a family’s billions, artfully sheltered · a resolution at 3:40 a.m., on the n.b.a. reaches...

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Late Edition

VOL. CLXI . . No. 55,602 © 2011 The New York Times NEW YORK, SUNDAY, NOVEMBER 27, 2011

U(D5E71D)x+&!{!/!=!#An engineer and naturalized Americancitizen found jail and then limbo after re-turning to China, highlighting the perilsof doing business there. PAGE 6

INTERNATIONAL 6-14

Perils of Commerce in ChinaCalifornia’s leaders have rallied arounda plan to build a high-speed rail line de-spite cries of boondoggle from theproject’s critics. PAGE 18

NATIONAL 18-28

Two Sides on a RailroadMany major gun makers, including the195-year-old Remington Arms, have qui-etly passed into the hands of one privatecompany, the Freedom Group. PAGE 1

SUNDAY BUSINESS

Stealth Giant of Gun Industry Nicholas D. Kristof PAGE 11

OPINION IN SUNDAY REVIEW

By SCOTT SHANE

WASHINGTON — At a time ofpartisan gridlock in the capital,one obscure cause has drawn astellar list of supporters fromboth parties and the last two ad-ministrations, including a dozenformer top national security offi-cials.

That alone would be unusual.What makes it astonishing is theobject of their attention: a fringeIranian opposition group, long anally of Saddam Hussein, that isdesignated as a terrorist organ-ization under United States lawand described by State Depart-ment officials as a repressive cultdespised by most Iranians andIraqis.

The extraordinary lobbying ef-fort to reverse the terrorist desig-nation of the group, the Mujahe-deen Khalq, or People’s Mujahe-deen, has won the support of twoformer C.I.A. directors, R. JamesWoolsey and Porter J. Goss; aformer F.B.I. director, Louis J.Freeh; a former attorney gen-eral, Michael B. Mukasey; Presi-dent George W. Bush’s firsthomeland security chief, TomRidge; President Obama’s firstnational security adviser, Gen.James L. Jones; big-name Re-publicans like the former NewYork mayor Rudolph W. Giulianiand Democrats like the former

Vermont governor HowardDean; and even the former topcounterterrorism official of theState Department, Dell L. Dailey,who argued unsuccessfully forending the terrorist label while inoffice.

The American advocates havebeen well paid, hired throughtheir speaking agencies and col-lecting fees of $10,000 to $50,000

for speeches on behalf of the Ira-nian group. Some have beenflown to Paris, Berlin and Brus-sels for appearances.

But they insist that their mo-tive is humanitarian — to protectand resettle about 3,400 membersof the group, known as theM.E.K., now confined in a campin Iraq. They say the terrorist la-bel, which dates to 1997 and then

reflected decades of violence thatincluded the killing of someAmericans in the 1970s, is nowoutdated, unjustified and danger-ous.

Emotions are running high asSecretary of State Hillary Rod-ham Clinton completes a reviewof the terrorist designation. Thegovernment of Prime Minister

Across Party Lines, Lobbying for Iranian Exiles on Terrorist List

JIM LO SCALZO/EUROPEAN PRESSPHOTO AGENCY

Mujahedeen Khalq supporters and Secretary of State Hillary Rodham Clinton in Washington.

Continued on 0

By JEREMY W. PETERS

Inside the debate halls, theclash may be Republican versusRepublican. But offstage, con-servatives are mounting a unifiedand expensive air assault on thecandidates’ common opponent:President Obama.

Nearly a year before ElectionDay, Republican presidential can-didates and conservative actiongroups are already spendingheavily on television advertisingaimed at casting Mr. Obama as afailure.

Their tactics, the aggressiveand sometimes misleading kindnot typically used until much fur-ther along in a campaign season,have led to a spat with Demo-crats in what is shaping up to bethe most costly election advertis-ing war yet.

In an advertisement from Gov.Rick Perry of Texas that is nowrunning on national cable televi-sion, Mr. Perry looks directly intothe camera and declares: “Oba-ma’s socialist policies are bank-rupting America. We must stophim now.”

A new commercial from Mitt

TV Attack AdsAim at ObamaEarly and Often

Continued on Page 4

By DAVID KOCIENIEWSKI

As he stood in the opulent marble foyerof a Fifth Avenue mansion late last month,greeting the coterie of prominent guestsarriving at his private art gallery, RonaldS. Lauder was doing more than just beinga gracious host.

To celebrate the 10th anniversary of theNeue Galerie, Mr. Lauder’s museum ofAustrian and German art, he exhibitedmany of the treasures of a personal col-lection valued at more than $1 billion, in-cluding works by Van Gogh, Cézanne andMatisse, and a Klimt portrait he boughtfive years ago for $135 million.

Yet for Mr. Lauder, an heir to the EstéeLauder fortune whose net worth is esti-mated at more than $3.1 billion, theevening went beyond social and culturalsignificance. As is often the case with hisactivities, just beneath the surface was a

stock deal so audacious that Congress lat-er enacted a law forbidding the tactic, Mr.Lauder has for decades aggressively tak-en advantage of tax breaks that are usefulonly for the most affluent.

The debate over whether to reduce taxshelters and preferences for the rich isone of the most volatile in Washington andwill move to the presidential campaign,now that repeated attempts in Congress tostrike a grand bargain over spending cutsand an overhaul of the tax code havefailed.

