Tag: wealth
Why Ordinary Americans Pay Taxes — But Billionaires Don’t

Why Ordinary Americans Pay Taxes — But Billionaires Don’t

After a year of reporting on the tax machinations of the ultrawealthy, ProPublica spotlights the top tax-avoidance techniques that provide massive benefits to billionaires.

Last June, drawing on the largest trove of confidential American tax data that’s ever been obtained, ProPublica launched a series of stories documenting the key ways the ultrawealthy avoid taxes, strategies that are largely unavailable to most taxpayers. To mark the first anniversary of the launch, we decided to assemble a quick summary of the techniques — all of which can generate tax savings on a massive scale — revealed in the series.

1. The Ultra Wealth Effect

Our first story unraveled how billionaires like Elon Musk, Warren Buffett and Jeff Bezos were able to amass some of the largest fortunes in history while paying remarkably little tax relative to their immense wealth. They did it in part by avoiding selling off their vast holdings of stock. The U.S. system taxes income. Selling stock generates income, so they avoid income as the system defines it. Meanwhile, billionaires can tap into their wealth by borrowing against it. And borrowing isn’t taxable. (Buffett said he followed the law and preferred that his wealth go to charity; the others didn’t comment beyond a “?” from Musk.)

2. The $5 Billion IRA

Other billionaires used less conventional ways to avoid income, we found. Tech mogul Peter Thiel amassed a $5 billion Roth IRA, a type of account that shields income from taxes and is intended to help low- and middle-class savers prepare for retirement. Back in 1999, Thiel stuffed low-valued shares of the company that would become PayPal into the account, a maneuver tax lawyers said risked running afoul of IRS rules. (It’s not clear if the government ever challenged the move.) He set himself up to reap billions in untaxed gains. (Thiel did not respond to questions for the original article.)


3. The $1 Billion Parlor Trick: Turning High-Tax-Rate Trading into Low-Tax-Rate Income

Even when tech billionaires do show income on their tax return, they tend to pay relatively low income tax rates. That’s because of the type of income they have: Gains from long-term investments, such as from stock sales, are taxed at a lower rate. But what do you do if you’re making over $1 billion every year, and it’s largely from short-term trading? Do you just accept that you’ll pay the higher rate on all that income? As we reported this week, Jeff Yass, head of one of the most profitable firms on Wall Street, did not meekly accept this fate. Instead, his firm, Susquehanna International Group, found creative ways to transform the wrong sort of income into the right kind, generating tax savings that exceeded $1 billion over just six years. (Susquehanna declined to comment but in a court case that centered on similar allegations, it maintained that it complies with the law.)

4: The Magic of Sports Ownership: Make Money While (Legally) Reporting Losses

The tax code offers business owners a slew of methods to erase income through deductions, none more awesome than buying a sports team, as former Microsoft CEO Steve Ballmer did with the Los Angeles Clippers. It doesn’t matter whether the team is actually profitable and growing in value. It can still be a write-off. (In some cases, we found, owners could effectively deduct a given player’s contract not once, but twice. They’re allowed to take deductions comparable to those for factory equipment that loses value as it ages, even as teams almost inevitably gain in value.) That’s one reason owners tend to pay far lower tax rates than the athletes they employ, or even the people serving beer in the team’s stadium. In our story, we found a Clippers arena worker who made $45,000 a year and paid a higher tax rate than the billionaire Ballmer. (Ballmer said he pays the taxes he owes.)

5. Build, Drill and Save: The Real Estate and Oil Businesses Can Both Be Tax Havens

In certain industries, like real estate or oil and gas, the tax breaks are so plentiful that billionaires can erase their income entirely even as they grow richer. That’s how real estate developer Stephen Ross (who also happens to own the Miami Dolphins) went 10 years without paying any income tax. Ross said that he followed the law. Another mogul, this one in the oil business, managed to tap a near bottomless well of write-offs via one of the biggest oil spills in history. (The mogul’s representatives did not respond to requests for comment.)

6. Even a Billionaire’s Hobbies Can Pay Off at Tax Time

Deductions from hobbies and side projects, which the ultrawealthy can structure as businesses, are another fun option. For some billionaires, it’s race horses: We found that six owners of thoroughbreds at the 2021 Kentucky Derby had taken a combined $600 million in tax write-offs on their horse racing operations. For others, like Beanie Babies founder Ty Warner, it’s luxury hotels. The billionaire splurged on a couple of landmark Four Seasons locations and then went 12 years without paying any income tax. (Representatives for Warner did not respond to requests for comment.)

