The Solyndra Scandal: Charity, Tax Loopholes, and Billionaire George Kaiser
By Fred Lucas, Foundation Watch, February 2012, (available in PDF form: FW0212)
Summary: You’ve read about Solyndra. It’s a failed solar panel company that the Obama White House kept promoting despite warnings that it was going bankrupt. Now the federal government has to make good on $535 million in loan guarantees to be paid with “stimulus” money that is supposed to revive the economy. Evidence for the misappropriation points to partisan political influence-peddling involving White House involvement with an Oklahoma billionaire named George Kaiser. Here’s the rest of the story.
Last November on the campaign trail in New Hampshire promoting his so-called jobs legislation, President Obama asked, “Do you want to cut taxes for the middle class and those who are trying to get into the middle class? Or do you want to protect massive tax breaks for millionaires and billionaires?”
In Manchester, New Hampshire, Obama proclaimed himself a “warrior for the middle class.” But in Manhattan and Hollywood he was hosting $30,000-a-plate fundraisers, where his railing against “millionaires and billionaires” was delivered with a wink and a nod to those feasting at his table.
When you think of wealthy donors to liberal groups and candidates, you usually think of rich trial lawyers, Wall Street investment bankers, movie stars and Warren Buffett. But who’s heard of George Kaiser, a prolific Obama fundraiser and Democratic donor from Oklahoma who has visited the White House 16 times since Obama took office?
Kaiser is a super wealthy oilman who gives heavily to charities in his beloved hometown and doesn’t draw attention to himself. A billionaire, he lives in Tulsa in a $1.6 million home that’s less extravagant than the homes of some of his top level employees. He prefers not to have buildings named after him.
But last fall Kaiser began attracting the media’s attention, and since then he has become a central figure in the escalating Solyndra scandal. Kaiser was the largest shareholder in Solyndra, the bankrupt solar panel company that got a $535 million Energy Department loan guarantee through the American Recovery and Reinvestment Act, better known as “the stimulus.” The government must now assume Solyndra’s debt, which will likely never be repaid.
Congress is exploring why the doomed loan was made and if it’s connected to the fact that Kaiser – whose foundation owned one-third of Solyndra – raised between $50,000 and $100,000 for Obama in the 2008 presidential race. It’s been suggested that Kaiser, ever seeking a boost for his hometown, may have used his political contributions to help secure the construction of a Solyndra plant in Tulsa. (Tulsa World, Oct. 2, 2011) Government documents suggest the White House exerted pressure to rush approval of the loan guarantee in 2009 despite evidence that the company was failing.
Many news stories about Solyndra focus on the Obama administration’s over-eagerness to promote solar power as an “alternative fuel.” But in the months since Solyndra declared bankruptcy last September more attention has been paid to Kaiser, a man whose estimated net worth of $10 billion led Forbes magazine to list him as the 31st richest person in the United States.
Kaiser first appeared on the Forbes list in 1992 when his net worth was estimated at $265 million. The 69-year-old married father of three is the son of Jewish immigrants who fled Nazi Germany. His father started an oil company in Oklahoma, Kaiser-Francis Oil, which George Kaiser took over in 1969. He transformed a 10-employee business into one of the most successful privately-held American oil companies.
Kaiser professes “guilt” over his fortune, which he attributes to “dumb luck.” Yet while he publicly advocates higher taxes on the rich, he strenuously avoids paying them, taking advantage of provisions in the IRS tax code to protect his business profits and structuring his foundation so that it gives away far less of its assets than most other private foundations. “Dumb luck” plays no role in keeping Kaiser’s fortune intact.
Big Oil, Big Banking, Big Philanthropy
In 1984, as a member of the board of directors of the Tulsa-based Bank of Oklahoma, Kaiser supported acquiring Oklahoma City-based Fidelity Bank N.A. even though it was weighed down by bad loans. The bad loans would become such a drag on the Bank of Oklahoma that it reported a $51 million quarterly loss in 1986. However, the Federal Deposit Insurance Corporation declared the Bank of Oklahoma essential to the state’s economy and subsequently provided it with a $130 million bailout. Five years later, oilman Kaiser bought the bank from the FDIC for $61 million. By 2011 Kaiser’s shares were worth $2.1 billion, while the family foundation he established held another $251 million in bank stock. (See http://reporting.sunlightfoundation.com/2011/barack-obamas-other-billionaire-how-george-kaiser-turned-oklahom/)
After creating so much wealth many successful people turn to philanthropy. Typically, they are concerned about particular causes, or they want to leave a legacy, or “give back.” But Kaiser doesn’t see it that way. He explains that he gives because he is assuaging his guilt for being so darn rich.
