Penn alumnus Ronald Lauder at center of tax code debate

Amidst heated national debate about tax reform, one Penn graduate’s tax avoidance methods have been brought to light by The New York Times.

1965 Wharton graduate Ronald Lauder — son of Estée Lauder and heir to her multi-billion dollar cosmetic company — utilized a number of federal tax code loopholes to avoid paying tens of millions of dollars in taxes, according to a Nov. 26 article by David Kocieniewski.

Although The Times singled Lauder out for tax avoidance techniques — which are completely legal and distinct from tax evasions — the practice is quite common among America’s wealthiest individuals and corporations, Lauder Institute director and Management professor Mauro Guillén said.

A philanthropist and art collector whose estimated net worth is over $3.1 billion, Lauder serves on the Lauder Institute’s Board of Governors, which offers two graduate-level dual degree programs between Wharton and the School of Arts and Sciences. Ronald founded the Institute in 1983 with his brother Leonard Lauder.

As a member of the Board, Ronald “gives advice and perspective” and is “engaged with our university,” Guillén said.

Penn Law professor Michael Knoll explained that tax codes provide many kinds of incentives, some of which are frequently used by the wealthy.

These incentives are designed to encourage various activities such as investing in green energy and — in Lauder’s case — donating pieces of art to private foundations, like the Neue Galerie in New York, Knoll said.

“I think there’s no question that there are opportunities in the code for some very aggressive tax planning,” he added.

The Times cites Lauder’s “labyrinth of trusts, limited liability corporations and holding companies” as examples of his exploitation of tax breaks. Other examples include his use of Bermuda as the headquarters for his Central European cable news network, CME Enterprises.

“Lots of major international companies are going to have offices in Bermuda and other places where they’re not doing any real business,” Knoll said, adding that the harmfulness of the practice depends on whether U.S. income or foreign income is being shifted offshore.

Lauder’s lawyers have said his strategies are intended for tax purposes.

The article calls into question Lauder’s technique to avoid paying as much as $95 million in capital gains taxes by “shorting against the box,” which Knoll explained to be a very common financial technique at that time.

The technique involves short selling one’s securities, resulting in a situation where gains in a stock are equal to its losses.

In 1997, Congress passed a law that limited the length of such tax deferrals — making “shorting against the box” more difficult. This was in response to the Lauders’ “aggressive” use of the technique, according to The Times.

The Lauders had to disclose their use of the technique in Securities and Exchange Commission filings in 1995 because they began publicly offering the Lauder Company stock at that time.

According to Knoll, though the technique is common among companies, many were not obligated to disclose their use of the tactic because they were not public companies.

While Guillén believes the article is “making the larger point that public policy should be more egalitarian,” he was dismayed by the fact that the article focused solely on Lauder. “They mention that there are literally hundreds of billionaires who pay taxes and benefit from tax breaks — why exactly did they single him out for the purpose of the article?” Guillén said.

“A large number of people have left the country or gone to jail because of failure to comply with tax laws, which is not the case of Ron Lauder or anyone else mentioned in the article,” Guillén added, citing the cases of Enron and international commodities trader Marc Rich as examples of other notable tax controversies.

The issues raised in The Times piece are particularly timely given the present debate in Congress and among presidential candidates about simplifying tax codes and eliminating tax breaks for the nation’s wealthiest individuals.

“The question becomes one of tax policy,” Knoll said.

“Does one want to impose more restrictions? Some of those restrictions the Treasury can enact on its own, but others require congressional action.”

“There’s need for reform — the tough questions have been what sort of reform is that going to be,” he added.

This article has been updated to reflect the correct spelling of Mauro Guillén’s name.

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