7. Think Your Taxes are Too High? Change the Tax Laws

Sometimes, it pays to fight for a new tax break. For the billionaires who contributed millions to Republican politicians, the payoff came in the form of Trump’s “big, beautiful tax cut” for passthrough businesses. We found the change sent $1 billion in tax savings in a single year to just 82 ultrawealthy households. Some business owners also boosted their savings with a trick: They slashed their own salaries and categorized the money instead as passthrough income.

8. Why Tech Billionaires Pay Less Than Hedge-Fund Managers

With so many options to reduce taxes, the richest Americans often manage low income tax rates. We analyzed the incomes and taxes of the country’s top 400 earners, those averaging over $110 million in income per year. Overall, the group paid relatively low rates, but certain segments (tech billionaires, heirs, private equity executives) stood out even within this elite population because they were able to draw on the sorts of techniques detailed above. (Also drawing on these techniques were wealthy politicians, like the governors of Colorado and West Virginia.)

9. Brother, Can You Spare a Stimulus Check?

But the real standouts were the billionaires who reported such low incomes that they qualified for government assistance. At least 18 billionaires received stimulus checks in 2020, because their tax returns placed them below the income cutoff ($150,000 for a married couple).

10. Trust This: How Wealthy Families Pass Billions to Heirs While Avoiding Taxes

The holes in the estate tax, we found, are even more remarkable. There are well-worn ways to make sure Uncle Sam doesn’t get his cut of a fortune being passed on to heirs, and the most common is through a trust. How common no one can say, but we found evidence that at least half of the nation’s 100 richest individuals had used estate-tax-dodging trusts. In another story,we followed three century-old dynasties down through the generations, showing how they used trusts to avoid taxes, so that a fortune could pass all the way from the original early 20th century tycoon to, for example, the great-great-granddaughter who recently collected $210 million before her 19th birthday.

Reprinted with permission from Propublica.

How The IRS Failed To Curtail Much-Abused Fat-Cat Loophole

How The IRS Failed To Curtail Much-Abused Fat-Cat Loophole

Reprinted with permission from ProPublica.

In March 2019, the IRS added a scheme to its annual “Dirty Dozen” list of “the worst of the worst tax scams.” That same scheme was targeted, just weeks earlier, when the U.S. Department of Justice filed a fraud lawsuit against a handful of promoters allegedly responsible for generating more than $2 billion in improper tax write-offs. And the Senate Finance Committee has been investigating that very same racket, recently demanding thousands of pages of documents from six promoters. Lawmakers from both parties have introduced legislation to halt the same practice.

The scheme they’re all trying to kill is what’s called a “syndicated conservation easement,” which the IRS calls “abusive” and says has resulted in bogus deductions for the rich that have cost the U.S. Treasury billions in revenues.

A conservation easement, in its original, legitimate form, is granted when a landowner permanently protects pristine land from development. In that scenario, the public enjoys the benefit of undeveloped land and the taxpayer gets a charitable deduction. By contrast, the syndicated form, created and packaged by profit-seeking middlemen known as “promoters,” involves buying up land, finding an appraiser willing to declare that it has huge development value and thus is worth many times the purchase price, then selling stakes in the deal to wealthy investors who extract tax deductions that are often five or more times what they put in. (ProPublica investigated syndicated easements in the 2017 article “The Billion-Dollar Loophole.”)

But the multifront crackdown seems to be having, at best, a limited effect. There were signs that the pace of syndicated deals has eased, according to an IRS letter to Congress in July 2018 that cited incomplete data; that’s the most recent official statement from the agency, which declined to comment for this article. And some entities doing syndicated projects have seen their business drop or have even left the field. But IRS commissioner Chuck Rettig offered a different picture to the Senate Finance Committee this spring. “Syndicated transactions have absolutely not declined,” he testified. “They’re still there.”

In November, Rettig announced an escalation — including the launch of criminal investigations — in the agency’s attempts to stymie syndicated easements. “We will not stop in our pursuit of everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions,” he said in a statement at the time. Three IRS divisions are now conducting coordinated examinations of syndication deals after identifying 125 “high-risk cases,” and outside contractors have been hired to assist with the investigative load. More than 80 tax court cases are now pending against partnerships that used the syndicated easement deduction.

