia. He called Exxon's argument that the taxes can be deferred aggressive but not frivolous.
--BradleyOlson contributed to this article.
Write to Richard Rubin at email@example.com
(END) Dow Jones Newswires
January 10, 2017 21:03 ET (02:03 GMT)
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