In a 2009 Rotary Club speech, Kaiser explained the roots of his philanthropy. “It starts with a sense of guilt we should all feel. We got to where we are by dumb luck.”
Now a moral obligation to help the less fortunate is very different from feeling guilty about oneself. And the “dumb luck” comment betrays Kaiser’s ignorance about how the free market works and why it’s been good to him. Kaiser’s parents came to America to escape oppression, and their son built a business that make profits, creates jobs and opportunities for others, and provides the wealth that makes philanthropy possible. Yet Kaiser feels guilty.
In 1999 Kaiser endowed the George Kaiser Family Foundation. He is the sole donor. The foundation, which had $1 billion in assets in 2005, has grown to $4 billion, according to its IRS Form 990 for 2009, the latest year available. The Kaiser Foundation owns Argonaut Ventures, a private investment firm which had $691 million in assets. Through Argonaut, the Kaiser Foundation invested $340 million in Solyndra. With a 36 percent stake, that made the foundation the largest investor in the solar company. (Bloomberg News, Sept. 27, 2011; Kaiser IRS Form 990, p.63 of 77; http://foundationcenter.org/pnd/news/story.jhtml?id=354900002)
Many Oklahomans believe George Kaiser acted with good intentions, and certainly the Kaiser Foundation has done good deeds. It’s given away $300 million over the past decade, contributing heavily to state and local charities such as the Tulsa Community Foundation, the University of Oklahoma Foundation, and the University’s medical school. The Kaiser Foundation has given $6 million to create an early childhood education program called Educare for at-risk children up to age three. Educare has two Tulsa locations with a third on the way. The Tulsa World newspaper has reported that $8 out of every $10 the George Kaiser Family Foundation contributes stays in Tulsa.
“Our Tax System Is Insufficiently Progressive”
George Kaiser’s guilt over his dumb luck may have helped Tulsa charities, but it hasn’t made him pay what liberals would call his “fair share” in taxes. According to a report by the Sunlight Foundation, a watchdog group, Kaiser has used loopholes in the tax code so that during one six year period he “reported taxable income to the Internal Revenue Service just once, totaling $11,699 – equivalent to a full-time hourly wage of $5.62.”
From 1986 to 1992 Kaiser filed returns showing his income was negative $860,000, and his companies reported an aggregate loss of more than $500,000 from 1989 to 1992, according to the Sunlight Foundation report. The IRS went after Kaiser and his companies, demanding that they owed the federal government more than $72 million.
Kaiser explained that he had engaged in tax “avoidance,” which is legal, buying up companies such as Waterford Energy that had substantial operating losses he claimed as deductible. In the Waterford case, the IRS disallowed Kaiser’s claims and sent him a bill for $24 million. Kaiser fought back in tax court and eventually settled, paying $3.7 million in back taxes. Kaiser then merged Waterford Energy with his company, Kaiser-Francis Oil.
“During the desperate depression of the 1980s, there were no oil and gas companies without net operating losses,” Kaiser contended in a 2001 interview about his run-in with the IRS. “Any company you’d buy had them. There was no indication that we didn’t comply with the Internal Revenue Code.”
In another case discussed in the Sunlight report, the IRS wanted to know where Kaiser got the money to buy the Bank of Oklahoma for $61 million in 1990 after claiming $2.3 million in losses and no income on his 1991 tax returns and paying zero taxes. The IRS sent him a tax bill for $48.6 million in back taxes and penalties. The parties settled for $11,891.
Despite these tax battles and the settlements that yielded the taxman pennies on the dollar, Kaiser told Forbes in 2007 that the wealthy should pay far more in taxes. “I agree wholeheartedly that our tax system is insufficiently progressive. 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 percent, maybe higher, not only are socially responsible but also would encourage more charitable giving.”
The Kaiser Foundation and the Payout Rule
When he set up his foundation, Kaiser found another perfectly legal way to avoid taxes on his wealth. (His guilty conscience has been very lucrative.) Federal tax law requires a private foundation to spend at least 5 percent of its assets on charitable work, an amount some philanthropy experts consider too little. But Kaiser’s foundation paid out even less. In 2009, the last year for which its tax records are available, the foundation made a mere $46.3 million in charitable grants, a little over 1 percent of its $4 billion in assets.