A handful of billionaires like Warren E.Buffett and Bill Gates have joined Demo-crats in calling for an elimination of thebreaks, saying that the current systemadds to the budget deficit, contributes tothe widening income gap between therichest and the rest of society, and shifts

shrewd use of the United States tax code.By donating his art to his private founda-tion, Mr. Lauder has qualified for de-ductions worth tens of millions of dollarsin federal income taxes over the years,savings that help defray the hundreds ofmillions he has spent creating one of NewYork City’s cultural gems.

The charitable deductions generated byMr. Lauder — whose donations have aid-ed causes as varied as hospitals and ef-forts to rebuild Jewish identity in EasternEurope — are just one facet of a sophis-ticated tax strategy used to preserve a for-tune that Forbes magazine says makeshim the world’s 362nd wealthiest person.From offshore havens to a tax-sheltering

BEBETO MATTHEWS/ASSOCIATED PRESS

In 2006, Ronald S. Lauder, who is now worth $3.1 billion, paid $135 million for the Klimt painting “Adele Bloch-Bauer I.”

A Family’s Billions, Artfully ShelteredEstée Lauder Heir’s Tax Strategies Typify Advantages for the Wealthy

BUT NOBODY PAYS THAT

Fighting for Tax Breaks

Continued on Page 20

By SALMAN MASOOD and ERIC SCHMITT

ISLAMABAD, Pakistan — Pa-kistani officials said on Saturdaythat NATO aircraft had killed atleast 25 soldiers in strikes againsttwo military posts at the north-western border with Afghani-stan, and the country’s supremearmy commander called themunprovoked acts of aggression ina new flash point between theUnited States and Pakistan.

The Pakistani government re-sponded by ordering the CentralIntelligence Agency to vacate thedrone operations it runs fromShamsi Air Base, in western Pa-kistan, within 15 days. It alsoclosed the two main NATO sup-ply routes into Afghanistan, in-cluding the one at Torkham.NATO forces receive roughly 40percent of their supplies throughthat crossing, which runsthrough the Khyber Pass, and Pa-kistan gave no estimate for howlong the routes might be shutdown.

A NATO spokesman said it waslikely that allied airstrikescaused the Pakistani casualties,but said an investigation hadbeen ordered to determine thecause.

In Washington, American offi-cials were scrambling to assesswhat had happened amid prelimi-nary reports that allied forces inAfghanistan engaged in a fire-fight along the border and calledin airstrikes. Senior Obama ad-ministration officials were alsoweighing the implications on arelationship that took a sharpturn for the worse after a NavySeal commando raid killed Osa-ma bin Laden near Islamabad in

NATO STRIKES KILLPAKISTANI FORCES,RAISING TENSIONS

AT LEAST 25 SOLDIERS DIE

Anger in Islamabad —U.S. Offers Regretsand Vows Inquiry


By ANTHONY SHADID

CAIRO — Through elections,protests, government formationsand armed struggle, Arab coun-tries in an arc from Libya to thegulf were engaged this past weekmore than ever in attempts not tosimply overthrow leaders, but todecisively shape the orders thatfollow.

The center of that struggle wasagain in Cairo, in the landmarkTahrir Square, where a protestmovement was revived and doz-ens were killed in violence. Somehailed it as a new revolution, orthe opening of a front in the oldone. But it might be bettertermed the end of the beginning,as within the span of just a week,events breaking out here andacross the region seemed as sem-inal as any since that burst of op-timism when the revolts erupted11 months ago.

“In January, it was an uprisingagainst the dictatorship, and nowit is an uprising against what isleft of that dictatorship,” saidSateh Noureddine, a columnist inthe leftist Lebanese newspaperAl Safir. “The fall of regimes wasnot the revolution, but just a wayto establish the foundations forthe Arab Spring. Freedom anddemocracy need time.”

No one expected the Arab re-volts to be a simple march ahead,but rarely have things seemed somuch in flux, with more potentialfor fragmentation, bloodshed anddisarray. While many analystsdescribe the disturbances as aninevitable reckoning with the leg-acy of dictatorship, others worrythe region may face years of un-rest before systems emerge to re-place the stagnant, American-backed order that held sway for

Post-Uprising,A New Battle

Arab World StrugglesTo Shape a New Order

NEWS ANALYSIS


By HOWARD BECK

Six weary figures rose fromtheir chairs early Saturday morn-ing, their expressions telegraph-ing the conclusion to the N.B.A.’sfive-month labor crisis: Basket-ball is back in business, with anew labor deal that heavily fa-vors the owners, despite somelast-minute concessions.

The league wanted an overhaulof its $4-billion-a-year enterprise,and it got it, with a nearly $300million annual reduction in play-er salaries and a matrix of newrestrictions on contracts andteam payrolls. The changes meana $3 billion gain for the ownersover the life of the 10-year deal.

Before finally agreeing to thosesacrifices, the players’ negotia-tors won a handful of concessionsthat will allow the richest teamsto keep spending on players, en-suring a more competitive free-agent market.

A truncated 66-game schedulewill begin Christmas Day withthree nationally televised games.For that, officials on both sideswere grateful as they announceda resolution at 3:40 a.m., on the

N.B.A. ReachesTentative DealTo Save Season

Continued in SportsSunday, Page 4

Fears of fresh clashes werestirred after security forces killedan unarmed protester. Page 6.

