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Billionaire Robert Smith’s $35 Million Student Loan Gift to Morehouse Grads Faced Tax Questions

Billionaire Robert Smith generously paid off student loans for graduating Morehouse students in May 2019. According to Business Insider, the amount of money he gave away was $35 million. But there were some tax considerations that made the gifting not as simple as one may think.

Smith
Robert Smith, chairman and chief executive officer of Vista Equity Partners LLC, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., on Tuesday, May 1, 2018. The conference brings together leaders in business, government, technology, philanthropy, academia, and the media to discuss actionable and collaborative solutions to some of the most important questions of our time.

The Tax Question

In a resurfaced episode of “Earn Your Leisure,” published on Dec. 13, 2022, Smith told hosts Rashad Bilal and Troy Millings that in order to pay off the HBCU graduating class’s debts, it would have to be considered a gift, which would then be taxed upon the receiver.

“It’s not as easy as you think to pay off somebody’s loan,” Smith said.

He continued, “I know everybody’s like ‘what are you talking about,’ who would have thought because, yeah, who would have thought, right, because if you pay off somebody’s loan either you’re giving them a gift or they’re receiving a gift now they got to pay taxes on it, so there’s a burden to them or increasing burden to you so you’ve got to actually architect a system to do that effectively so that doesn’t create the burden in that process.”

But according to Eric Bronnenkant, head of tax at the online financial adviser Betterment, the student most likely did not have to pay taxes on the money. “The receipt of a gift is excluded from income regardless of the amount or the source,” Bronnenkant told The Washington Post. “Assuming the payment of the graduates’ student loans is classified as a gift, it would be income-tax free.”

However, it comes down to the amount each student received. The year of the gift, “donors were allowed to give up to $15,000 annually to an individual without triggering the reporting of the gift to the IRS,” The Washington Post reported. Still, that didn’t mean taxes would be owed on the gift. The lifetime gift allowance in 2019 was $11.4 million per person.

Smith’s IRS Drama

Smith is no stranger to tax issues.

In 2020, Smith avoided criminal charges despite a four-year investigation by U.S. prosecutors and the IRS into his alleged concealment of over $200 million in income. Facing the possibility of indictment, Smith negotiated a non-prosecution agreement, admitting to tax crimes, paying $139 million, and cooperating in the case against another individual. The agreement allowed Smith to avoid jail time while agreeing to pay penalties, forfeit tax deductions, and cooperate with prosecutors for five years, according to Bloomberg.

Smith, who has an estimated net worth of about $7.05 billion, went on to explain why, despite, the complicated process, he wanted to make the substantial gift.

“What I learned is over 60 percent of African-American wealth goes towards servicing student loans,” he said. “Okay, you come out you’ve got $60- $80-, $120,000 worth of student loans now you’re paying interest on those loans something happens in your family, you lose your job, whatever, now that compounds and it can be decades before you’ve paid off those student loans that inhibit your ability to buy stocks, bonds, a house, invest in a business, you see what I mean? and I was like well that’s just unconscionable because mostly student loans are paying back to the United States government.”

Smith also introduced the Student Freedom Initiative, aiming to provide equitable access to education funding.

“So then I thought well what’s a better way to do it this is what’s the better equilibrium system; the better equilibrium system is to create a fund it’s called the Student Freedom Initiative. We raise money, I put in a bunch of money, and now these students borrow from the fund,” the wealthiest Black man in America said on the podcast.

This initiative involves creating a fund where students can borrow money at low interest rates, with flexibility for life interruptions like caring for family. If students work in community service or low-paying jobs, their debt can be forgiven by contributing back to the fund. Additionally, Smith suggests corporations allocate 2 percent of their earnings toward community development projects tailored to address local needs, such as healthcare, banking, and access to quality food.

How Robert Smith Made His Billions

Smith, CEO of Vista Equity Partners, has become even more affluent as a result of the sale of Apptio, a provider of financial and operational IT monitoring and optimization software to businesses that he sold to IBM in the summer of 2023.

Vista Equity Partners announced in late June 2023 that it had struck a deal to sell Apptio to IBM for $4.6 billion, yielding a 142 percent return on Smith’s $1.9 billion investment Vista spent in 2019 to purchase the Bellevue, Washington-based software company.

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