How is this possible? The answer is that about ten years ago the George Kaiser Family Foundation converted itself from a “private foundation” to a “supporting organization,” an important distinction in tax law that lawmakers have seriously considered eliminating. A “supporting organization” is set up to support another charitable group – in Kaiser’s case the Tulsa Community Foundation. As a matter of law, a supporting organization is not required to abide by the 5% payout rule. According to an analysis by the staff of Iowa Sen. Charles Grassley, in 2009 the Tulsa Community Foundation received a measly $3.1 million, which constitutes less that 7% of the $46 million the Kaiser Foundation paid out in grants. Were the Kaiser Foundation a “private foundation” it would have been required to make at least $200 million in grants annually.
So the Kaiser Foundation got to avoid charitable giving just as George Kaiser got to avoid paying taxes. Remember: “avoid” is legal, “evade” is not.
It’s distinctions like this that tick off Sen. Grassley. In 2005, the Senate Finance Committee, then controlled by Republicans and chaired by Grassley, issued a staff memo that said this loophole “is now being used by wealthy individuals to avoid the private foundation rules.” The memo cited Kaiser’s foundation for giving just 0.2 percent in 2002. “Tax deductions for charitable contributions are intended to encourage transfer of wealth to those in need,” the memo said. “Individuals should not be allowed to ‘park’ their assets in charities in order to preserve their assets in perpetuity, while simultaneously benefiting from a charitable contribution deduction.”
Questioned by the Washington Post, the George Kaiser Family Foundation (GKFF) said it passed a “full audit” by the IRS and, “the programs that the foundation has invested in, like early childhood development and reducing female incarceration rates in Oklahoma, have driven substantial behavioral and policy change in the community and state. GKFF will make an impact for generations to come and we are in the earliest stages of our giving.”
As the Solyndra scandal has unfolded Sen. Grassley has kept his eye on Kaiser—and he is outraged. He notes that while a “supporting organization” is not required to pay out 5% of its assets to charity, it is legally permitted to invest in private hedge funds (like Argonaut Ventures) and companies (like Solyndra). Were a private foundation to do the same thing, it would have to pay excise taxes on its investment income. It would be subject to strict rules on self-dealing. And the deductibility of contributions to any private foundation engaged in such commercial transactions would be further limited.
Said Grassley, “So with Solyndra, the government didn’t just lose out on its investment through the $535 million loan guarantees. It also lost out on the tremendous subsidy it provided the George Kaiser Family Foundation through the charitable contribution deduction.”
Democratic Party Booster and Environmentalist
All this should give Democrats enough material to label Kaiser a heel at the very least—except he’s such a good source of campaign money.
Kaiser bundled between $50,000 and $100,000 for presidential candidate Barack Obama, according to the Center for Responsive Politics. Perhaps as important, he was one of Obama’s early supporters when the Illinois senator was trailing Hillary Clinton during the Democratic primary season. On March 19, 2007, Obama visited Educare in Tulsa before attending a fundraising event at Kaiser’s home.
Kaiser’s help became a campaign issue during the Democratic primary season, when Sen. Obama announced in a campaign ad prior to the Pennsylvania primary, “I don’t take money from oil companies or Washington lobbyists.” The Clinton campaign issued a rebuttal: “Two major bundlers for his campaign – George Kaiser and Robert Cavnar – are oil company CEOs.”
Kaiser has funded other Democratic war chests. In 2010 he contributed $30,400 to the Democratic Senatorial Campaign Committee and $2,400 to Senate Majority Leader Harry Reid, a Nevada Democrat. (Bloomberg News, Sept. 27, 2011)
George Kaiser has also put his mouth where his money is. In 2009, before a committee of the Oklahoma state legislature he testified that oil companies like his do not need tax breaks, and that government funds should be used instead for “tax cuts or services for the middle class and working poor.” (Wall Street Journal, Oct. 3, 2011)
He has called for a graduated gasoline tax that would collect fees from drivers of fuel-inefficient vehicles and rebate them to drivers of fuel-efficient vehicles who commute to work. Called a “feebate” (fee and rebate) the tax would rise from 8 cents per gallon to $1.80 per gallon over 20 years. “Yes it’s redistribution, but it’s redistribution based on energy profligacy and dependence,” Kaiser said. “It’s a tax on the excess users of liquid hydrocarbons and a reward to lesser users. It puts the incentive exactly at the right spot.” (Human Events, Sept. 21, 2011)
The George Kaiser Family Foundation and the University of Tulsa set up a program called the National Energy Policy Institute to develop “sustainable solutions for the energy crisis facing the U.S.” Two Democrats run the organization: the executive director is former Oklahoma Rep. Brad Carson (who lost his 2004 Senate race to Tom Coburn) and the Institute’s president is former Alaska Gov. Tony Knowles, (who lost his 2006 reelection bid to Sarah Palin).
