Buffett

Forget corporate inversions -- Warren Buffett's Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) is saving billions of dollars in taxes by making big deals financed with asset swaps.

In April, Buffett swapped about $1.1 billion of stock Berkshire owned in Graham Holdings, formerly The Washington Post Company, for a Miami television station it owned. In doing so, Berkshire Hathaway avoided paying taxes on the more than 100-fold increase in the shares since its initial purchase. If the company had sold the stock, Berkshire Hathaway would have been on the hook to pay taxes of up to 35% on its gains.

Now Buffett's back at it. In a deal with Procter & Gamble, Berkshire Hathaway will swap shares it owns of P&G for ownership of the company's Duracell battery unit. Once again, Berkshire Hathaway will avoid taxes on the capital gains on its Procter & Gamble stock.

Nothing new, just bigger
Buffett's tax trick isn't anything new. Close observers have watched Buffett perform the maneuver time and time again. He did it in 2008, when Berkshire bought two insurance units from White Mountains Insurance Group.

As recently as 2013, the company swapped a stake in Phillips 66 for control of a pipeline business in a $1.3 billion deal, again avoiding taxes on its capital gains.

Brk Deferred Taxes

And going back to his early years, Buffett's had a penchant for tax-friendly acquisitions. Berkshire Hathaway purchased 90% ownership in Nebraska Furniture Mart in 1983. The deal was designed to cross the 80% threshold at which Berkshire could consolidate the company into its financials, and divide up its earnings to the corporate parent without any tax consequences.

Size is no disadvantage for taxation
Berkshire Hathaway is the fourth largest business in the world by revenue. Many believe that its size may limit the company's ability to generate excess returns over the market average in the future.

And while size may hamper its investment opportunities on the front end, it isn't hampering the company's ability to generate tax savings on the back-end. At the time of each tax-friendly deal, Berkshire Hathaway was one of the largest investors in Graham Holdings, Philip 66, and Procter & Gamble.

Its outsized stakes, combined with the company's historical capital gains, give it a unique edge as a bidder for units on the chopping block. By making deals through asset swaps, Buffett's effectively bidding with some of Uncle Sam's money -- call it just another benefit to the long-term, buy-and-hold investing process.

 

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Procter & Gamble. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.