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Capital One and Tax Evasion

Updated on October 7, 2011

With Capital One and Taxes both being in the news, let's look at them both together...

Capital One has lobbied against corporate income tax collections for fees and interest earned from users in states in which they do not have nexus (a “brick and mortar” presence). [1] Capital One petitioned the United States Tax Court [2] for exclusion of interest and fee revenues collected from consumers of states in which it does not maintain a physical presence. The Court ruled against Capital One and denied their petition regarding income being exempt from taxation under the lack of “nexus” premise. This ruling possibly generates billions in tax collections for various companies doing business via interstate commerce.

For 2010, Capital One ranked 15 in 40 of the most offending companies to pay CEOs more than they paid in taxes. [3] Capital One paid CEO Richard Fairbank $14.851M (a 144% increase since 2009) while taking an EARNED INCOME TAX REFUND of $152M on a pretax income of $3.804B for an effective tax rate of NEGATIVE 4.0%. Id. One saving grace, it has no known subsidiaries in tax haven nations. Both Capital One and Fairbank are ranked 15 in the nation for tax dodging.

At the executive level, Fairbank has foregone a “salary” or “bonus,” per se, in favor of equity and option awards. Warren Buffett has championed changing the way equity and stock option are viewed for taxation purposes since it truly is compensation, even if it is delayed (although can be borrowed against for living expenses) and taxed at a rate of only 15% for capital gains all the while avoiding paying any payroll taxes.

Buffett on Taxes

The capital gains tax allows CEOs to effectively starve the government of not only the payroll tax, but the income tax that the average worker pays. (Also see Lobbying section in the author's HubPages full-length article regarding Capital One for where a portion of those tax funds went).

For those in the highest tax bracket, their effective rate is 35%. Using an options and stock awards compensation structure, a CEO can “wait out” cashing his “paycheck” until tax rates favor doing so. For example, in 2005, when the “Bush tax cuts” were first implemented, Fairbanks cashed in his options and stock awards and took a “salary” of $249.42M [4] at a capital gains rate of 15% verses the typical 35% income tax rate. At the time, Capital One stocks were trading at its historic “bubble” rate of, on average, $80 per share (note, the stock is currently [as of October 2011] trading at $39 to $40 per share). [5]

If the “Bush tax cuts” had not been implemented, thereby encouraging Fairbank to cash in his chips when he did, he could effectively have avoided ever paying any taxes at all by allowing his stock options and equity awards to simply remain in the company and borrowed against their value. However, as a “banker” with insider knowledge of the eventual “bubble” bursting, Fairbank was smart enough to know when to cash in (and at a significantly higher value than when the stock was first issued). And even if he had left his stock and options awards in the company, borrowing against the assets at the record high prime rate of 21.5% (Wall Street Journal's Prime Rate in December 1980 [6]), borrowing against those assets is effectively cheaper than paying taxes. Being that Capital One is a lending institution and Fairbank is at the helm of it, an assumption can be made that even the prime rate would effectively be waived in loaning money to its top executive (after all, as the head of the Board of Directors he also sets his own compensation package).

This tax “loophole” and pay structure needs to be plugged. The most logical solution would be to tax the stock and options award at the time they are received at the “income” tax level, deduct the “payroll” tax and then allow the corporate executives to gamble with his or her “income” by accepting the stock and options awards as their compensation in lieu of a traditional paycheck. Naturally, any gains would be taxed when cashing in the chips.

And if the company loses money or if the stocks lose value, there are no tax deductions for “capital losses” (which is no different than a traditional homeowner who cannot write off the loss of equity in their homes on tax forms when selling below what they purchased the home for or any improvements made to them). Fair is fair.

For an in-depth discussion of Capital One, please see “If Capital One’s acquisition of ING hinges on “public benefit,” by all means lawmakers should say “NO![7]


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SEE for a full list of citations without redactions. Threshold for citations to some sources unwittingly violated HubPages Terms of Service.




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