The imperviousness of the scam’s promoters and investors has left tax experts flummoxed. “Boy, it isn’t like the old days, when people were fearful of the IRS,” said Steven Miller, who oversaw enforcement and tax-exempt organizations during his 25 years at the IRS and is now national tax director with consulting firm Alliantgroup. “I’m worried people aren’t afraid of the cop on the beat any more.”

Another IRS veteran offered a similar view. “I thought by now they would have put these guys out of business,” said former agency commissioner John Koskinen, who took steps against syndicated easements before he left in late 2017. “Obviously, if you can get four to seven times your investment back in deductions, that’s a good deal. But you really have to have a lot of chutzpah to pull it off.”

Some promoters continue to flaunt their sales pitches. In November, for example, an Alabama promoter (which was not sued by the Justice Department) solicited high net-worth clients with an ad in Barron’s, promising, in capital letters, “TAX DEDUCTIONS AVAILABLE THROUGH CONSERVATION EASEMENTS…100,000 INVESTED YIELDS UP TO 600,000 IN DEDUCTIONS.”

And sizable deals are still being struck, including by an Atlanta firm called EcoVest Capital, a chief target of the Justice Department lawsuit. According to a private placement memorandum dated Oct. 24, which was obtained by ProPublica, EcoVest was planning as many as three new syndicated deals on 1,549 acres in rural Calhoun County, Texas. One, touting a deduction of $4.10 for every $1 invested, was completed by year-end. (The Justice Department suit, which is still in its early stage, asserted that EcoVest has been involved in 51 syndication easement deals since 2009, generating $1.7 billion in federal tax deductions.)

On their face, the risk disclosures to potential investors in a syndicated deal seem daunting. For example, the private placement memo for EcoVest’s Texas offering warned of a “very high likelihood that the Property Entity or the Company will be audited by the IRS.”

But experts cite several reasons for the stubborn survival of this tax-avoidance scheme. The first is that the IRS, which Congress has starved for funding, chiefly wields its clout through individual audits and tax court cases, which invariably take years. And even the dozens of tax court cases the IRS is pursuing target only a fraction of syndicated deals.

More important, the syndicated deals are structured in a way that insulate the wealthy individual investors, leaving the promoters and outside lawyers to do battle with the IRS. Their fight is fueled with “audit reserves” of as much as $1 million that are set aside as part of every syndication partnership. Some deals even offer “audit insurance” from Lloyds of London to offset disallowed write-offs.

“The way the structure works is pretty buttoned up,” Miller said. “The investor sits there and doesn’t see immediate pain. You’re not going to be bothered by the IRS at the front end. Some of them say: ‘Well, let me do the math. What’s the likelihood of that 40% penalty?’ That’s the calculation people are making.”

Miller believes the deterrent effect will kick in only if more cases personally target individual promoters and deal consultants with tough penalties and professional sanctions. “Ultimately,” he said, “they need to crush a few appraisers like a grape.”

The “linchpin” of the syndicated easements, Miller said, is the inflated appraisal. “How do I buy something today for a dollar and magically everything I buy is truly worth $10? That belies rational thought. You just scratch your head.”

Here’s how the appraisal worked in one syndicated deal described in the Justice Department complaint. In 2015, an EcoVest entity acquired 28 acres in North Myrtle Beach, South Carolina, for $1.1 million. The firm raised about $9 million from investors who bought the property, then made an easement donation based on a claimed value for what the land would be worth if developed as a multifamily resort. That projection, made by an appraiser hired by the promoters, produced a tax deduction of about $39.7 million. The tax writeoff for investors: $4.12 for every $1 invested.

In a written response to ProPublica’s questions, an EcoVest spokesperson called the government’s charges “baseless” and insisted that “none of the appraisals associated with EcoVest sponsored investments are abusive or fraudulent.”

One appraiser regularly retained by EcoVest and other syndicators also looms large in the Justice Department suit: Claud Clark III, based in Magnolia Springs, Alabama. The complaint notes his involvement in at least 58 syndicated easement deals and alleges that Clark, 66, “continually and repeatedly” generated “grossly overvalued appraisals.”

In January 2019, the Alabama state real estate appraiser board brought a formal complaint against Clark, after a detailed review of one of his easement appraisals found an inflated valuation riddled with errors and omissions. Threatened with loss of his Alabama license, Clark voluntarily surrendered it in April instead. He faces a second complaint filed with state regulators in Louisiana, regarding a 2018 appraisal he did for syndicators in Jefferson Davis Parish.