Anger After Death in Cairo

Bombs exploded in and around Bagh-dad, killing at least 11 people, as violencecontinues in the weeks before the Amer-ican withdrawal. PAGE 10

Bombs Kill at Least 11 in Iraq

Today, periodic clouds and sun,quite mild, high 63. Tonight, partlyto mostly cloudy, mild, low 52. To-morrow, cloudy, still mild, high 63.Details, SportsSunday, Page 12.

C M Y K Nxxx,2011-11-27,A,001,Bs-BK,E3

As he stood in the opulent marble foyer of a Fifth Avenue mansion late last month, greeting the coterie of prominent guests

arriving at his private art gallery, Ronald s. Lauder was doing more than just being a gra-cious host.

To celebrate the 10th anniversary of the Neue Galerie, Mr. Lauder’s museum of Austrian and German art, he exhibited many of the trea-

sures of a personal collection valued at more than $1 billion, including

works by Van Gogh, Cézanne and Matisse, and a Klimt portrait he bought five years ago for $135 million.

Yet for Mr. Lauder, an heir to the Estée Lauder fortune whose net worth is estimated at



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more than $3.1 billion, the evening went beyond social and cultural significance. As is often the case with his activities, just beneath the surface was a shrewd use of the United states tax code. By donating his art to his private foundation, Mr. Lauder has qualified for deductions worth tens of millions of dollars in federal income tax-es over the years, savings that help defray the hundreds of millions he has spent creating one of New York City’s cultural gems.

The charitable deductions generated by Mr. Lauder — whose donations have aided causes as varied as hospitals and efforts to rebuild Jew-ish identity in Eastern Europe — are just one facet of a sophisticated tax strategy used to preserve a fortune that Forbes magazine says makes him the world’s 362nd wealthiest person. From offshore havens to a tax-sheltering stock deal so audacious that Congress later enacted a law forbidding the tactic, Mr. Lauder has for decades aggressively taken advantage of tax breaks that are useful only for the most affluent.

The debate over whether to reduce tax shel-ters and preferences for the rich is one of the most volatile in Washington and will move to the presidential campaign, now that repeated attempts in Congress to strike a grand bargain

over spending cuts and an overhaul of the tax code have failed.

A handful of billionaires like Warren E. Buffett and Bill Gates have joined Democrats in calling for an elimination of the breaks, say-ing that the current system adds to the budget deficit, contributes to the widening income gap between the richest and the rest of society, and shifts the tax burden onto small businesses and the middle class. Republicans have resisted, saying the tax increases on the wealthy would harm the economy and cost jobs.

An examination of public documents involv-ing Mr. Lauder’s companies, investments and charities offers a glimpse of the wide array of legal options for the world’s wealthiest citizens to avoid taxes both at home and abroad.

His vast holdings — which include hundreds of millions in stock, one of the world’s largest private collections of medieval armor, homes in Washington, D.C., and on Park Avenue as well as oceanfront mansions in Palm Beach and the Hamptons — are organized in a labyrinth of trusts, limited liability corporations and holding companies, some of which his lawyers acknowl-edge are intended for tax purposes. The cable television network he built in Central Europe,

20 N NATIONALTHE NEW YORK TIMES SUNDAY, NOVEMBER 27, 2011

the tax burden onto small businessesand the middle class. Republicans haveresisted, saying the tax increases on thewealthy would harm the economy andcost jobs.

An examination of public documentsinvolving Mr. Lauder’s companies, in-vestments and charities offers aglimpse of the wide array of legal op-tions for the world’s wealthiest citizensto avoid taxes both at home and abroad.

His vast holdings — which includehundreds of millions in stock, one of theworld’s largest private collections ofmedieval armor, homes in Washington,D.C., and on Park Avenue as well asoceanfront mansions in Palm Beach andthe Hamptons — are organized in a lab-yrinth of trusts, limited liability corpo-rations and holding companies, some ofwhich his lawyers acknowledge are in-tended for tax purposes. The cable tele-vision network he built in Central Eu-rope, CME Enterprises, maintains anofficial headquarters in the tax haven ofBermuda, where it does not operate anystations.

And earlier this year, Mr. Lauderused his stake in the family business,Estée Lauder Companies, to create atax shelter to avoid as much as $10 mil-lion in federal income tax for years. InJune, regulatory filings show, Mr. Lau-der entered into a sophisticated con-tract to sell $72 million of stock to an in-vestment bank in 2014 at a price ofabout 75 percent of its current value inexchange for cash now. The transaction,known as a variable prepaid forward,minimizes potential losses for share-holders and gives them access to cash.But because the I.R.S. does not classifythis as a sale, it allows investors like Mr.Lauder to defer paying taxes for years.

It was a common tax reduction strat-egy for chief executives and wealthyshareholders a decade ago, but in 2006the I.R.S. said it appeared to be an abu-sive tax shelter and issued tighter re-strictions to regulate the practice. Thatruling was enough to persuade mostwealthy taxpayers to abandon the tech-nique, according to tax lawyers andrecords at the Securities and ExchangeCommission.

Advisers to Mr. Lauder maintain thathis deal “was made in compliance withpublished I.R.S. guidance on thesetypes of transactions and was fully re-ported as required by S.E.C. rules,” saidhis spokesman, Gary Lewi.

In theory, Mr. Lauder is scheduled topay taxes on the $72 million when theshares are actually delivered in 2014.But tax experts say wealthy taxpayerscan use other accounting techniques tofurther defer their payment.

