Here’s a tale of two Stephen Rosses.
Real life Stephen Ross, the founder of Related Companies, a global company best known for developing the Time Warner Center in Manhattan and Hudson Yards in Manhattan was a huge winner between 2008-2017. He became the second-wealthiest real estate titan in America, almost doubling his net worth over those years, according to Forbes Magazine’s annual list, by adding $3 billion to his fortune. His assets included a penthouse apartment overlooking Central Park, and the Miami Dolphins football club.
Then there’s the other Stephen Ross, the big loser. That’s the one depicted on his tax returns. Though the developer brought in some $1.5 billion in income from 2008 to 2017, he reported even more — nearly $2 billion — in losses. And because he reported negative income, he didn’t pay a nickel in federal income taxes over those 10 years.
What is the secret to this dual identity? The upside-down tax world for the ultrawealthy.
ProPublica’s analysis of more than 15 years of secret tax data for thousands of the wealthiest Americans shows that Ross is one of a special breed.
He is part of a select group of ultrarich people who take advantage of businesses that allow them to deduct large tax amounts that then flow through to personal tax returns. Many of them work in oil and gas or commercial real estate. These industries have been granted unique advantages in the American tax system, which allows the ultrawealthy tax losses even on profitable businesses. Manhattan apartment towers with high values can be used as tax sinkholes. A hugely profitable natural-gas pipeline company can produce Texas-sized write-offs to its billionaire owner.
By being able to generate losses — effectively, by being the biggest losers — these Americans are the most effective income-tax avoiders among the ultrawealthy, ProPublica’s analysis of tax data found. While ProPublicaIt has been proven. some of the country’s absolute wealthiest people, including Jeff Bezos, Elon Musk and Michael Bloomberg,Sometimes, it is possible to avoid federal income tax altogether. This group does this year in and out.
Jay Paul, Silicon Valley real-estate mogul and investor Jay Paul, earned $354 million between 2007-2018. Forbes reports that he rose to the top of the multibillionaires list in those years. Paul paid taxes in just one year, despite losses of more than $700 million.
Then there’s Texas wildcatter Trevor Rees-Jones, who built Chief Oil & Gas into a major natural gas producer over the past two decades. Multibillionaire Rees-Jones reported $1.4 billion in total income between 2013 and 2018, but also suffered even greater losses. In four of those six years, he didn’t pay federal income taxes.
None of these people would discuss their tax situation or tax-avoidance strategies with any of the others mentioned in this article. ProPublica.
Ross spokesperson declined to answer questions. In a statement, he said, “Stephen Ross has always followed the tax law. His returns — which were illegally obtained and descriptions of which were released by ProPublica — are reflective of and in accordance with federal tax policy. It should alarm all Americans that their information will not be safe with the government, and that illegal media will disseminate them. We will have no further correspondence with you as we believe this is an illegal act.” (As ProPublica has explained(The organization believes its actions to be legal and protected by the Constitution.
Rees-Jones’ spokesperson declined to comment. Paul did not respond repeatedly to requests for comment.
| Name | Wealth | Longest Streak Payments No Fed Income Tax | Lowest Reported Income |
|---|---|---|---|
| Stephen Ross | $8.3B | 10 years | -$447M |
| Jay Paul | $3.6B | 11 years | -$250M |
| Charles Kushner | Not available | 5 years | -$226M |
| Donald Trump | $2.5B | 6 years | -$665M |
| Trevor Rees-Jones | $4.5B | 4 years | -$285M |
| Kelcy Warren | $3.5B | 2 years | -$84M |
These billionaires use legal methods to generate losses. Loopholes for fossil-fuel businesses date back practically to the income tax’s birth in the early 20th century. Because of widespread support for energy and housing investment, Congress has not been able to reform the carve-outs for oil and gas and real estate.
Some of America’s wealthiest citizens have been able long periods of time to avoid federal income taxes through the sale of commercial real estate or fossil fuel breaks. Sometimes they accumulate large losses and cannot use all of them in one year. They then accumulate a lot of deductions which they then use to reduce taxes in the future. Before ProPublica’s analysis of its trove of tax data, the extent of this type of avoidance among the nation’s wealthiest was not known.
Typical working Americans do not generate these kinds of business losses and thus can’t use them to offset income or reduce income tax.
There have been schemes to reduce income taxes for as long as there has been income taxes. There have also been counter-efforts by Congress to rein in the IRS. But ProPublica’s findings show these measures to prevent deduction abuses “aren’t doing what they are supposed to do,” said Daniel Shaviro, the Wayne Perry Professor of Taxation at New York University Law School. “The system isn’t working right.”