EcoVest has continued to use Clark. Its October private placement memorandum, which raised $19.3 million from investors, did not disclose that he had surrendered his appraisal license in his home state. (A spokesperson for EcoVest said Clark’s relinquishment of his Alabama license wasn’t disclosed “because, under securities laws, it was not material to whether Mr. Clark was authorized to issue an appraisal in Texas — a state with different appraisal rules, regulations, and practices.”)

Clark did not respond to requests for comment. On Christmas Eve, however, his attorneys filed a 130-page response and counterclaim to the Justice Department complaint, denying any inflated appraisals and accusing government officials, including the IRS commissioner, Rettig, of making “unlawful disclosures” of appraisal information from his tax returns in public statements about the litigation.

Promoters of syndicated conservation easements have long been at war with the supporters of traditional easements, who worry that abusive deals will prompt Congress to eliminate the tax break altogether. The traditional conservation community, embodied by the Land Trust Alliance, the Washington, D.C., association of nonprofit land trusts, began pressing the IRS to crack down nearly a decade ago. (Land trusts are a key part of the process: The rules for conservation easements require that any property donated to seek an easement deduction must be accepted and maintained by a land trust or government entity.) The Land Trust Alliance later refused to accredit any trust accepting syndicated deals.

The IRS’ attempt to crack down on syndicated easements dates back to December 2016, when the agency took the rare step of designating profit-making syndicated easements as abusive “listed” transactions. The IRS demanded special paperwork identifying everyone involved in such deals — from promoters and tax advisers to appraisers and investors — and warned that continued involvement would brand them for investigations and audits.

The agency next took its campaign to tax court, after refusing to back down on dozens of audits rejecting the fat write-offs and demanding back taxes, interest and penalties of up to 40%.

But with millions at stake, promoters have fought back fiercely. In 2016, they formed a Washington, D.C.-based advocacy group, called Partnership for Conservation, which has spent more than $3 million to date on lobbyists. EcoVest has spent another $2.5 million.

The Partnership for Conservation defends the legitimacy of syndicated deals, arguing that the profit motive produces “tremendous opportunities” for conservation, according to Robert Ramsay, executive director of the organization. He said that the IRS should limit enforcement to cases of appraisal and valuation abuse, which he calls rare. “You have to stop with the premise that all of these are egregious and over the top,” Ramsay said. “I don’t think that’s the case.”

Among the syndicators’ most fervent supporters is Robert Keller, a conservation biologist who runs the Atlantic Coast Conservancy, a land trust in Jasper, Georgia, and has accepted more syndicated easements than anyone. Keller acknowledged in an interview that his business has slowed, declining from 56 easements in 2017 to 22 in 2019. His land trust is itself now also under IRS audit for 2014 through 2016. (One of the reasons for the decline in volume for Keller: Atlanta-based Ornstein-Schuler, among the most prolific syndicated-easement promoters, announced last January that it was abandoning the business, citing “recent developments and the uncertainty related to the conservation and gifting of property.”)

Keller’s land trust displays the slogan “Saving the world — One small piece at a time.” He is unapologetic about accepting syndicated easements. “For me, as a conservation biologist, this allows me to put away vast pieces of property,” Keller said. “I want to save the world.”

Keller asserts the campaign against syndicated easements resulted from an unholy political deal between the Land Trust Alliance and IRS. In September, he filed a Freedom of Information Act lawsuit against the IRS to force the release of correspondence between the two groups that he claims will provide smoking-gun evidence.

Land Trust Alliance CEO Andrew Bowman called the notion of such a conspiracy “absurd.” As he put it: “Taxpayers are being bilked. The intent of Congress is being violated. And the future viability of land conservation is endangered. The egregious profiteering the IRS has tracked … must end.”

At the urging of Bowman’s group, bipartisan congressional sponsors have, for the past three years, proposed legislation that would kill most syndications by limiting their profitability. It would bar deductions that exceed two and a half times the investment for any easement partnership that owned the land for less than three years.

In July, Congress’ Joint Committee on Taxation projected that passage of the latest incarnation, the “Charitable Conservation Easement Program Integrity Act of 2019,” would, if enacted, produce $7.1 billion in additional tax revenue through 2021. The bill has yet to get out of committee.