The tax burden on the nation’s su-perelite has steadily declined in recentdecades, according to a sliver of data re-leased annually by the I.R.S. The ef-fective federal income tax rate for the400 wealthiest taxpayers, representingthe top 0.000258 percent, fell from about30 percent in 1995 to 18 percent in 2008,the most recent data available.

When Mr. Lauder ran unsuccessfullyfor the Republican nomination for may-or of New York and released his tax re-turn to the public, he reported paying 30percent in total federal, state and citytaxes on about $30 million in income in1988. At the time, his net worth was esti-mated at nearly a quarter of a billiondollars.

Mr. Lauder’s more recent tax returnsremain private, and he declined to makethem available for this article.

The Family FortuneMr. Lauder, now 67, was born into a

storied American fortune. His mother,Estée Lauder, the daughter of EasternEuropean immigrants, began sellinghomemade beauty creams at a few NewYork City hair salons in the 1940s andbuilt her product line into a multibillion-dollar global empire.

As the son of a fabulously wealthyfashion icon, Mr. Lauder developedaristocratic tastes — and grand aspira-tions — at an early age. He summeredin Vienna as a boy, developing a passionfor Austrian art and medieval armor. Atage 13, he bought his first Schiele withmoney from his bar mitzvah. Mr. Lau-der grew so enthralled by politics as ayoung man that he told friends hedreamed of becoming the first Jewishpresident of the United States.

After studying in Brussels and Parisand at the Wharton School at the Uni-versity of Pennsylvania, he joined thefamily business in 1964 and served in avariety of limited roles. While his olderbrother Leonard rose to become EstéeLauder’s chief executive, Ronald en-gaged in a variety of pursuits: becom-ing a major Republican fund-raiser;serving a rocky tenure as ambassadorto Austria; running for mayor, an un-successful bid in which he spent $363 foreach vote he received; and starting anassortment of business ventures inEastern Europe, one of which wentbankrupt during the technology bubble.

While the family’s wealth was createdby hard work and ingenuity, it was bol-stered by aggressive tax planning, askill that has become Ronald Lauder’sspecialty. When Mr. Lauder’s father, Jo-seph, died in 1983, family membersfought the I.R.S. for more than a decadeto reduce their estate tax. The disputeinvolved a block of shares bequeathedto the family — the estate valued it at$29 million, while the I.R.S. placed it at$89.5 million. A panel of judges ulti-mately decided on $50 million, a deci-sion that saved the estate more than $20

million in taxes.Estée Lauder Companies went public

in 1995, and Ronald Lauder and hismother cashed in hundreds of millionsof dollars in stock but managed to side-step paying tens of millions in federalcapital gains taxes by using a hedgingtechnique known as shorting againstthe box.

Together, Mr. Lauder and his motherborrowed 13.8 million shares of compa-ny stock from relatives and sold them tothe public during the offering at $26 ashare. Selling borrowed shares in thisway is referred to as a short position.Since the Lauders retained their ownshares, the maneuver allowed them tohave a neutral position in the stock, notsubject to price swings. Under I.R.S.rules at the time, they avoided payingas much as $95 million in capital gainstaxes that might otherwise have beendue had they sold their own shares.

Such transactions allowed investorsto cash in their shareholdings withoutpaying taxes. But the Lauders’ use ofthe technique was so aggressive thatCongress enacted a law afterward thatlimited the length of the tax deferral.And the Lauders eventually paid tens ofmillions in stock from the transaction.

Still, the family’s tax planning was ef-fective enough that after Estée Lauderdied in 2004, she passed down nearly $4billion to her heirs, according to tax ex-perts who studied the case and estimat-ed that the estate was taxed at an ef-fective rate of 16 percent — about a thirdof the top estate tax rate at the time.

Ronald Lauder has not been a di-rector of the company since 2009, but hestill serves as the president of its Cli-nique Laboratories subdivision. He alsosublets a full floor of office space fromEstée Lauder, on the 42nd story of theGeneral Motors Building in Manhattan,which serves as the hub for the matrixof foundations, investment funds, part-nerships and trusts used to control hisbusinesses and personal finances.

His stake in Estée Lauder Compa-nies, according to regulatory filings, isvalued at more than $600 million. Near-

ly $400 million of that stock is pledged tosecure various lines of credit. Many fi-nancial planners consider it imprudentfor principal shareholders in a companyto borrow against their stock. But it re-mains a popular way for wealthy tax-payers to get cash out of their holdingswithout selling and paying taxes.

There is a certain irony that Mr. Lau-der has used $72 million worth of hisEstée Lauder shares to carry out his lat-est state-of-the-art tax reduction tactic.These contracts emerged as a populartool about a decade ago and were devel-oped by accountants and tax plannersafter Congress closed down the loopholeon the Estée Lauder public offering.The I.R.S. began cracking down onthese contracts in 2008, and has pur-sued a prominent case against the bil-lionaire Philip Anschutz, who used oneto avoid more than $140 million in fed-eral taxes.

Whether or not the I.R.S. agrees withMr. Lauder’s contention that his con-tract is legitimate, some tax policy ex-perts say the deal illustrates how thewealthy take advantage of the system.

“There’s real truth to the idea that thetax code for the 1 percent is differentfrom the tax code for the 99 percent,”said Victor Fleischer, a law professor atthe University of Colorado. “Any tax-payer lucky enough to have appreciatedproperty is usually put to a choice: cashout and pay some tax, or hold the prop-erty and risk the vagaries of the market.Only the truly rich can use derivativesto get the best of both worlds — lots ofcash and very little risk.”