One Columbus Place, a 51-story apartment block in midtown Manhattan, has been a great investment for decades. Located a block off the southwest corner of Central Park, it’s adjacent to the Columbus Circle mall for shopping at Coach or Swarovski or for dining at the Michelin three-star restaurant Per Se.
Its 729 rental units generate millions of dollars annually in rental income for its owners, Stephen Ross among them. Its value has risen from $250 million in 2000 to nearly $550 million in 2016. Mortgage records show this.
This prime piece of New York realty was a tax-loser for more than a decade. Ross has lost $32 Million in taxes since he purchased a share in the property, according to tax records.
Tax losses from properties owned through a host of such partnerships are central to Ross’ ability, and that of other real estate moguls, to continue to grow their wealth while reporting negative income year after year to the IRS.
Their down-is-up, up-is-down tax life comes in large part from provisions in the code that amplify developers’ ability to exploit write-offs from what’s known as depreciation, or the presumed decline in the value of assets over time. Some of these rules apply only to the real estate business, letting developers take outsize deductions today to reduce their taxable income while delaying their tax bill for decades — and potentially forever.
Depreciation is a well-known concept. The majority of businesses recognize that depreciation is a write-off of assets such as machinery. Over time, these assets lose their value; eventually, a machine breaks down or becomes obsolete.
A common reason for depreciation in real estate is that older buildings tend to have lower rents than those in newer buildings. This eventually makes it more profitable for an owner to tear down a building and build a new one. The tax code allows investors to deduct $100,000,000 over the course of a number of years if a building originally cost $100 million.
Real estate properties are not worth less, but they can rise in value over time. This is what One Columbus Place has done to Ross and his business partners. (That value includes the cost of the land, which doesn’t generate depreciation write-offs.)
These depreciation write-offs, along with deductions for interest and other expenses, have helped many of the nation’s wealthiest real estate developers largely avoid income taxes in recent years, even as their empires have grown more valuable.
Former President Donald Trump, whom Ross hosted a $100,000-a-plate fundraiser in 2019, is perhaps the best-known example of commercial real estate’s tax beneficiaries. As The New York Times reported last yearTrump paid $750 federal income taxes in 2016/2017, and nothing in 10 years between 2001-15. According to ProPublica’s data, Trump took in $2.3 billion from 2008 to 2017, but his massive losses were more than enough to wipe that out and keep his overall income below zero every year. Trump’s 2008 negative income was $650 million. This was one of the largest single-year losses to the tax trove. ProPublica.
New York-area real estate developer Charles Kushner, the father of Trump’s son-in-law, Jared Kushner, also avoided federal income taxes for long stretches of time. Charles Kushner reported earning $330 million between 2008-2018, but he only paid income taxes twice ($1.8 million) due to deductions. After being convicted of a crime, Kushner was sent to prison in 2005. tax fraud and other charges. Trump pardoned Trump last January.
Trump’s spokesperson did not respond to questions regarding his taxes. (The Trump Organization’s chief legal officer told The New York Times last year that Trump “has paid tens of millions of dollars in personal taxes to the federal government” over the past decade, an apparent reference to taxes other than income tax.) Kushner representatives did not respond to repeated requests to comment.
Stephen Ross is a rare individual, even in comparison to other real estate developers. He didn’t start out in commercial real estate. He began his career in tax law.
Ross, 81, was born in Detroit to an inventor’s son. Ross, who received a University of Michigan Business degree, decided to study law to avoid the Vietnam war draft. He then extended his education, earning a master’s degree in tax law at New York University.
Ross saw the tax code as a puzzle that he had to solve. “Most people, when you say you’re a tax lawyer, they think you’re filling out forms for the IRS,” Ross once told a group of NYU students. “But I look at it as probably the most creative aspect of law because you’re given a set of facts and you’re saying, ‘How do you really reduce or eliminate the tax consequences from those facts?’”
After graduating, Ross went to work, first at the accounting firm Coopers & Lybrand, and later at a Wall Street investment bank, which fired him. Ross then started his own business, selling tax shelters, using a $10,000 loan from a mother.
In its early years, Ross’ Related Companies solicited investments in affordable-housing projects from affluent professionals like doctors and dentists with the promise that the deals would generate deductions they could use on their taxes to offset the income from their day jobs.
Such shelters were big business by Wall Street’s mid-1970s. These losses were often used to subsidize economically risky investments in a wide range of industries. It wasn’t uncommon for firms to offer investors the chance to get $2 or $3 worth of tax savings for every $1 they put in.