Paul Kiel contributed to this report.

Correction: This story originally misstated the founding year for the Partnership for Conservation. It was 2016, not 2017.

What’s Scaring The Bejeezus Out Of Billionaires?

What’s Scaring The Bejeezus Out Of Billionaires?

There’s a new political army on the march in America, moving forcibly into the 2020 presidential campaign. Tromp, tromp, tromp they come — it’s the Billionaire Brigade!

It’s actually a very small army — only 749 Americans rank as billionaires — but they have lots of firepower. Collectively, they’ve amassed some $4 trillion in personal wealth, and they now wield the financial and political clout to grab nearly all of the new wealth that our economy creates. Understandably, their extreme avarice and the inequality they’ve created have spurred populist outrage among the vast majority of workaday Americans who’re being stiffed by plutocratic elites.

In one response, Bernie Sanders, Elizabeth Warren and other Democratic leaders are proposing a widely popular wealth tax on the opulent riches being amassed and hoarded by this tiny group — and ho, what wails of anguish this legislation has generated in the lairs of billionaires! They’re indignant that fortunes above $50 million would be assessed for a teeny surtax to help fund education, health care, infrastructure and America’s other essential needs.

So, the Billionaire Brigade has organized a PR blitz to try to change the public opinion. With a rallying cry of Save the Poor Rich, we have such spectacles as Mark Zuckerberg lamenting that taxing his gabillions would hurt charities; Michael Bloomberg suggesting that the tax could turn America into Venezuela; Bill Gates moaning that it would eliminate rich people’s incentive to get up and go to work every day; and Wall Street baron Leon Cooperman actually tearing up while complaining on a cable news show that a wealth tax is a “morally, and socially, bankrupt” idea that would harm his family. As one money manager said of his elite clients, “These tax proposals are scaring the bejeezus out of people who have accumulated a lot of wealth.”

“Bejeezus?” I don’t think there’s much Jesus in these people! The Biblical Jesus I learned about in my childhood would bless Sanders, Warren and the majority of Americans who favor a wealth tax to benefit the Common Good. No need to cry for the few hundred haughty families whose love of money will be only slightly dinged by this tax — every one of them will still be fabulously rich. Plus, they’ll be privileged to live in a country that’s a little more closely aligned with its people’s egalitarian values. And that’s priceless.

We might expect that billionaires, corporate chieftains and Koch-funded right-wingers — and the Koch brothers’ bought-and-paid-for Republican Party — would be howl-at-the-moon opponents of a wealth tax, “Medicare for All” and other big progressive ideas created to help improve the circumstances of America’s workaday majority. But … Democrats?

Unfortunately, yes. Not grassroots Dems, who strongly favor such populist proposals, but a gaggle of don’t-rock-the-corporate-boat, fraidy-cat Democrats. These naysayers are the party’s insider elites (old-line pols, lobbyists and high-dollar funders) who’re suddenly screeching frenetically at Democratic candidates, demanding that they back off those big proposals. Why? Because, they screech, being so bold, so progressive, so — well, so Democratic — will scare voters. As one meekly put it: “When you say Medicare for All, it’s a risk. It makes people afraid.”

Excuse me, but in my speeches and writings, I say “Medicare for All” a lot, and far from cowering, people stand up and cheer! Union members, women, people of color, small-business owners, nurses, farmers, musicians, the middle class and the poor. In fact, The New York Times has just reported that 81 percent of Democrats (and nearly two-thirds of independents) support Medicare for All. Eighty-one percent! Even apple pie doesn’t score that high. It’s simply a lie that the people are “afraid” of the idea of everyone getting public-financed health care.

So who really fears it? Three special interest groups: insurance company profiteers, Big Pharma price gougers — and the political insiders who count on funding from those corporations.

Not only is it a pusillanimous fabrication to claim that the people oppose any changes stronger than corporate minimalism; it’s also political folly. If the Democratic Party won’t stand up for the transformative structural changes that America’s middle- and low-income majority clearly wants and needs, why would those people stand up for Democrats? As the 2016 presidential election taught us so painfully, a whole lot of the working-class Democrats the party counts on … won’t.

Populist author, public speaker and radio commentator Jim Hightower writes “The Hightower Lowdown,” a monthly newsletter chronicling the ongoing fights by America’s ordinary people against rule by plutocratic elites. Sign up at HightowerLowdown.org.