Poor Leon Black

Poor Leon Black. For the uninitiated, Leon Black is a financial titan who is suffering guilt by association with Jeffrey Epstein, the result of which is Black’s resigning from his post as CEO of one of the world’s largest hedge funds and calls for his removal as the Chairman of the board at the Museum of Modern Art. Somehow, I fear that the attention to the Black/Epstein relationship may be somewhat misdirected. I have no idea about the extent of Mr. Black’s knowledge of Jeffrey Epstein’s behavior — directly or indirectly — and for that reason, I’m willing to leave that aspect of this saga to others. Independent of the issue of sexploitation, though, this story has implications that affect a much broader audience than Epstein’s sexual victims. I’m focused on the implications for US taxpayers.

According to Wikipedia, Black has recently had an estimated net worth approaching $9 billion and a lifestyle that has allowed him to assemble one of the world’s most impressive private art collections. It’s not been uncommon for him to spend scores of millions of dollars for individual pieces. His wealth notwithstanding, it’s been reported that Black paid Jeffrey Epstein $158 million over a five-year period to develop tax strategies designed to reduce Black’s tax liabilities. You can only imagine how much he saved in taxes to make paying $158 million to Epstein a rational choice.

Our tax system needs to be fixed. The reporting of these financial dealings highlights the fact that the IRS allows those with outsized financial standing to orchestrate individualized tax avoidance programs that aren’t broadly available, leaving the rest of us feeling like saps. The claim that these shenanigans may be legal is no defense. Arranging and participating in these kind of tax deals is a deplorable use of talent and resources. It’s one thing to claim any legally admissible deduction to which one is entitled, but it seems to be another thing altogether to set up special purpose vehicles designed solely to achieve an intended tax effect. I don’t claim to know or understand just what Jeffrey Epstein brought to the table to justify the fees he “earned,” but it’s a safe bet that Black wouldn’t have had the same outcome had he engaged H&R Block.

In my professional life, I’ve served as an expert witness in lawsuits involving financial disputes — often tax related — where the legality of disputed transactions depended upon whether they had economic merit exclusive of tax considerations. Often, that distinction was difficult to determine, but the objective was a worthy one; and that same consideration would seem to be appropriate here.

The fact that these activities are performed by rich people for rich people gives rich people a bad name. You’d think, being rich, those who engage in tax avoidance schemes could afford to be more high-minded, but I guess not. Our tax system needs revision to put a check on these apparent excesses. At a minimum, greater budgetary authority needs to be authorized for auditing the tax returns of high net worth individuals. It’s been well documented that expanded audits of this type will more than pay for their incremental costs. Beyond that, I’d certainly like to see a wholesale reconsideration of tax rules. It doesn’t require the nose of a bloodhound to realize that something stinks about what currently passes as legal. The time is ripe to set things right.