As the decade progressed, regulators became more aware. The IRS established programs to examine loss-making businesses. Ross and his real estate partnerships were audited according to a company prospectusThe IRS found that the firm was too aggressive in claiming write-offs.
The lawmakers started to crack down. Congress restricted the tax losses that investors could claim if they borrowed money to invest into industries like oil and natural gas or motion pictures in 1976. But the change didn’t apply to the real estate industry, which successfully argued that without such tax shelters, investors wouldn’t back new low-income housing.
1986 was a significant tax overhaul that saw Congress seek to rein in tax-sitting organizations. The changes were made to prohibit affluent individuals from using the types of investments Ross was offering. The rules reduced who could offset income from business losses to only those who were involved in the business’s management, such as those who worked for a certain number hours; passive investors were out.
Ross and others in this industry went through many difficult years. But, the realty lobby mounted a pressure campaign that resulted in 1993 when Congress allowed realty professionals to use losses from rental properties to wipe out taxable earnings like wages.
After being pounded by the real estate crashIn the early 1990s, Related Companies reorganized with cash from new investors. Related utilized federal housing tax credits and local tax breaks as well tax-exempt public funding offered by New York City. This was to help develop affordable housing units. The firm expanded its reach into traditional office and luxury apartment deals.
Ross was a prominent developer in New York, and the $1.7 billion Time Warner Center project catapulted him into the upper echelon. Ross was the most expensive realty project in New York’s history. The two shining glass towers located beside Columbus Circle helped to elevate Ross to the Forbes 400 in 2006.
Ross was a multimillionaire, but he rarely owed federal income tax. He paid 12 federal income tax payments in the 22 years 1996-2017. After reporting just over $100,000,000 in income, his largest tax bill was $12.6 million in 2006.
Ross has used a combination business losses, tax credits, and other deductions over the years to avoid such bills. Ross earned $306 million in 2016, including $219 millions in capital gains, $51million in interest income, and $5 million in wages in his role at Related Companies. However, he was able offset this income entirely by losses. He also claimed $271,000,000 in losses as a result of his business activities and by tapping into his losses reserve from previous years.
ProPublica’s records don’t offer a complete picture of the sources of each taxpayer’s losses, but they do provide some insight. Ross lost $31 million to a partnership associated the Miami Dolphins in that year. As ProPublica previously reportedProfessional sports teams can provide tax losses for wealthy owners. Ross also suffered a loss of $16.9million from RSE Ventures his investment company. This company owned stakes in restaurants and a chickpea pasta manufacturer.
After absorbing all of his losses his records show that he would owe a small amount in alternative minimum tax. This is an option that ensures that taxpayers with large incomes and significant deductions pay at the least some taxes. But Ross was able to eliminate that bill, too, by using tax credits, which he’d also built up a store of over the years. He was left with a federal income tax bill that was zero dollars for the year.
Ross began to use charitable donations as a method of reducing taxes in the early 2000s when he had substantial taxable income. Ross has made multimillion-dollar donations to his alma mater, University of Michigan. These contributions have earned him the naming rights for its business school as well as some of its sports facilities. Ross and his business partners donated a portion of a stake in a property in southern California to the school in 2003. In return, they received a $33 million tax deduction. It received $1.9million for the stake when it was sold by the university two years later.
The IRS denied the claimed tax deduction in 2008. In court, the agency argued that the transaction was “a sham for tax purposes” and that Ross and his partners had grossly overvalued the gift. After almost a decade of legal wrangling, a federal judge sided with the IRS, disallowing the deduction, including Ross’ personal share of $5.4 million. The judge also upheld the penalties of millions of dollars that the IRS imposed upon the partnership for engaging the maneuver. Both Ross’s tax attorney as well as the accountant who advised Ross on it pleaded guilty tax evasion in a unrelated case. (In a 2017 article on the case, a spokesperson said Ross “was surprised and extremely disappointed by the actions of the two individuals, who have pled guilty, and has severed all dealings with them.”)
Ross’ core business, real estate, remains almost unmatched as a way to avoid taxes.
For most investors, losses are limited by how much money they stand to lose if the enterprise goes belly up, or how much money they have “at risk.” But not real estate investors. Even if they borrowed the money to purchase the property, they can still deduct depreciation from their income. If they buy a building worth $50 million, putting $10 million down and borrowing the rest, they can still deduct $50 million from their personal taxes over time, even though they’ve put much less of their own money into the project.
Savings related to depreciation and similar write-offs are supposed to be temporary; when you sell the assets, you owe taxes not only on your profits from the sale, but on whatever depreciation you’ve taken on the property as well. In tax lingo, this is known as “depreciation recapture.”
Two big gifts in the tax code can work together to allow real estate moguls push those taxes off for good.
