Bill Ackman tweeted on March 15 that he gave his entire stake in Coupang (NYSE:CPNG), the South Korean e-commerce company that went public on March 10, to three charitable organizations, including the Pershing Square Foundation. The move indicates the billionaire investor believes in the future of CPNG stock.
It also means he needed a substantial tax deduction to take care of the massive capital gain he’d otherwise face for selling his stake in CPNG stock.
Here are the pros and cons of such an announcement.
According to Ackman’s tweet, he donated 26.5 million shares of Coupang stock, which he made personally, not through Pershing Square Capital Management. Those shares, as I write this, are worth $1.24 billion.
Ackman also stated he was a “day one investor in Coupang,” which means he’s owned the stock for at least a decade.
A Closer Look at CPNG Stock
In 2014, Coupang raised $300 million in new funding from investors including Greenoaks Capital Management, the second-largest shareholder behind SoftBank (OTCMKTS:SFBTY) at 16.6% after the company’s initial public offering (IPO).
According to page 76 of its prospectus, the pre-IPO shareholders paid an average of $2.24 per share for 51% of the company, while the new shareholders bought 49%, 100 million shares at $35 each.
So, assuming the $2.24 average for Ackman, his capital gain was approximately $1.2 billion. That’s a tremendous tax bill, even for a billionaire.
Fidelity Investments points out on its website the benefits of donating stock to charity.
“When you donate stock to charity, you’ll generally take a tax deduction for the full fair market value. And because you are donating stock, your contribution and tax deduction may instantly increase over 20%,” Fidelity states.
The example on its website uses a $300,000 investment at cost and a $450,000 market value.
If you sell the shares and donate the cash proceeds, your charitable contribution and charitable deduction are 414,300 based on a 23.8% long-term capital gains rate [assumes a 20% long-term capital gains tax rate and 3.8% Medicare surtax].
By donating the stock to Fidelity’s charity directly, the full amount of $450,000 is contributed and available as a charitable deduction.
Read further down Fidelity’s website. A fascinating note about the difference in donating to a private foundation [Pershing Square] versus a donor-advised fund, which Ackman also did.
“[T]he tax deduction for giving their stock to the private foundation would be limited to 20 percent of their adjusted gross income, while for a public charity with a donor-advised program, the deduction limit was 30 percent—a significant difference.”
What’s This Mean in Dollars and Cents?
Well, based on a 23.8% tax rate, Ackman would be responsible for approximately $286 million in capital gains taxes. By donating all of the stock, he pays none. But there’s more.
According to Schwab’s website, Ackman would be able to deduct up to 50% of his adjusted gross income (AGI) for stock donations to donor-advised funds. For private charities, the maximum donation is 30% of AGI. Should the charitable deduction exceed AGI limits in a particular year, Ackman could carry forward for five additional years.
According to Institutional Investor, Pershing Square Capital Management earned $1.4 billion in 2020. Let’s say Ackman earned half that number or $700 million. Without getting into the various deductions used to calculate AGI, I will use $700 million for simplicity’s sake.
Assuming the higher of the two deduction rates (50%), Ackman would be able to use $350 million of his $1.2 billion in total deductions. The remaining $850 million could be spread over the next five years.
Now, if you’re an accountant, please don’t lambaste me for my math or calculations. First, I’m not a tax expert. Not even close. And second, I’m Canadian. We have a whole different set of rules.
The whole point is, from where I sit, Ackman is conservatively saving himself anywhere from $500-750 million in taxes over the next six years, I would guess.
Donald Trump would say good for him.
The Bottom Line
As one of the first into the CPNG stock growth story, I’m sure Ackman’s a huge fan. But a guy’s gotta do what a guy’s gotta do.
The charitable funds that receive Coupang stock may turn around and sell it for cash to be redeployed in businesses that actually make money. It’s more likely that Ackman set conditions for the sale of the stock at some point in the future.
In my estimation, Ackman’s killing two birds with one stone. For this reason, I do believe that he will continue to be a strong supporter of the stock and company.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.