Tom Steyer, the billionaire environmental activist who is spending $100 million to help elect Democrats this fall, is rallying support for energy taxes that could impact everyday Americans. But when he ran his own hedge fund, Mr. Steyer sought to help wealthy clients legally avoid paying taxes, confidential investor memos show.
Mr. Steyer’s strategy included establishing funds in tax havens like the Cayman Islands and Mauritius, and are reminiscent of the tactics used by former Republican presidential nominee Mitt Romney during his career at Bain Capital — which was repeatedly savaged by Democrats during the 2012 election.
For instance, Mr. Steyer boasted to investors such as major universities that his hedge fund, Farallon Capital Management LLC, had a “desire not to earn income which would be taxable to our tax-exempt investors,” one internal memo reviewed by The Washington Times showed.
Mr. Steyer also helped his firm’s wealthy clientele avoid the highest of U.S. taxes and penalties by establishing arcane tax shelters such as blocker corporations — tactics most Americans have never heard of or used.
The tax avoidance memos could complicate Democrats’ efforts to run populist, middle-class targeted campaigns this fall to retain control of the Senate by reminding voters that one of their biggest political benefactors is a classic “one percenter” who made his reported $1.6 billion fortune by helping others avoid paying taxes.
Conservatives already are sharpening their attack lines.
“To me, the most astonishing aspect of this is the Democrats’ reliance on this guy. While Harry Reid is on the floor of the Senate lambasting out-of-state billionaires for funding political activities, he has no problem using their money when it comes to his purposes. There’s a totally absurd disconnect,” said Phil Kerpen, president of American Commitment, a free market public policy group, who also has written on Mr. Steyer’s business dealings. “They’re criticizing the use of dark money, but Steyer’s money is about as dark as it comes.”
Now a political activist who left his hedge fund in 2012, Mr. Steyer is pushing for a variety of new taxes on the energy sector. In California, Mr. Steyer supports an oil extraction tax, and he is funding politicians who support taxing carbon, including Sen. Mark Udall, Colorado Democrat.
Mr. Steyer also has been a vocal advocate for cap-and-trade measures and has helped fund a defense of California’s climate change law. Industry advocates say such measures necessarily raise energy costs, which are passed on to consumers.
While at Farallon, however, Mr. Steyer used loopholes in U.S. tax regulations to produce maximum returns for his elite clientele. That included using tax havens in the Cayman Islands, the British Virgin Islands and Mauritius, “where there are no regulations at all, no call for transparency, and have little to no income tax rates,” said Matthew Gardner, executive director of the Institute on Taxation and Economic Policy in Washington.
Mr. Steyer, through his political action committee, declined to comment.
A spokesman from Farallon Capital also declined a request for comment from The Times. Farallon was notified of the content of the investor documents obtained by the Washington Times and didn’t object to it as inauthentic or fraudulent.
The billionaire has said little publicly about his hedge fund days, even after newspapers such as The New York Times questioned why he once was heavily invested in fossil fuels, an industry that conflicts with his environmental positions.
One of his few rebuttals to the criticisms, however, came in the form of a blog post late last month in which Mr. Steyer claimed to have undergone a political conversion of self-described biblical proportions when he stepped down from Farallon in 2012 to launch his environmental movement.
“My version of a Paul on the Road to Damascus conversion on the issue was the result of continuing to learn more about the devastating impacts of climate change and as the scientific evidence became clearer, I realized I could no longer remain at my company — not when it meant supporting investments in the fossil fuel industry,” Mr. Steyer wrote June 25.
“I left the firm and committed myself to addressing global climate change because — based on the scientific evidence — I could not reconcile my personal values with managing a fund that by mandate is invested in all sectors of the global economy, including fossil fuels,” Mr. Steyer wrote in the July 14 article.
He added: “To prevent any possible conflict of interest, I no longer own any stake in Farallon or have any influence over its actions.”
Mr. Steyer didn’t address any tax issues in the op-ed. He also has declined to say whether his former firm is managing any of his personal money.
Romney and offshore politics
The mystery, intrigue and potential conflicts for Mr. Steyer’s image as a populist environmental crusader could become grist for Republicans hoping to blunt the impact of his spending during the campaign season.
When Mr. Romney was running for president two years ago, Mr. Reid, the Senate majority leader, created a firestorm in the national media by blasting Mr. Romney on the chamber floor for not having paid U.S. taxes in a decade.
Mr. Reid never disclosed where he obtained that information and told reporters that they were the ones who should check out the claim. One of President Obama’s attack ads at the time, however, provided a world map pointing to the tax havens in Bermuda, Luxembourg and the Cayman Islands, where Mr. Romney owned assets.
Mr. Obama’s online ad questioned: “Has Mitt Romney avoided U.S. taxes by investing millions in tax havens? We’ll never know, because he won’t release his records.”
Mr. Steyer, through his representatives, also declined to release his tax records to The Times.
Farallon’s empire while Mr. Steyer was at the helm consisted of almost 200 corporations, partnerships and LLCs set up in different locations, including the Cayman Islands, Singapore, and Mauritius. All are known tax havens. In the Cayman Islands, for instance, confidentiality law states that a person can be imprisoned up to four years just for inquiring about a fund’s underlying assets.
