Warren Buffett's Berkshire Hathaway Inc. BRKB +2

Warren Buffett's Berkshire Hathaway Inc. BRKB +2.30% repurchased $1.2 billion in stock from an unnamed shareholder, an unusual deal for a company that typically eschews buybacks.

Berkshire bought the shares from a "long-time shareholder," allowing it to cash in on the holdings before the federal government raises taxes on such gains. Berkshire's board signed off on the repurchase of 9,200 of Berkshire's Class A shares at $131,000 apiece.

The deal tops the maximum price Mr. Buffett has said he was willing to pay for Berkshire's own stock: no more than 10% above its per-share book value. The company said Wednesday it would now pay as much as 20% above book, which stood at $111,718 a share as of Sept. 30.

Berkshire Hathaway bought back $1.21 billion in Class A shares from the estate of a longtime shareholder at a slight premium to Tuesday's close. David Benoit reports on Markets Hub. Photo: Reuters.

The moves show Mr. Buffett's belief that Berkshire is deeply undervalued, and that he isn't finding enough ways to use Berkshire's capital that can match the benefit of retiring chunks of the company's stock.

Berkshire Class A shares jumped 2.4% to $134,000 in 4 p.m. composite trading on the New York Stock Exchange. The stock is up 17% this year.

Companies buy their own stock to reduce the number of shares in circulation. Such repurchases—common for other public companies but nearly unheard of at Berkshire before last year—give investors who retain the stock a larger stake in the company by taking some shares off the market.

The repurchase disclosed Wednesday by Berkshire represents less than 1% of the company's shares outstanding.

Mr. Buffett has repeatedly criticized other chief executives for wasting money on buybacks when the share price is too high, describing such moves as "overpaying departing shareholders at the expense of those who stay."

But he also has said buybacks can be beneficial when the price is right. He wrote in a letter to Berkshire investors early this year that he was willing to purchase Berkshire shares if they are selling at a "material discount to the company's intrinsic business value."

Until now, that meant paying a premium of no more than 10% above book value, the level he set when Berkshire first authorized its buyback program in September 2011.

Berkshire's book value, a measure of the company's net worth, was $111,718 a share as of Sept. 30, meaning the maximum price it is authorized to pay under the new criteria is about $134,000.

Longtime shareholder Whitney Tilson of T2 Partners wrote to his investors in an email that the new authorization was "big news" because it "put a [new] floor on the stock." He said he purchased more shares "the moment I saw the news."

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Warren Buffett, left, with JPMorgan Chase CEO James Dimon, center, in New York last month.

Mr. Buffett has said Berkshire's intrinsic value, a confidential measure he calculates personally, is substantially greater than its book value.

Mr. Buffett declined to comment on any details involving the seller or the holdings, or on how aggressive the company will be in buying back shares in the future.

Mr. Buffett has said in the past that some of the company's larger individual shareholders aren't known to the public, largely because they aren't bound by securities regulations that require them to report their positions.

He has said that some of Berkshire's largest investors would make the Forbes list of the richest people if their holdings were divulged.

The estate that sold the shares did so at a time when many investors are unloading some of their winning stocks to avoid an increase in the capital- gains tax next year, and the sale should qualify for this year's top tax rate of 15% on long-term capital gains. Next year the top rate will be at least 18.8% for wealthy Americans, because of a new 3.8% tax on net investment income.

In addition, as part of the debate in Washington over taxes and spending, President Barack Obama has called for a five-percentage-point increase in the 15% rate, so the top rate could be 23.8%.

Exactly how much a difference the coming tax increase would make is unclear. One thing is certain: Even though the Berkshire shares were longtime holdings, the estate appears unlikely to pay tax on all of the stock's rise over the decades that Mr. Buffett has run the company. Estates that sell shares pay tax only on increases in the value of shares after the date of death, according to tax experts.

Mr. Buffett has been a vocal advocate for higher taxes on the wealthiest Americans, arguing that the most affluent people in the country should pay a minimum tax of 35% on taxable incomes over $10 million.

The price Berkshire paid for the 9,200 Class A shares was less than 1% above the company's $130,831 closing price Tuesday.

Until now, Berkshire hadn't spent much of its massive cash stockpile on buybacks. Berkshire bought about $67 million worth of shares over four days immediately following the announcement of the buyback authorization in 2011 "before the price advanced beyond our limit," Mr. Buffett said in this year's annual shareholder letter. The company, whose authorization from the board is open-ended, hadn't disclosed other share repurchases until Wednesday's transaction was announced.

At the time, Mr. Buffett said he wanted to keep a cash cushion on hand to protect against unexpected expenditures, saying he wouldn't buy back stock at any price if Berkshire's cash fell below $20 billion.

The Omaha, Neb., company had $47.8 billion in cash as of Sept. 30.

Berkshire has about 1.65 million Class A "equivalent" shares outstanding, but some are actually the company's Class B shares. Class A's can be exchanged for 1,500 Class B shares each. The so-called "Baby B's" rose 2.7% to $89.63 in recent trading.