Solyndra: What Did They Know and When Did They Know It?
Kaiser expressed his full support for the stimulus act – an $800 billion boondoggle that failed to lift the U.S. out of recession. “There’s never before been more money shoved out the government’s door in world history,” he said, later adding, “And our selfish parochial goal is to get as much for Tulsa and Oklahoma as we possibly can.”
The stimulus provided $535 million for the loan guarantee to Solyndra, the Fremont, Calif.-based company that was a centerpiece of President Obama’s green agenda. On May 26, 2010 Obama visited the plant and praised the company as the future of the American economy.
“Every day that you build this expanded facility, as you fill orders for solar panels to ship around the world, you’re demonstrating that the promise of clean energy isn’t just an article of faith – not anymore,” Obama said.
“It’s not some abstract possibility for science fiction movies or a distant future – 10 years down the road or 20 years down the road. It’s happening right now. The future is here. We’re poised to transform the ways we power our homes and our cars and our businesses. And we’re poised to lead our competitors in the development of new technologies and products and businesses. And we are poised to generate countless new jobs, good-paying middle-class jobs, right here in the United States of America.”
However, e-mails from the summer of 2009 have since surfaced to suggest that more was being promised than the promise of clean energy. An investigation by the House Energy and Commerce Committee into the unfolding scandal shows that White House officials ignored warnings by career government officials in the Office of Management and Budget and the Energy Department that Solyndra was “not ready for primetime.” White House chief of staff Rahm Emanuel and Ron Klain, chief of staff to Vice President Joe Biden (and earlier chief of staff to Vice President Al Gore) pushed OMB to award the loan guarantee, according to documents obtained by the committee. Emanuel and Klain have since left the White House.
Then in October 2010 Solyndra began planning to layoff 200 employees. E-mails for the period show Energy and White House officials worrying about how to handle the bad news. The emails show the Energy Department asked the company to delay the layoff announcement until November 3, one day after the elections. (Washington Post, Jan. 14, 2012) In February 2011, the Energy Department restructured the Solyndra loan agreement to allow the struggling company to pay off $75 million in private loans before repaying $535 million in taxpayers’ money.
The company declared bankruptcy in September 2011, and 1,100 employees lost their jobs. Soon after, the FBI raided the plant.
In late September the House Energy and Commerce Committee subpoenaed Solyndra’s CEO and chief financial officer to testify about the matter. Each refused, invoking his Fifth Amendment right against self-incrimination. The Committee has also subpoenaed the White House and the Energy Department for records, and the Justice Department and the Treasury Department’s Office of Inspector General say they are probing the matter.
White House logs show Kaiser visited the White House 16 times, four of them just before approval of the Solyndra loan. He met with top Obama aides, including top aide Valerie Jarrett and Emanuel. Kaiser and the White House have insisted these discussions were not about the Solyndra loan but concerned the priorities of the Kaiser Family Foundation, “including early childhood education and poverty, health care policy and energy policy,” according to a White House official who insisted on anonymity. (Of course, the foundation also had $340 million of its money invested in Solyndra.) The House committee has released e-mails that seem to contradict Administration assertions. For instance, emails between executives from Argonaut, the investment firm owned by the foundation, express enthusiasm about the prospects of securing a second administration loan guarantee for Solyndra. (No second loan was ever made.) (New York Times, Nov. 10, 2011)
Kaiser obviously wanted Solyndra to succeed, which makes it reasonable to believe he supported the loan, although he says he never engaged in direct lobbying. In any event, it’s easy to believe that Obama—or someone high up in the administration and eager to use the government to punish its enemies and reward its friends—knew Kaiser had a big financial stake—$340 million—in Solyndra’s success.
Kaiser and his foundation became partners in one of the Obama administration’s proliferating public-private partnerships. (See, for instance, “The Obama Administration’s Social Innovation Fund,” Foundation Watch, Dec. 2010). These are exercises in what’s variously been called “crony capitalism” or “gangster government.” And Kaiser is a perfect partner. He believes the rich should pay more—and he avoids paying taxes. He gives to charity because he feels guilty—and he structures his non-profit foundation to avoid giving too much. He gladly accepts corporate welfare for an unproven solar energy project—and denounces tax breaks for oil, a proven energy source that has made him one of the richest—and guiltiest—men in America.
Fred Lucas is White House correspondent for Cybercast News Service (CNSNews.com).