Barack Obama’s other billionaire: How George Kaiser turned Oklahoma into his personal tax haven
It's unlikely that President Barack Obama will be naming any tax proposals after George B. Kaiser. An investment by the Tulsa billionaire's family foundation in Solyndra, whose bankruptcy may leave taxpayers on the hook for $535 million in federal loans, has raised speculation that the administration acted in part to aid a financial supporter. But the impact on taxpayers of Kaiser's career goes far beyond the $535 million loss. Kaiser has built his fortune in part through shrewdly playing the Internal Revenue Code. In one six year period, during which he increased his net worth enough to land him on the Forbes list of the 400 wealthiest Americans, Kaiser reported taxable income to the Internal Revenue Service just once, totaling $11,699–equivalent to a full-time hourly wage of $5.62.
Solyndra's bankruptcy has led to multiple investigations by the Federal Bureau of Investigation, Treasury's Inspector General and a House subcommittee. Kaiser's role as a fundraiser for Obama's 2008 campaign–the Tulsa World reported that, in March 2007, the oilman hosted an event at his home for the candidate, where Obama raised about $250,000–has led to speculation that the administration intervened on behalf of the ill-fated Solyndra's loan application to benefit a campaign supporter.
In addition to Solyndra, the George Kaiser Family Foundation has investments worth hundreds of millions in energy firms, most of them in the oil and gas industry. The Washington Post reported that, in 2005, Senate investigators focused on the tax implications of the foundation, whose assets at the end of 2009 had grown to nearly $4 billion. GKFF has averaged more than $194 million a year in income from those assets over the last five years and issued grants that averaged about $53 million a year–or just 1.7 percent of its net assets.
That wasn't the first time Kaiser caught the attention of government tax officials. In 1997, the Internal Revenue Service sent Kaiser and his companies' tax bills for more than $72 million in back taxes, interest and penalties, covering individual and corporate returns filed from 1986 to 1992. Kaiser filed returns showing his personal income averaging negative $860,000 between 1986 and 1991; his holding company, GBK Corp., and its subsidiaries reported an aggregate loss from 1989 to 1992 of $507,000–some years it made money and paid taxes, others it claimed losses and paid none.
Those figures come from a chapter in a 2001 book, The Cheating of America, written by Charles Lewis, the Center for Public Integrity and this author. Cheating investigated how wealthy individuals and powerful corporations avoid taxes. Tax avoidance is legal–and the strategies Kaiser used to minimize his own and his company's tax burden were certainly legal–and in the end, the Internal Revenue Service settled both cases for pennies on the dollar. How he did it had as much to do with the economics of the domestic and international energy markets and those of the state of Oklahoma as it did with the Internal Revenue Code.
Kaiser's first fortune came from domestic energy production. When he took over his father's business, Kaiser-Francis Oil, in 1969, it had all of ten employees. The 1970s energy shocks that resulted in lines at gas stations and natural gas shortages proved to be a boon for the domestic oil and gas industry, and Kaiser built his company up into Oklahoma's largest privately-held producer of natural gas. At the peak of the oil boom, when a popular bumper sticker in the state read, "If you don't own an oil well, get one," Kaiser started to sell his–at peak prices.
When oil prices started to decline in the 1980s due to increased OPEC production, the boom went bust, and affected far more than the Oklahoma energy industry. Unemployment soared and real estate values dropped, leaving many homeowners with negative equity. Banks that had loaned wildly during the boom ended up with mountains of bad debt on their books backed by devalued assets, including empty office towers and bankrupt energy producers.
During the bust, Kaiser changed course again, and started buying up bankrupt firms like Waterford Energy, which had all of $7 million in assets and some $151 million in losses on its books. The losses were valuable–under the Internal Revenue Code, a company can use past losses as credits, known as net operating losses, to reduce their tax burden in profitable years. In 1990, after Kaiser acquired the firm, Waterford filed a plan of reorganization in a Texas bankruptcy court that stated that one of the principal motivations of the plan was to "preserve the tax attributes of the debtor in order to allow the debtor to realize the benefits of the tax attributes." Kaiser's company, GBK Corporation–the parent of Kaiser-Francis Oil–began claiming those losses on its tax returns.