First, commercial realty investors can avoid taxes by rolling their sale proceeds into similar investments within six month. This provision of the tax code, called the “like-kind exchange,” goes back to the years following the end of World War I and used to apply to other kinds of property owners. Now it’s available only to real estate investors, a provision that’s expected to cost the U.S. Treasury $40 billion in revenueOver the next ten years. Real estate moguls can “swap till they drop,” as the industry saying has it.
Then, there are even more tax benefits that can be used when they do meet their demise — at least to benefit their heirs. For starters, all the gains in the value of the moguls’ properties are wiped out for tax purposes (a process known by the wonky phrase “step-up in basis”). The tax record is similarly clean with respect to depreciation writeoffs. The heirs don’t have to pay depreciation recapture taxes.
Real estate heirs then get another quirky benefit: They can depreciate the same buildings all over again as if they’d just bought them, using the piggy bank of write-offs to shield their own income from taxes.
Ross had a stash of tax losses after he filed his 2017 taxes ProPublicaEstimates exceed $440 million. It was entirely possible that he’d never pay federal income taxes again.
If you’re looking to get richer while telling the tax man you’re getting poorer, it’s hard to beat real estate development. However, the oil and gas industry is fierce competition.
The energy sector, considered the lifeblood of the economy, has been long given tax breaks. The 1910s provisions allow drillers to immediately write-off large portions of their investments, effectively subsidizing oil exploration.
Depletion is the special gift of U.S. taxpayers for oil drillers. The idea is grounded in common sense: As oil (or gas or coal) is taken out of the ground, there’s less left to collect later. That bit-by-bit depletion — analogous to depreciation — becomes a tax write-off. Oil investors can deduct a certain percentage of the revenue each year from the property.
But investors can keep on deducting that set amount indefinitely, even after they’ve recouped their investment, a benefit that had its critics almost from the beginning. The idea was “based on no sound economic principle,” grousedThe Joint Committee on Taxation in 1926. The depletion provision was only meaningfully reduced in the 1970s, and that was mainly for the largest oil producers. Congress kept it in place for independent operators, such as wildcatters. Wildcatters are long revered as a cross between cowboys & plucky entrepreneurs.
These independent operators are today a majority of the billionaires. They get the best both of them: legacy tax cuts from days when oil exploration was a failure and current technology that makes it less speculative.
These tax breaks are no longer intended to encourage drilling, according Joseph Aldy of Harvard University’s John F. Kennedy School of Government. Now “we’re just giving money to rich people.”
Billionaires in this industry receive enough deductions to dwarf even huge incomes. The 18 billionaires ProPublica previously identified as having received COVID-19 stimulus checks last year — they were eligible because their huge tax write-offs resulted in reported incomes that fell below the middle-class cutoffs for receiving payments — six made their fortunes in the oil and gas industry.
Trevor Rees Jones was one of them, and he rode the boom in shale oil fracking to build. a fortune of over $4 billionWhile reducing his federal income taxes to zero.
His tax returns reveal a huge income of over a billion dollars between 2013 and 2018, with even greater deductions. In 2013, for instance, Rees-Jones’ company, Chief Oil & Gas, made a major move, acquiring 40 natural gas wells in Pennsylvania’s Marcellus Shale for $500 million. Hundreds of millions in write-offs for that acquisition flowed to Rees-Jones’ taxes.
Rees-Jones’ spokesperson declined to comment.
Another Texan, Kelcy Warren of the pipeline giant Energy Transfer, shows how the industry’s tax breaks, when blended with others that are more broadly available, can turn a wildly profitable company into a tax write-off for its owner, even as he reaps billions of dollars in income.
Warren, who cofounded Energy Transfer in 1990s, is worth approximately $3.5 billionAccording to Forbes,. He created the company with a plan for aggressive expansion through acquisitions and building pipelines. “You must grow until you die,” he has said.
Warren’s aggressive strategy has allowed him to amass billions of dollars in income, only a small portion of which is taxed. (Representatives of Warren did not respond on request for comment.
Energy Transfer is publicly traded, but it’s structured as a special kind of partnership, called a master limited partnership. This form is only available to public companies in oil & gas and a few other industries.
Partnerships are different from corporations. A corporation is a separate entity than its investors. The corporation pays tax on its profits, while the investors pay taxes for the dividends they receive. By contrast, partnerships, including master limited partnerships, don’t generally pay taxes. Only the investors (the partners) pay taxes on their share of the partnership’s profits.
But when Energy Transfer sends regular cash distributions to its partners, these payments are, in most cases, considered a “return of capital” rather than a profit. They are exempt from tax.