In 2000, Mr. Steyer’s hedge fund established Farallon Capital Offshore Investors Inc. in the British Virgin Islands. One of the aims of the fund was to attract investment from deep-pocketed institutions, such as university endowments and pension plans. Although these are generally tax-exempt, they are liable for taxes on “unrelated business taxable income” if they put money into funds that use debt financing to make investments, which is commonly referred to in the industry as leverage.
Farallon Capital Offshore Investors was used to help investors potentially reap the gains of debt-financed gambles while avoiding the taxes. In the industry, it’s known as a “blocker corporation.” The fund, in essence, became a conduit for institutional investors, as well as foreign investors, looking to avoid U.S. taxes.
Memos tout lack of taxes
In a memo to investors, Mr. Steyer explained how the newly established offshore fund would allow its tax-exempt limited partners to make leveraged investments while avoiding taxes.
“Since inception, [Farallon’s flagship fund for tax-exempt organizations] generally has not utilized overall portfolio leverage in its investment program. This practice has followed from our desire not to earn income, which would be taxable to our tax-exempt investors as Unrelated Business Taxable Income (“UBTI”),” he wrote.
“We would now like to give [tax-exempt institutional investors] the benefits of leverage, without generating UBTI. This can be accomplished indirectly through an investment by [Farallon’s flagship fund for tax-exempt organizations] of cash and/or a portion of its assets into FCOI, a British Virgin Islands corporation.”
The October 2000 memo was obtained and made public by Yale University students who were protesting the fact that Farallon was managing part of their school’s endowment.
The group’s website, called Unfarallon where the memo was posted, subsequently has been removed from the Internet.
“Many universities hold billions of dollars in hedge funds and private equity investments that have little regulation, transparency, or accountability,” wrote Amanda Ciafone, one of the group’s organizers. “In one of the largest of these funds run by Farallon Capital Management, researchers uncovered the economic, social, political, and environmental destructiveness of their university’s capital.”
In 2005, Farallon opened a fund for primarily foreign investors called FOIC II Holdings — this one based in the Cayman Islands, and called for a minimum $5 million investment from clients. By basing the fund in the Cayman Islands, foreign investors could avoid the vast majority of U.S. taxes and complexities of the tax code.
Nearly a quarter of the pages in the 87-page investment document have some mention of tax strategy, regulations or risks for potential investors and for the fund itself.
The fund advertised in its prospectus to the ultra-elite who were able to afford buy-in: “Based on the Partnership’s organizational structure [it] generally should not be subject to U.S. federal income tax gains from trading in securities and commodities. In addition, interest from U.S. sources earned on bank deposits and ‘portfolio interest’ as defined under the U.S. IRS code of 1986, as amended, are not subject to withholding for U.S. federal income tax.”
It went on to mention, just as a reminder to potential clients: “There are no income, corporation, capital gains or other taxes in effect in the Cayman Islands.”
Structuring a hedge fund to include many foreign feeder funds — in tax-friendly and regulation-light countries — is a fairly common way to help investors avoid U.S. levies, said David Miller, a tax lawyer and partner at Cadwalader, Wickersham & Taft LLP in New York.
“Foreign feeder funds are often used to reduce tax liability for specific classes of investors, such as U.S. taxable investors, U.S. tax-exempt investors, and foreign investors,” Mr. Miller wrote in a white paper evaluating the structure of hedge funds. “Increasingly, U.S. taxable investors may find their effective tax rate minimized by investing through a foreign feeder fund.”
Congress has left loopholes in U.S. tax code that allow this tax avoidance, which forces ordinary Americans to make up the difference, according to Citizens for Tax Justice, a nonprofit think tank in Washington.
Every dollar in taxes that corporations avoid by using tax havens must be balanced by higher taxes on individuals, cuts to public investments and public services, or increased federal debt, the group says.
“If small business owners were to pick up the full tab for offshore tax avoidance by multinationals, they would each have had to pay an estimated $3,206 in additional taxes last year,” according to a report by the group, titled “Offshore Shell Games 2014,” released in June.
Most offshore corporate subsidiaries are “often shell companies with few, if any employees, and which engage in little to no real business activity,” the group wrote.
Obama, taxation and Steyer
In a speech shortly after being elected president, Mr. Obama said most Americans paid taxes as “an obligation of citizenship,” but some businesses and rich people were “shirking” their duties, “aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals.”
The president and Democrats in Congress called for a revision of tax law. The administration, at the time, said it could raise $86.5 billion by ending a practice in which companies create foreign subsidiaries to shift income in ways that avoid taxes. Separate steps to crack down on wealthy individuals would raise nearly $9 billion.
The U.S. has “a tax code full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share. It’s a tax code that makes it all too easy for a number — a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all,” Mr. Obama said at the time.
Such tax reform has not advanced, and the president — who is able to single-handedly take a swipe at the so-called carried interest loophole by asking the IRS for a new ruling on the matter — has chosen, for the time being, to remain silent. He has, however, invited Mr. Steyer, as recently as June 25, to visit the White House to talk about environmental initiatives.
Republicans on Capitol Hill have taken notice.
A top Senate Republican aide criticized Mr. Steyer’s access to the White House and blasted Mr. Reid’s chastising of conservative donors, especially the Koch brothers, on their political influence while leaving Mr. Steyer out of the equation.
“Sen. Reid will attack [Mr. Steyer‘s] billionaire’s access to politicians, right?” Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell, Kentucky Republican, posted on Twitter. Mr. Reid “is totally cool with this,” Mr. Stewart added smugly.