In 1997, the Internal Revenue Service disallowed the Waterford losses, arguing that "losses resulting from acquisitions made to evade or avoid income tax are prohibited." The service sent Kaiser a bill for $24 million. Kaiser fought the IRS in U.S. Tax Court, ultimately settling the case for $3.7 million, or 15 cents on the dollar. "During the desperate depression of the 1980s, there were no oil and gas companies without net operating losses," Kaiser said during an interview for the book in 2001. "Any company you'd buy had them. There was no indication that we didn't comply with the Internal Revenue Code."
In 1991, the same year that Kaiser merged Kaiser-Francis Oil with Waterford, he bought the Bank of Oklahoma from the Federal Deposit Insurance Corporation. Bank of Oklahoma had largely avoided making rash loans during the state's oil boom economy that led so many other savings institutions–including savings and loans, 162 of which shut down during the crisis–from going broke. But in 1984, Bank of Oklahoma bought Fidelity Bank N.A., an Oklahoma City-based bank whose books were loaded with bad loans. Kaiser, who was a shareholder and served on Bank of Oklahoma's board of directors at the time, favored the deal, which didn't work out so well. Fidelity's bad loans were a drag on Bank of Oklahoma, which, after declaring a quarterly loss of $51 million in 1986, turned to the Federal Deposit Insurance Corporation for a bailout. The FDIC deemed it essential to the state's economy, and rather than shut it down bailed it out the bank for $130 million. Five years later, after returning the bank to profitability, the FDIC sold it to Kaiser–for $61 million.
The deal was a profitable one–by 1998, his shares in the company were worth some $917 million; on April 26, 2011, when the bank issued its last proxy statement, Kaiser's shares were worth more than $2.1 billion, while his foundation held another $251 million of its stock.
The IRS questioned where the money came from when Kaiser purchased the bank. In 1991, when he bought it, he filed a tax returns claiming no income, but instead losses of $2.3 million. The year before, in 1990, when he submitted his $61 million bid to the FDIC, he told the IRS he had lost $115,000. Kaiser's total income taxes paid those years: zero.
The money came from GBK Corp., the same company that claimed millions in losses from bankrupt energy firms like Waterford Energy, which loaned Kaiser $100 million. The IRS concluded that the money was actually a dividend paid by the company to Kaiser, and in 1997 sent him a bill for $48.6 million in back taxes, interest and penalties.
"There are about 11 things you have to show to disprove that," Kaiser said of the IRS's contention that the $100 million was a dividend, "and the only one I didn't have was the corporate minutes. I'm the only director and I hold all the directors' meetings in the shower. I don't take minutes because the ink runs."
After negotiating with the IRS, Kaiser settled for $11,891 in back taxes. Because he prevailed on the loan issue, he was able to deduct the interest he paid back to GBK Corp.
Kaiser still owns the Bank of Oklahoma–its most recent proxy statement notes that, "George B. Kaiser currently owns approximately 60.4% of the outstanding common stock and plans to vote in person at the meeting" He's also continues play a prominent role in the nonprofit foundation that bears his name–its most recent Form 990 calls him "a substantial contributor the George Kaiser Family Foundation." What percentage of the foundation's tax deductible gifts he's given is uncertain, but since the year 2000, the average amount of donations received has been $325 million a year.
In 2007, when billionaire Warren Buffett first began advocating for raising taxes on the wealthiest, Forbes asked Kaiser what he though of the proposal. "I agree wholeheartedly that our tax system is insufficiently progressive," he told the business magazine. "I also agree that the estate tax at levels above $10 million should be retained. Higher tax rates for higher levels of income [up to at least 50%, maybe higher] not only are socially responsible but also would encourage more charitable giving."