Rauner hits Pritzker on offshore assets but could have some of his own

2017-12-06 | Chicago Tribune

Dec. 06--Republican Gov. Bruce Rauner took aim Tuesday at a potential Democratic rival in next year's general election, accusing businessman J.B. Pritzker of parking his inherited billions offshore to avoid paying taxes -- while admitting that some of his own fortune could be socked away there as well.

The allegation raised the specter of a governor campaign centered on a theme in which two extremely wealthy candidates debate who's a better businessman, whose wealth is more legitimate and who was the more responsible citizen in paying taxes -- all against a backdrop of growing economic inequity and serious questions about Illinois' financial future.

Also joining the fray are less well-off candidates in the race for governor. That includes Republican state Rep. Jeanne Ives, who's joked that winning the election will require her to beat a millionaire and then a billionaire, and Democratic state Sen. Daniel Biss, whose campaign on Tuesday labeled Rauner and Pritzker "two sides of the same shiny gold coin."

When Rauner first ran for governor, he was considered the wealthiest person to seek elected office in state history, with a net worth he'd pegged at more than $500 million. He reported $188 million in state taxable income in 2015, and $91 million in 2016.

That title now falls to Pritzker, a Hyatt hotel heir and entrepreneur worth an estimated $3.4 billion, according to Forbes magazine. But income tax return cover sheets Pritzker's campaign released last week show a comparatively small income of $15 million in 2016, and even less in the prior two years.

Like Rauner, Pritzker did not release tax return schedules with more specific information, leaving unanswered questions about whether he's employing the much-maligned but often-used strategy of avoiding taxes by transferring assets overseas.

Until Tuesday, the trading of jabs largely had been confined to competing campaign press releases. Rauner, however, has had a difficult week, saying Monday that he's "not in charge" of Illinois despite being governor for nearly three years, and fending off attacks from Ives, his new Republican primary challenger. Faced with reporters' questions Tuesday, Rauner lobbed his charges against Pritzker, providing no documentation to back them up.

"The candidate Pritzker inherited over $3 billion and he and his family has chosen, chosen on a massive scale, to hide hundreds and hundreds of millions of dollars of their money offshore in accounts outside the United States," Rauner said when asked if he has any of his own money stashed in offshore tax havens.

"I mean, you have to be one of the worst investors on the planet to only generate $16 million of income on $3 billion of assets," Rauner continued, a reference to Pritzker's 2016 tax return. "How do you do that? By hiding from taxes and tax avoidance. That's how you do that."

Pritzker's campaign declined to explain why Pritzker's taxable income was so low compared with his assets, or to provide details about how the candidate earns his income. Campaign spokeswoman Galia Slayen said Pritzker's offshore investments are in trusts the family established generations ago, and that he'd "directed that any disbursements from these trusts to be given to charity." She provided no documentation to assess those claims.

"Bruce Rauner's accusations are false, and he is lying about J.B. Pritzker," Slayen said in an email.

Rauner had his own troubles explaining his tax bill in 2014, after his returns revealed that most of the millions he'd made in the years leading up to his candidacy had been taxed at 15 percent, less than half the top federal rate for the wealthy.

A Tribune analysis of the limited records Rauner released found he'd employed tax-reduction strategies available to a select few, such as reporting a major portion of his earnings as capital gains, which are taxed at the 15 percent rate, while claiming losses in the regular business income category, which is subject to a top tax rate of 35 percent.

Included in Rauner's capital gains income was money from what's known as management fee waivers, a tax-avoidance strategy employed by private equity firms. Rauner formerly chaired private equity firm GTCR. Fees for managing an investment fund typically would be taxed as ordinary income. But management-fee waivers are used as an alternative, accepting interest on a fund's profits while the income is taxed at a lower capital gain rate.

Earlier this year, Bloomberg News reported that the IRS has begun looking into the tax-avoidance strategy and specific private investment funds that used it. The IRS also has proposed regulations to curb the strategy in investment funds lacking "significant entrepreneurial risk." The issue could be part of GOP-led efforts to change the federal tax code.

Rauner's economic disclosure forms when he first ran for governor revealed that he was an investor in several of GTCR's investment pools registered in the Cayman Islands. The records did not reveal the value of Rauner's stake.

Asked Tuesday about his current holdings in offshore investments, Rauner dismissed the question as "spin."

"I have investments that I do not control, for example investments in banks and insurance companies, et cetera. They manage some money," Rauner said. "And what's got reported, which is true, some of them, for their accounts, where I'm a tiny piece, I have no voice, I have no control of the decision-making, they have an investment in some operation in the Bahamas or somewhere. Tiny for me, tiny for them."

When he took office, Rauner transitioned his assets to what he referred to as a "blind trust," but what's really a structure known as a power of attorney that granted management authority over much of his wealth to a New York investment adviser.

If Rauner had set up an actual blind trust, he would have had to transfer to it ownership of most of his wealth. He still would have been the beneficiary of the trust but would have relinquished control over his assets to an independent trustee pledged to keep the governor in the dark about transactions.

Rauner aides said at the time that the alternative power of attorney was chosen because he could not establish a traditional blind trust and still comply with the state's annual disclosure of economic interests requirement.

Who has paid more in taxes in recent years? Rauner reported earning $81 million through capital gains on his 2016 federal taxes, the primary source of the $90 million he reported in income. He and wife Diana paid $19.5 million in federal income taxes and $3.2 million in state income taxes that year.

Pritzker, by contrast, reported earning $14.95 million in 2016, and paying $4.1 million in federal taxes and $456,000 in Illinois income taxes. Much of Pritzker's income over the past three years has come from partnerships and trusts, which totaled $13.2 million last year compared with $5.9 million the year before.

Rauner's latest economic disclosure statement listed 111 entities doing business in Illinois from which he received at least $1,200 in dividends or held a $5,000 ownership. He listed an additional 57 sources of assets from capital gains of $5,000 or more, and 66 businesses operating in the state in which he derived at least $1,200 in income.

In his statement of economic interests, Pritzker lists more than 360 entities doing business in Illinois from which he received in excess of $1,200 in dividends or held an ownership stake of $5,000 or more through stock and partnerships. Pritzker also described more than 110 sources of assets from which he claimed capital gains of at least $5,000, and 180 business entities operating in the state from which he derived at least $1,200 in income.

As expected, the extensive listing includes stock in Hyatt Hotels Corp., which was founded by his uncle and managed by his late father. It also includes partnership interests of an unstated amount in two obvious off-shore investments: Front Range Fund 1 Offshore LP and Valiant Capital Partners Offshore Ltd., each located in the Cayman Islands.

Pritzker also listed an interest in Merrick Ventures, a private equity firm whose CEO and chairman is Michael Ferro, who also is chairman of Tronc, the parent company of the Chicago Tribune.

kgeiger@chicagotribune.com

rap@aol.com

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