Warren’s stake in Energy Transfer — he is the primary general partner and holds hundreds of millions of units of the publicly traded limited partnership — has long entitled him to receive hundreds of millions of dollars in distributions every year, which have helped fund an outsize lifestyle. A 23,000-square-foot Dallas home with a 200-seat theatre, a bowling alley, and a baseball diamond, Warren also owns a fleet of private airplanes, an entire Honduran islands, and an 11,000-acre ranch in Austin that is home to giraffes.
Warren was entitled, from 2010 to 2018, to more than $1.5 trillion in cash distributions. ProPublica’s analysis of company filings. Warren also revealed an additional $500 million of income from other sources in his tax returns.
But in six of the nine years, he told the IRS he’d lost more money than he’d made. In four of these, he did not pay anything.
Warren was able eliminate his income tax liabilities due to Energy Transfer providing him with large deductions not only from tax breaks for oil and gas but also from the way his company can account for depreciation.
Energy Transfer constructs a new pipeline. It becomes an asset. This asset will eventually degrade over time and therefore generates depreciation deductions. All of this is standard. What’s unusual is that the tax code has long allowed Energy Transfer and its peers to treat the pipeline as if it lost more than half its value immediately. This “bonus depreciation” can wipe out billions in profits; indeed, in 2018, Energy Transfer reported $3.4 billion in profits in its annual public filing while simultaneously delivering big tax losses to its partners.
Both political parties have supported bonus appreciation on the grounds that the tax break, which is available in many industries, increases spending on new equipment and boosts the economy. Trump and Republicans took the idea to extreme in 2017, making two key changes which benefited aggressive companies such as Energy Transfer.
Under the new tax law, the “bonus” rose from 50% to 100%. This means that a shiny new pipeline is no longer worth tax purposes once it’s completed. The new law also included an additional perk: it allowed for the purchase of used equipment. This means that when a big company like Energy Transfer buys the assets of a smaller one, the value of all the smaller company’s equipment can be written off immediately.
Warren’s tax data reflects the benefits of this to individual owners. He started 2018 with an $82million loss portfolio and by the end, it had risen to more than $130million. ProPublica estimates.
Warren is a major Republican donor. He has given $18 million since 2015 to both federal and state Republicans. Most of that money went to Trump, who was once an Energy Transfer Investor.
Warren’s closeness to the Trump administration seemed to pay off. Days after taking office in 2017, Trump ordered the Army to reconsider a decision to block Energy Transfer’s Dakota Access Pipeline, whose planned path under a reservoir and near the Standing Rock Sioux Reservation had sparked strong opposition. The pipeline was approved two weeks later. Energy Transfer enjoyed record profits in the years following.
The company’s biggest quarter ever came last year. Why? A $2.4 Billion windfall from the worst storm to hit Texas in decades. Hundreds of Texans died. Utilities scrambled as natural gas prices rose. San Antonio’s largest utility later accused Energy Transfer of “egregious” price gougingThey sued to recover some payments. The city’s mayor called Energy Transfer’s actions “the most massive wealth transfer in Texas history.” No company profited more, reported Bloomberg. (A spokesperson for Energy Transfer responded that the company had merely sold gas “at prevailing market prices.”)
Warren was proud of this win. who once said, “The most wealth I’ve ever made is during the dark times.”
It is unknown how many ultra-wealthy can completely eliminate their income tax bills by using business losses. The IRS publishes many reports that analyze the characteristics of taxpayers at different income levels. However, it usually starts with those who have $0 or more in income and excludes anyone with negative income.
But while the scope of the problem isn’t known, policymakers are well aware of techniques taxpayers use to game the system. Congress is constantly looking to tighten tax loopholes, especially when it has ambitious spending programs it needs to fund. President Joe Biden, for his part, presented plans this spring that would have eliminated a variety oil and gas tax cuts, including percentage depletion. Master limited partnerships, which Energy Transfer uses as a corporate form, were being eliminated. The special like-kind swap carve-out in real estate was to be eliminated. The plans would have eliminated the step-up to basis, which is a vital provision that allows titans in both industries huge deductions without worrying about an income tax bill in the future.
As in the past, lobbyists are still needed to promote these industries. ralliedTo preserveTheir privileged statusThese proposals were withdrawn.
An original reform proposal survived. Recent versions of Biden’s Build Back Better plan have contained a provisionThis would stop wealthy taxpayers using large losses from their businesses to wipe away future income.
Even if the proposal is passed, older losses that were not covered by the legislation will still be entitled to a privileged status and would be exempt from the new limitations. It appears that the biggest losers will once more emerge unscathed.