While Mr. Lauder’s stock holdings inpublicly traded companies show someof his tactics, much of his wealth is hard-er to examine because it is controlled bya maze of privately held trusts and com-panies. Court documents, S.E.C. filingsand property tax records spotlight a fewof the more ordinary tax breaks used byaffluent people.

Significant portions of his inheritedstock are held in family trusts, which re-duce the ultimate estate tax. Mr. Lauderand his wife have also established theirown family trusts, allowing them to be-queath their wealth to their heirs withminimal taxes.

Other trusts and partnerships controlhis real estate properties in Palm Beachand the Hamptons and at 740 Park Ave-nue, a building that was once home toJohn D. Rockefeller, and is known asone of the world’s wealthiest apartmentbuildings.

United States tax law allows taxpay-ers to deduct mortgage interest on one’shomes up to $1.1 million in debt. House-

holds with more than $1 million in in-come claimed more than $27 billion insuch deductions from 2006 to ’09, ac-cording to a report this month by Sena-tor Tom Coburn of Oklahoma, who saidsome wealthy taxpayers even deductedmortgage interest on their yachts.

And there is no limit on the amount ofproperty taxes that can be deductedfrom federal income. So Mr. Lauder isentitled to deduct the $400,000 he paysannually on his Palm Beach mansion aswell as what he pays on his home onPark Avenue and his holdings in theHamptons.

“This welfare for the well-off — cost-ing billions of dollars a year — is beingpaid for with the taxes of the less fortu-nate, many who are working two jobsjust to make ends meet, and i.o.u.’s to bepaid off by future generations,” saidSenator Coburn, a Republican, who hascalled for limits on tax breaks for highearners.

Mr. Lauder deducts property taxes onall of his holdings, his spokesman said.Mr. Lauder declined to say how muchthat reduced his federal taxes, but saidhe did not receive tax benefits in someyears because of the alternative mini-mum tax and other limits.

Charity and Tax BreaksA week before the opening at the

Neue Galerie last month, Mr. Lauderappeared at another gala, 40 blockssouth, at the New York Public Library,to receive the Carnegie Foundation’sMedal of Philanthropy.

The program honored people whohave given profusely to charities, in-cluding Mr. Lauder’s brother Leonardand his wife, Evelyn (who died Nov. 12),whose causes include the Whitney Mu-seum and the pink ribbon campaign forbreast cancer awareness.

Ronald Lauder and his wife, Jo Car-ole, were honored for a variety of contri-butions: the work of their joint founda-tion supporting hospitals, rebuildingmonuments and refurbishing Americanembassies around the world — morethan a quarter of a billion dollars overthe last five years, according to hisspokesman.

The Ronald S. Lauder Foundation hasdonated tens of millions of dollars to re-build Jewish communities devastatedby the Holocaust and communist rule.Mr. Lauder has also given to a variety ofJewish and Israeli organizations, in-cluding the World Jewish Congress,where he has served as president since2007. Richard Parsons, the former TimeWarner chairman, presented the award,

calling Mr. Lauder and his wife two of“the nation’s pre-eminent supporters ofthe arts and civic causes.”

Mr. Lauder said his life was changed25 years ago when he visited a kin-dergarten in Austria and met a class-room full of Jewish children who wererefugees from Russia. Still, he said hefound it odd to be referred to as a phi-lanthropist.

“I did what I wanted to do,” he said.“What I thought was right.”

A Passion for ArtIn the United States, Mr. Lauder has

focused on what he calls his greatestpassion — art.

In 1976, at age 32, his generous dona-tions helped him become the youngesttrustee of the Metropolitan Museum ofArt. He later served as chairman of theMuseum of Modern Art and remains anhonorary chairman. He has donatedand lent artwork to an assortment ofmuseums. Part of his collection of lav-ishly decorated ceremonial armor is ondisplay at the Met, in a gallery namedfor him.

As all art collectors may, Mr. Lauderis entitled to deduct the full market val-ue of artworks donated to museums.(For years, Mr. Lauder availed himselfof a quirk in the tax code that alloweddonors to take a deduction for donatinga portion of an artwork, without actu-ally turning over the art. That break,known as fractional donation, was elim-inated in 2006.) The tax code also allowsartwork in offices to be deducted as abusiness expense.

Unlike some wealthy collectors whoare criticized for using tax breaks to un-derwrite private collections that offerlittle access to the public, Mr. Lauder iswidely praised for making his artwork acommunity asset.

The Neue Galerie, created by Mr.Lauder and Serge Sabarsky, who died in1996, in a mansion once owned by Cor-nelia Vanderbilt, offers public viewingof an exquisite collection, worth morethan $200 million even before Mr. Lau-der added dozens of pieces for its 10thanniversary.

Sheldon Cohen, a former I.R.S. com-missioner, said that when used as in-tended, the tax code’s breaks for art col-lectors balance private interests withthe public good.

“If an art collector makes significantcontributions, and the public actuallygets access to the works they are donat-ing, then the major thing the collectorgets is prestige and social status,” saidMr. Cohen, now a lawyer in Washington.

At times, Mr. Lauder’s efforts to en-hance his art collection have coincidedwith tax avoidance techniques.

In 2006, three months after he agreedto pay $135 million, a record at the time,for the Klimt painting “Adele Bloch-Bauer I,” Mr. Lauder sold a $190 millionstake in his broadcast network CME.

