Koch Industries is A C Corporation (Not An S Corporation)

For many years I have wondered if Koch Industries was established as a C Corporation or an S Corporation. At one time I believed they were an S Corporation due to this article discussing Bill Koch and his fight with Massachusetts when he reported a $275 million capital gain on his 1983 tax return (when he sold his Koch shares back to Charles and David Koch for $470 million) and placed the proceeds into S Corporations. Bill Koch would go on to start Oxbow Carbon LLC. Even the S Corporation organization links to an article in which a Forbes reporter believes Koch Industries is an S Corp. The most famous deceleration of this was back in 2010 when economic advisor Austan Goolsbee made the remark that Koch Industries didn't pay much in corporate income tax. The concern was Austan had access to confidential tax filings Koch Industries. However, it turns out Austan had the incorrect information and was referring to Bill Koch in an article he read from a Florida newspaper (see even economic advisors get the Koch brothers confused!).

Through searching business filings with the state of Kansas I came across filings that Koch Industries had filed with the state (going back to the original article of incorporation in 1940). Wood River Oil and Refining Company (predecessor to Koch Industries) back in 1940 (started by Fred Koch and partners) was funded with $15 million of capital and only had common stock of 16,000 shares. Then on July 20, 1959 Wood River Oil and Rock Island Oil and Refining merged together. After the merger the company had a total capital amount of $10 million. Charles Koch would grow the company year in and out by reinvesting 90% of the earnings back into the company. As the company grew all the number of common shares would grow but the company would also offer preferred stock as well. S Corporations are not able to have multiple classes of shares (preferred and common stock). Having different classes of stock would revoke the S Corporation and cause a large tax bill as well. C Corps are able to have multiple classes of shares. Since Koch industries offers different share classes (preferred and common) they would most likely be a C-Corp. 

The last report in 2004 breaks out the the preferred/common stock amounts. The company has 57,922,925.623 common non voting shares along with 276,524.2 voting shares which puts the total common shares at ~58.2 million shares. Koch Industries has authorized (or the capacity) to issue close to 133 million common shares. The company also has the capacity to issue 251,000 preferred shares as well (non-voting as well as cumulative voting shares as well). Charles and David Koch each own 42% of Koch Industries which would mean they would together own roughly 49 million common shares of Koch Industries.

This finally puts to rest the notion that Koch Industries is some type of pass through entity (LLC or S Corporation) to Charles and David Koch. Also remember that a C-Corp faces double taxation as well since the corporation is taxed first at the company level and then any dividends that are paid out are taxed to the shareholder. I do wonder though if Charles Koch started the company from scratch if he would still choose a C-Corp or want to set up Koch Industries LLC (as an S-Corp). 

Republican Tax Cut: What Does This Mean for Koch Industries Inc. and "Koch Brothers"

Recently, I have heard all sorts of claims in terms of how the recent Republican tax bill will affect the "Koch brothers". Senator Bernie Sanders remarked "Congratulations to the Koch brothers, massive, corporations, and billionaire campaign contributions on looting the Treasury and working families".  I decided to look deep to see how the tax bill would impact Koch Industries and the "Koch brothers" by doing some back of the envelope calculations.

For many years I have published many blog posting on Koch Industries and Charles and David Koch and still am not sure how Koch Industries is structured (whether it is formed as an S Corporation or C Corporation). Well my blog is the first to break this but Koch Industries is actually a C Corporation. The company filled articles of incorporation with the state of Kansas here and the articles of incorporation date back to 1949 when Fred Koch originally founded the company. If you look under the 2004 Koch Annual Report on page 3 the number of common and preferred shares are shown. This is important because a S Corporation (pass through entity) can't have multiple classes of stock . If an S Corp does have multiple classes of stock the company would terminate the S Corp status and subject the corporate tax on the net income to shareholders on the net income and the shareholders would also be taxed on the distributions of income. Due to the multiple share classes Koch Industries would only be able to be classified as a C-Corporation (also the Inc. in Koch Industries Inc. is a giveaway too). Also given the company was formed in the 1940's and the S Corporation election wasn't even available until 1958. 

With regard to the impact for Koch Industries Inc. the company would see possibly a reduction in their corporate tax rates. Koch has many different subsidiaries that are around the world. Some of these subsidiaries pay a very low tax rate. One European subsidiary paid a 4% tax rate on $269 million in profits. Some of these structures get very complicated Invista (subsidiary of Koch) went through 26 step process to reduce their taxes. Although, this is a subsidiary Koch is unable to do this on all their subsidiaries. The newly passed tax bill would cut corporate rates from 35% to 21% of course this is the Federal rate and corporations do pay state states as well (which can range from 0%-12%) . According to MarketWatch the energy industry has median tax rate of 37% (over the last 11 years). The tax rate for S&P 500 companies is 30%. Let's assume we take the lower tax rate for S&P 500 companies. The next question is how much will Koch Industries Inc. save in taxes?

Koch Industries from recent estimate and generally accepted figures has revenue $100 billion . I estimated that Koch earns $6-$10 billion per year before taxes. Let's assume $8 billion of earnings with the same tax rate for S&P 500 companies (30%). This would reduce the net profit to $5.6 billion. Now if the rate is cut to 21% the net profit would be $6.3 billion. This would be $720 million more in earnings for Koch Industries. Since David and Charles Koch each own 42% of the company and the dividend rate is 6%  would mean roughly $18 million more in dividends ($720 million x 42% ownership x .06 dividend rate) each for Charles and David Koch which would mean the government would also get an additional $8.5 million ($36 million x 23.8% tax rate on dividends) in revenue. 

Also there are implications for estate tax too. The estate exemption amount (only pay estate taxes on the amount above the exemption) was raised from roughly $11 million per couple to $22 million per couple. As I write this Bloomberg Billionaires value each of the Koch brothers at $48 billion each which would be a total net worth of $96 billion. $22 million in an exemption amount is a rounding error for covering the estate taxes on $96 billion! The estate tax rate would be ~$38 billion in estate taxes when Charles and David Koch pass. Although, Charles Koch has said that he has been doing estate planning for a number of years.  David Koch mentioned that his estate planning consists of his shares going to his children (I would imagine it is similar for Charles Koch as well). Also it should be noted that since the exemption amount is raised their will be fewer taxable estates which means the IRS will spend time and resources auditing those over the amount. I wouldn't be surprised to see a tax case in the future with the Koch family. 

Overall the recently passed Republican tax bill will help Koch Industries and Charles and David Koch. However, the degree to which it will help Koch Industries and Charles and David Koch has been overstated. From my back of the envelope calculations Koch Industries will save roughly $720 million in taxes at the corporate level and save essentially a rounding error in estate taxes and most likely be a audit target once they pass given the amount of money the government could collect.