Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

Chapter 9. Tax Deferment: Interest-Free Loans from the Government

So long as Wesco [a Berkshire subsidiary] does not liquidate, and does not sell any appreciated securities, it has, in effect, an interest-free "loan" from the government equal to its deferred incomes taxes on the unrealized gains, subtracted in determining its net worth.^[99]

—Charlie Munger

You may find it difficult to believe that at the end of 2008, Berkshire Hathaway had a $10 billion interest-free loan from the U.S. Internal Revenue Service and other tax authorities. According to most tax rules, neither you nor anyone else has to pay taxes on paper gains on stocks until those paper gains are converted into real gains. For example, Berkshire's Coca-Cola investment, purchased about 20 years ago, has increased from the initial $1.3 billion to $9.1 billion, but Berkshire has not yet paid any taxes on the paper gains of $7.8 billion. The nonpayment of taxes is indirectly an interest-free loan that Berkshire enjoys. The longer you wait to capture your paper gains, the longer you don't have to pay taxes.

Value of Berkshire's $10 Billion Interest-Free Loan from the Government

What is the value to Berkshire of the interest-free loan? We can understand this using a simple example. Assume that your mother gives you $100 interest free and says that you can keep it forever. Since you need not pay any interest and need not ever pay the money back, it is essentially a gift. If an interest-free loan is held forever, its value is ...