When asked about the sale, Mr. Lau-der’s spokesman said the proceedswere taxable in the United States at thefull capital gains rate. Even then,though, CME’s complex corporatestructure — it operates in Central Eu-rope, is organized as a Netherlandsholding company, keeps its headquar-ters in Bermuda and routed the $190million sale through two Cayman Islandcompanies — allowed Mr. Lauder tominimize taxes in countries outside theUnited States where it does business.

Some tax reform advocates say that itis unfair that the wealthiest can sub-sidize their lifestyles using myriad off-shore maneuvers and complex account-ing strategies.

“It’s admirable when people backtheir charitable impulses up with dona-tions,” said Scott Klinger, tax policy di-rector of the group Business for SharedProsperity. “But the tax code shouldn’tallow the wealthy the kind of loopholesthat let them, essentially, force othertaxpayers to underwrite donations totheir pet causes.”

Billionaire’s Playbook for Tax Avoidance To reduce his taxes, Ronald S. Lauder has used many of the techniques available to the wealthy to shelter his income while still having access to his money.

The broadcast company Mr. Lauder founded, CME Enterprises, operates television stations in Europe but has headquarters in tax-friendly Bermuda.

OFFSHORE CORPORATIONS

Mr. Lauder has donated extensively from an art collection worth more than $1 billion to his private foundation, entitling him to tax deductions worth tens of millions of dollars.

NONPROFIT OR CHARITABLE FOUNDATION

Mr. Lauder has used hundreds of millions of dollars worth of Estée Lauder stock as collateral for low-interest loans. That gives him access to money without having to pay capital gains taxes by selling the stock.

BORROWING AGAINST STOCK

By creating trusts and putting family holdings, such as stock and real estate, in those trusts, Mr. Lauder and other members of his family have minimized estate taxes.

FAMILY TRUSTS

These are agreements to sell stock at a future date for less than its current value, in return for an immediate cash payment. These deals postpone capital gains taxes for Mr. Lauder.

VARIABLE PREPAID FORWARD CONTRACT

Estée Lauder Heir’s Fortune, Worth Billions, Is Artfully ShelteredFrom Page 1

BILL CUNNINGHAM/THE NEW YORK TIMES

THE COLLECTOR

To celebrate the 10th anniversary of his Neue Galerie, Ronald Lauder exhibited works from his personal collection, including Cézannes.

A TAX BEGETS A TAX BREAK

Mr. Lauder pays $400,000 in property taxes annually on his Palm Beach mansion.

JOHN VAN BEEKUM FOR THE NEW YORK TIMES

Articles in this series are examining ef-forts by businesses to lower their taxesand the debate over how to improve thetax system.

But Nobody Pays That

ONLINE: Previous articles in thisseries:

nytimes.com/businessday

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CME Enterprises, maintains an official head-quarters in the tax haven of Bermuda, where it does not operate any stations.

And earlier this year, Mr. Lauder used his stake in the family business, Estée Lauder Companies, to create a tax shelter to avoid as much as $10 million in federal income tax for years. In June, regulatory filings show, Mr. Lauder entered into a sophisticated contract to sell $72 million of stock to an investment bank in 2014 at a price of about 75 percent of its cur-rent value in exchange for cash now. The trans-action, known as a variable prepaid forward, minimizes potential losses for shareholders and gives them access to cash. But because the I.R.s. does not classify this as a sale, it allows investors like Mr. Lauder to defer paying taxes for years.

It was a common tax reduction strategy for chief executives and wealthy shareholders a de-cade ago, but in 2006 the I.R.s. said it appeared to be an abusive tax shelter and issued tighter restrictions to regulate the practice. That ruling was enough to persuade most wealthy taxpay-ers to abandon the technique, according to tax lawyers and records at the securities and Ex-change Commission.

Advisers to Mr. Lauder maintain that his deal “was made in compliance with published I.R.s. guidance on these types of transactions and was fully reported as required by s.E.C. rules,” said his spokesman, Gary Lewi.

In theory, Mr. Lauder is scheduled to pay taxes on the $72 million when the shares are actually delivered in 2014. But tax experts say wealthy taxpayers can use other accounting techniques to further defer their payment.

The tax burden on the nation’s superelite has steadily declined in recent decades, accord-ing to a sliver of data released annually by the I.R.s. The effective federal income tax rate for the 400 wealthiest taxpayers, representing the top 0.000258 percent, fell from about 30 percent in 1995 to 18 percent in 2008, the most recent data available.

When Mr. Lauder ran unsuccessfully for the Republican nomination for mayor of New York and released his tax return to the public, he re-ported paying 30 percent in total federal, state and city taxes on about $30 million in income in 1988. At the time, his net worth was estimated at nearly a quarter of a billion dollars.

Mr. Lauder’s more recent tax returns re-main private, and he declined to make them available for this article.

The Family FortuneMr. Lauder, now 67, was born into a storied

American fortune. His mother, Estée Lauder, the daughter of Eastern European immigrants, began selling homemade beauty creams at a few New York City hair salons in the 1940s and built her product line into a multibillion-dollar global empire.

As the son of a fabulously wealthy fashion icon, Mr. Lauder developed aristocratic tastes — and grand aspirations — at an early age. He summered in Vienna as a boy, developing a pas-sion for Austrian art and medieval armor. At age 13, he bought his first schiele with money

































































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from his bar mitzvah. Mr. Lauder grew so en-thralled by politics as a young man that he told friends he dreamed of becoming the first Jewish president of the United states.

