New regulation benefits Trump adviser
The role of billionaire investor Icahn raises a conflict-of-interest question
Billionaire investor Carl Icahn, President Donald Trump’s regulatory adviser, stands to benefit from one of the few significant regulations published since Trump took office, records show.
The new regulation expands the use of a lucrative securities structure that gives qualifying energy companies a corporate tax break.
Trump appointed Icahn a “special adviser” in December to help him dismantle a host of “strangling regulations.”
Icahn, 81, has a net worth of about $16.5 billion, according to Forbes, and is chairman of the board of a Sugar Land-based refining company and holds a large stake in a Houston-based shale gas exporter. His portfolio includes other industries potentially impacted by regulatory changes, including investing, automotive, gaming, metals, mining, real estate and home fashion.
According to the White House, Icahn is not a federal employee and thus not subject to the financial and ethics disclosures that apply to other high-level posts. Nor will he have to put his businesses out of arm’s reach by way of blind trusts.
“This is the problem with Carl Icahn,” said Richard Painter, the former chief ethics counsel to President George W. Bush.
It is unclear whether Icahn weighed in on the IRS’ new tax regulation,
published Jan. 24 despite a promised regulatory freeze. The rule was at least two years in the making.
Icahn did not return calls, and the IRS did not respond to questions about the regulation.
Seven Democratic senators asked in early February for clarification on Icahn’s role in the administration, warning of potential conflicts of interest.
“We have specific concerns about Mr. Icahn’s role given his previous public statements and significant ownership interest in CVR Energy,” the senators wrote.
Energy MLPs
There is no question that Icahn’s business empire is affected by the new regulation, which involves master limited partnerships, or MLPs, specifically in the energy industry.
Icahn was among the first generation of financiers to take advantage of MLPs. He formed his first MLP, Icahn Enterprises, some 30 years ago. Its last quarterly report shows how beneficial the structure can be. The MLP paid taxes of $15 million on income of $253 million for an effective tax rate of 5.9 percent — far below the standard corporate rate of 35 percent, according to Securities and Exchange Commission records.
Icahn Enterprises paid at least $2 billion for an 82 percent stake in Sugar Landbased CVR Energy in 2012, then split off its refineries into an MLP.
CVR Refining’s initial offering resulted in $690 million in gross proceeds, according to SEC filings. CVR Energy also created another MLP, CVR Partners, a nitrogen fertilizer business.
A 2013 New York Times article noted that the CVR deal earned Icahn a profit of about $2.5 billion, largely because of the MLPs. The deal, Icahn told the Times, was “right up there” with the best of his career.
“We saw the added value of creating a M.L.P.,” Icahn said in the Times interview. “It’s tax-efficient, and it passes profits through to shareholders, which is great, especially in a lowinterest-rate environment.”
In order to qualify as an MLP, a company must derive 90 percent of its income from specific sources, including interest, dividends, rent or natural resources.
Over the years, as the energy industry became more complex, so did the questions about what activities qualified under the law. The IRS in 2014 stopped reviewing petitions on a caseby-case basis and started rule-making.
A proposed rule, released in 2015, included a list of allowable activities, and sent some MLPs into a frenzy, because it looked like they’d lose their status.
Michael Bresson, a partner at Houston-based Baker Botts who specializes in income tax planning, said many felt the proposed rule “muddied the water.”
The IRS received more than 130 comments on the proposed rule, which looked like it wasn’t going to be finalized under the Obama administration. Then it appeared certain to be included in Trump’s regulatory freeze. Instead, it was published — with revisions that made it much more inclusive.
That helped remove uncertainty for investors, including those in CVR Refining.
Its annual report, filed with the SEC on Feb. 21, noted that the regulation would allow the company to continue as an MLP.
“However,” the SEC filing states, “there are no assurances the Final Regulations will not be revised to take a position that is contrary to our interpretation of the current law.”
Shares of CVR Energy have nearly doubled since Trump’s election, including a big bump the day after Ichan was named regulatory adviser.
Icahn also holds about 14 percent interest in Cheniere Energy, a Houstonbased MLP that exports shale gas. It looked like Cheniere was in jeopardy of losing its MLP status under the proposed rule, but it fared well with the revision.
“There are few people that were adversely affected,” Bresson said. “Most people in the industry were glad to be rid of those old proposed regulations and happy to have the new final rule.”
Unprecedented?
Painter said it is unprecedented for a special adviser to the president to not be a government employee, even if he is unpaid and working part-time. If Icahn were a federal employee, he’d be required to sell his interests in any companies substantially affected by the regulations he’s in charge of overhauling, he said.
“If he’s getting involved personally and substantially in a matter that affects his financial interests, then that would be a criminal offense,” Painter said, citing the conflict-of-interest statute that prohibits an executive-branch employee from participating in a government matter that affects his financial interests.
“He needs to either become a White House employee, which means selling off a lot of investments and staying out of things that affect him, or he has to stand down from getting involved in government business, other than to be a friend to the president and give him personal advice once in a while,” Painter said.