Will Rex Tillerson get a tax break on his big Exxon payout?

Rex Tillerson in 90 seconds
Rex Tillerson in 90 seconds

Rex Tillerson is one of the first among President-elect Trump's nominees to make public his agreement to avoid conflicts of interest if he's confirmed as secretary of state.

As part of that agreement, Tillerson will cut all ties with Exxon Mobil -- where he worked for 40 years and from which he just retired as CEO.

Like White House political appointees before him, Tillerson can get a special capital gains tax break when he sells his Exxon stock and other assets with gains.

That same break, however, won't apply to the largest slice of Tillerson's Exxon wealth that he's divesting. But thanks to how his deal with the oil giant is structured he may get a big tax break anyway.

How the capital gains break works

As part of his agreement, Tillerson would sell the 600,000 shares he currently owns in the company, worth roughly $54 million today.

Before he does, he can seek permission to defer the capital gains taxes on those shares. To qualify, he must reinvest the proceeds in approved investments such as U.S. Treasuries and diversified mutual funds within 60 days of the sale.

Tillerson will have to pay capital gains taxes if he ever sells those new investments. At that time he would have to pay tax on the gains that had accrued on his Exxon shares before he sold them, plus on any gains that accrued on his new investments from the day he bought them.

But the longer he defers taxes, the more his money can grow.

Plus, "he'll own a diversified portfolio, which is more attractive than concentrating his wealth in one stock," said Steve Rosenthal, a senior fellow at the Tax Policy Center.

The really big payout

Tillerson still has a much bigger Exxon payout coming to him — 2 million shares worth about $180 million -- that was supposed to be paid to him over the next decade.

Instead, Exxon has agreed to pay the cash equivalent of those shares today and put the money directly into a blind trust, which will also make payments to him over 10 years.

That money is considered cash compensation and he'll owe regular income and payroll taxes on it. There is no special federal tax break for White House appointees on income. And normally he'd have to pay those taxes up front on the full $180 million. That could mean a tax bill north of $77 million.

But there's a chance Tillerson may be able to spread his tax payments out over 10 years.

Here's why: Exxon attached what is a non-compete provision to the trust, tax and benefits lawyer Loretta Richard said.

Tillerson is essentially prohibited from working for an Exxon competitor during the 10 years. If he does, he loses the rest of the money in the trust, and the trustee must donate it to charity.

Under today's tax rules, if there's a substantial risk of forfeiture tied to a promised payment, the money is only considered taxable when that risk lifts. In this case, that would be every time Tillerson receives a payment from the trust.

But if the IRS later decides that the risk wasn't substantial, he'll have to pony up the remaining taxes on the $180 million plus penalties and interest.

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