After studying in Brussels and Paris and at the Wharton school at the University of Penn-sylvania, he joined the family business in 1964 and served in a variety of limited roles. While his older brother Leonard rose to become Es-tée Lauder’s chief executive, Ronald engaged in a variety of pursuits: becoming a major Re-publican fund-raiser; serving a rocky tenure as ambassador to Austria; running for mayor, an unsuccessful bid in which he spent $363 for each vote he received; and starting an assort-ment of business ventures in Eastern Europe, one of which went bankrupt during the technol-ogy bubble.

While the family’s wealth was created by hard work and ingenuity, it was bolstered by aggressive tax planning, a skill that has become Ronald Lauder’s specialty. When Mr. Lauder’s father, Joseph, died in 1983, family members fought the I.R.s. for more than a decade to re-duce their estate tax. The dispute involved a block of shares bequeathed to the family — the estate valued it at $29 million, while the I.R.s. placed it at $89.5 million. A panel of judges ul-timately decided on $50 million, a decision that saved the estate more than $20 million in taxes.

Estée Lauder Companies went public in 1995, and Ronald Lauder and his mother cashed in hundreds of millions of dollars in stock but managed to sidestep paying tens of millions in federal capital gains taxes by using a hedging technique known as shorting against the box.

Together, Mr. Lauder and his mother bor-rowed 13.8 million shares of company stock from relatives and sold them to the public during the offering at $26 a share. selling borrowed shares in this way is referred to as a short position. since the Lauders retained their own shares, the maneuver allowed them to have a neutral position in the stock, not subject to price swings. Under I.R.s. rules at the time, they avoided pay-ing as much as $95 million in capital gains taxes that might otherwise have been due had they sold their own shares.

such transactions allowed investors to cash in their shareholdings without paying taxes. But the Lauders’ use of the technique was so ag-gressive that Congress enacted a law afterward

that limited the length of the tax deferral. And the Lauders eventually paid tens of millions in stock from the transaction.

still, the family’s tax planning was effective enough that after Estée Lauder died in 2004, she passed down nearly $4 billion to her heirs, ac-cording to tax experts who studied the case and estimated that the estate was taxed at an effec-tive rate of 16 percent — about a third of the top estate tax rate at the time.

Ronald Lauder has not been a director of the company since 2009, but he still serves as the president of its Clinique Laboratories subdi-vision. He also sublets a full floor of office space from Estée Lauder, on the 42nd story of the Gen-eral Motors Building in Manhattan, which serves as the hub for the matrix of foundations, invest-ment funds, partnerships and trusts used to con-trol his businesses and personal finances.

His stake in Estée Lauder Companies, ac-cording to regulatory filings, is valued at more than $600 million. Nearly $400 million of that stock is pledged to secure various lines of cred-it. Many financial planners consider it impru-dent for principal shareholders in a company to borrow against their stock. But it remains a popular way for wealthy taxpayers to get cash out of their holdings without selling and paying taxes.

There is a certain irony that Mr. Lauder has used $72 million worth of his Estée Lauder shares to carry out his latest state-of-the-art tax reduction tactic. These contracts emerged as a popular tool about a decade ago and were developed by accountants and tax planners af-ter Congress closed down the loophole on the Estée Lauder public offering. The I.R.s. began cracking down on these contracts in 2008, and has pursued a prominent case against the bil-lionaire Philip Anschutz, who used one to avoid more than $140 million in federal taxes.

Whether or not the I.R.s. agrees with Mr. Lauder’s contention that his contract is legiti-mate, some tax policy experts say the deal il-lustrates how the wealthy take advantage of the system.

“There’s real truth to the idea that the tax code for the 1 percent is different from the tax code for the 99 percent,” said Victor Fleischer, a law professor at the University of Colorado. “Any taxpayer lucky enough to have appreci-ated property is usually put to a choice: cash

out and pay some tax, or hold the property and risk the vagaries of the market. Only the truly rich can use derivatives to get the best of both worlds — lots of cash and very little risk.”

While Mr. Lauder’s stock holdings in pub-licly traded companies show some of his tactics, much of his wealth is harder to examine be-cause it is controlled by a maze of privately held trusts and companies. Court documents, s.E.C. filings and property tax records spotlight a few of the more ordinary tax breaks used by afflu-ent people.

significant portions of his inherited stock are held in family trusts, which reduce the ul-timate estate tax. Mr. Lauder and his wife have also established their own family trusts, allow-ing them to bequeath their wealth to their heirs with minimal taxes.

Other trusts and partnerships control his real estate properties in Palm Beach and the Hamptons and at 740 Park Avenue, a building that was once home to John D. Rockefeller, and is known as one of the world’s wealthiest apart-ment buildings.

United states tax law allows taxpayers to deduct mortgage interest on one’s homes up to $1.1 million in debt. Households with more than $1 million in income claimed more than $27 billion in such deductions from 2006 to ’09, ac-cording to a report this month by senator Tom Coburn of Oklahoma, who said some wealthy taxpayers even deducted mortgage interest on their yachts.

And there is no limit on the amount of prop-erty taxes that can be deducted from federal income. so Mr. Lauder is entitled to deduct the $400,000 he pays annually on his Palm Beach mansion as well as what he pays on his home on Park Avenue and his holdings in the Hamptons.

“This welfare for the well-off — costing bil-lions of dollars a year — is being paid for with the taxes of the less fortunate, many who are working two jobs just to make ends meet, and i.o.u.’s to be paid off by future generations,” said senator Coburn, a Republican, who has called for limits on tax breaks for high earners.

Mr. Lauder deducts property taxes on all of his holdings, his spokesman said. Mr. Lauder declined to say how much that reduced his fed-eral taxes, but said he did not receive tax ben-efits in some years because of the alternative minimum tax and other limits.

Charity and Tax BreaksA week before the opening at the Neue Gal-

erie last month, Mr. Lauder appeared at anoth-er gala, 40 blocks south, at the New York Public Library, to receive the Carnegie Foundation’s Medal of Philanthropy.

The program honored people who have giv-en profusely to charities, including Mr. Lauder’s brother Leonard and his wife, Evelyn (who died Nov. 12), whose causes include the Whitney Mu-seum and the pink ribbon campaign for breast cancer awareness.

Ronald Lauder and his wife, Jo Carole, were honored for a variety of contributions: the work of their joint foundation supporting hospitals, rebuilding monuments and refurbishing Ameri-can embassies around the world — more than a quarter of a billion dollars over the last five years, according to his spokesman.

The Ronald s. Lauder Foundation has do-nated tens of millions of dollars to rebuild Jew-ish communities devastated by the Holocaust and communist rule. Mr. Lauder has also given to a variety of Jewish and Israeli organizations, including the World Jewish Congress, where he has served as president since 2007. Richard Parsons, the former Time Warner chairman, presented the award, calling Mr. Lauder and his wife two of “the nation’s pre-eminent support-ers of the arts and civic causes.”

Mr. Lauder said his life was changed 25 years ago when he visited a kindergarten in Austria and met a classroom full of Jewish chil-dren who were refugees from Russia. still, he said he found it odd to be referred to as a philan-thropist.

“I did what I wanted to do,” he said. “What I thought was right.”

A Passion for ArtIn the United states, Mr. Lauder has focused

on what he calls his greatest passion — art.In 1976, at age 32, his generous donations

helped him become the youngest trustee of the Metropolitan Museum of Art. He later served as chairman of the Museum of Modern Art and remains an honorary chairman. He has donated and lent artwork to an assortment of museums. Part of his collection of lavishly decorated cer-emonial armor is on display at the Met, in a gal-lery named for him.

As all art collectors may, Mr. Lauder is enti-

tled to deduct the full market value of artworks donated to museums. (For years, Mr. Lauder availed himself of a quirk in the tax code that allowed donors to take a deduction for donating a portion of an artwork, without actually turn-ing over the art. That break, known as fractional donation, was eliminated in 2006.)

Unlike some wealthy collectors who are criticized for using tax breaks to underwrite private collections that offer little access to the public, Mr. Lauder is widely praised for making his artwork a community asset.

The Neue Galerie, created by Mr. Lauder and serge sabarsky, who died in 1996, in a man-sion once owned by Grace Wilson Vanderbilt, the widow of Cornelius Vanderbilt III, offers public viewing of an exquisite collection, worth more than $200 million even before Mr. Lauder added dozens of pieces for its 10th anniversary.

sheldon Cohen, a former I.R.s. commis-sioner, said that when used as intended, the tax code’s breaks for art collectors balance private interests with the public good.

“If an art collector makes significant con-tributions, and the public actually gets access to the works they are donating, then the major thing the collector gets is prestige and social status,” said Mr. Cohen, now a lawyer in Wash-ington.

At times, Mr. Lauder’s efforts to enhance his art collection have coincided with tax avoid-ance techniques.

In 2006, three months after he agreed to pay $135 million, a record at the time, for the Klimt painting “Adele Bloch-Bauer I,” Mr. Lauder sold a $190 million stake in his broadcast network CME.

When asked about the sale, Mr. Lauder’s spokesman said the proceeds were taxable in the United states at the full capital gains rate. Even then, though, CME’s complex corporate

structure — it operates in Central Europe, is organized as a Netherlands holding company, keeps its headquarters in Bermuda and routed the $190 million sale through two Cayman Island companies — allowed Mr. Lauder to minimize taxes in countries outside the United states where it does business.

some tax reform advocates say that it is unfair that the wealthiest can subsidize their lifestyles using myriad offshore maneuvers and complex accounting strategies.

“It’s admirable when people back their charitable impulses up with donations,” said scott Klinger, tax policy director of the group Business for shared Prosperity. “But the tax code shouldn’t allow the wealthy the kind of loopholes that let them, essentially, force other taxpayers to underwrite donations to their pet causes.” n

This article has been revised to reflect the following correction published on December 9, 2011:

An article on Nov. 26 about the tax strate-gies used by the businessman and philanthro-pist Ronald s. Lauder referred imprecisely to the tax treatment of art in commercial settings. While the purchase of decorative art or lease payments on rented art may be deducted or de-preciated as a business expense, the cost of ac-quiring fine art like the examples in Mr. Laud-er’s collection is generally not deductible. The article also misidentified the previous owner of the Fifth Avenue mansion that is now the Neue Galerie. It was owned by Grace Wilson Vander-bilt, the widow of Cornelius Vanderbilt III, not by Cornelia Vanderbilt. Also, a picture with an earlier version of this article was published in error. It showed a house owned by Leonard A. Lauder in Palm Beach, Fla., not the one owned by Ronald s. Lauder.

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