Deep pockets can hold sticky details

What’s a politician to do upon discovery that a generous billionaire donor turns out to be a major tax dodger? It’s a dilemma already encountered by the Republican and Democratic parties in this season of unprecedented political fundraising.

At a time when newly powerful Democrats, including presidential hopeful Sen. Hillary Clinton of New York, are pressing for aggressive pursuit of unpaid tax bills to boost federal revenue, the party’s biggest financier and prominent Clinton backer is tied to one of the largest individual tax avoidance schemes on record.

And two Republican billionaires -- Texas brothers who have poured a small fortune into supporting the presidential bids of two George Bushes and, more recently, Sen. John McCain (R-Ariz.) -- were accused last year of exploiting offshore havens to escape taxes on nearly $200 million in gains.

Amid predictions that the 2008 presidential campaign will be the most expensive in history, with spending possibly topping $1 billion, pressure to raise huge sums of cash is a certainty. For candidates, the question is whether the headlong pursuit of deep pockets may also risk embarrassment over their donors’ financial baggage.

Sheila Krumholz, executive director of the Washington-based Center for Responsive Politics, said that candidates sometimes have to make their own “cost-benefit analysis.”

“The political cost of taking tainted money can be far greater than the value of the contribution itself,” she said.

The alleged tax-dodging billionaires may offer a case in point. They ended up being challenged by the Internal Revenue Service and investigated by Congress. The billionaires denied wrongdoing even as they acknowledged trying to avoid or defer significant tax bills.

And while some politicians have returned the businessmen’s donations, others seem not to have been troubled by their gifts. Such cases tend to be complex and the distinction between error and wrongdoing murky.

“It all boils down to which side the public comes down on. Will they blame the candidate for being involved, or the donor?” Krumholz said.

With a personal fortune worth billions and control of the leading Spanish-language media company in the U.S., Hollywood mogul Haim Saban stands alone among Democratic Party donors.

Over the three election cycles from 2002 through 2006, Saban contributed $12.7 million to the party and to Democratic candidates -- outstripping the runner-up in individual donations, real estate investor and movie producer Stephen L. Bing, who gave $8.9 million. Saban has been a fervent supporter of Clinton in her quest for the White House, as he was of her husband, President Clinton.

Mixed blessing

What makes his support something of a mixed blessing is his aggressive use of offshore tax shelters in 2001. In recent months, Saban has been negotiating final settlement of a massive IRS claim over his attempt to avoid paying taxes on a $1.5-billion capital gain -- a savings of $300 million or more.

Stephanie Pillersdorf, a spokeswoman for the financier, said this week that Saban has agreed to pay all taxes due, as well as penalties and interest. She would not say what the total payment would be.

The details of Saban’s IRS-challenged tax strategy were first disclosed in August by the investigations subcommittee of the Senate Committee on Homeland Security and Governmental Affairs.

The billionaire’s close ties to the Clintons compound the potential for political embarrassment.

For example, a company created as part of Saban’s tax avoidance scheme was used to make a $10-million loan in 2004 to the William J. Clinton Foundation to help fund construction of the Clinton library in Little Rock, Ark., the Los Angeles Times has learned. A spokesperson said the Clintons and the foundation were unaware of Saban’s tax troubles at the time, so the use of any questionably sheltered funds was unwitting.

Democrats defend Saban, noting that he has publicly acknowledged his attempted tax dodge and has agreed to settle the case. A spokesman for Hillary Clinton called Saban “a strong supporter” and said Clinton was unaware of his tax problems until they were publicly disclosed.

Phil Singer, a Clinton campaign spokesman, also endorsed the Hollywood tycoon’s defense that he had simply followed the advice of lawyers.

“As Haim Saban himself has said, not even he knew about the tax issues surrounding” his company, Singer said.

Like Saban on the Democratic side of the political fence, the Texas billionaire brothers Sam and Charles J. Wyly Jr. have been heavy donors to Republicans for years. Their generosity has gained them invitations to the White House and Camp David.

Sam, 72, and Charles, 73, left jobs at IBM to found software companies and invest in a range of other ventures, including the Michaels chain of craft supply stores and Green Mountain Energy, which markets electricity from “clean” sources. The Wylys’ use of offshore trusts as tax shelters has prompted investigations by the Securities and Exchange Commission, the IRS and Congress.

Public records show that contributions from the Wyly brothers, their family members and their companies to the GOP totaled $1.1 million in 2000 and 2002. Since the McCain-Feingold campaign finance reform law went into effect the day after the 2002 election, they have contributed roughly $500,000 to the party and some $350,000 more to state GOP committees or individual candidates.

In fact, they have been prominent Republican financiers since the Nixon presidency, giving the party and its candidates a total estimated by the Wylys of about $10 million. In 2000, the Center for Public Integrity noted that the brothers ranked ninth on the list of patrons of George W. Bush’s political career.

That same year, they helped underwrite an ad campaign during the GOP primary attacking Bush rival McCain’s environmental voting record. In 2004, they contributed to attack ads against Democratic presidential nominee John F. Kerry by the Swift Boat veterans.

Last year, the Wylys and McCain appeared ready to forget their differences. The brothers donated $20,000 to McCain’s 2008 presidential bid in early 2006 and agreed to co-chair a Dallas fundraiser on his behalf.

By then, the family’s business practices were under investigation. As the Senate committee later reported, the Wylys had employed “an armada of lawyers, brokers, financial professionals and offshore service providers” to engage in “the most elaborate offshore operations” it had seen: a network of 58 overseas trusts and corporate shells designed to evade taxes on $190 million in corporate compensation.

McCain refunded their $20,000 in April 2006 and canceled the brothers’ role in the Dallas fundraiser. His campaign said it rejects gifts from anyone under investigation. At the time, then-Senate Majority Leader Bill Frist of Tennessee also returned $5,000 the Wylys gave his political action committee.

But others still accept their money. Records show that in the last year since the Wylys came under federal scrutiny, the Republican National Committee and its Senate and congressional campaign committees have received $175,000 from them.

Nor have their donations been refunded by other Republican senators during the same period, among them John Cornyn of Texas, Orrin G. Hatch of Utah and Jon Kyl of Arizona, records show.

The Wyly brothers refused an invitation to appear before the Senate and said they would invoke their 5th Amendment rights if compelled to appear. In their absence, Sen. Carl Levin (D-Mich.) chastised them for what he called their “scam and scheme.”

Transactions defended

The Wylys’ tax advisors defend their transactions, which are still under investigation by the Securities and Exchange Commission, the IRS and a grand jury.

“This was a tax-deferral strategy, one that the Wylys do not believe violated any law,” said their Dallas-based attorney William A. Brewer III. He added that the brothers cooperated fully with the Senate subcommittee. “Not only were the transactions pursued under the watchful eyes of high-powered professionals, but they were entirely appropriate strategies used by many people during that period of time,” Brewer said.

The tax-avoidance strategies of Saban and the Wylys became public last summer when the Republican-led Senate subcommittee held its hearing into notable examples of tax schemes. It attracted limited media coverage at the time.

Unlike the Wyly brothers, Saban appeared at the Senate hearing Aug. 1. He pleaded ignorance, said he mistakenly trusted tax advisors who received fees in excess of $50 million and promised he would repay the government.

Saban, 66, and his wife, Cheryl, have been big donors to the Clintons and other politicians, mostly Democrats. According to public records, they have given $40,400 to Hillary Clinton’s Senate campaigns and political action committees since 1999.

In 2002, Saban announced the largest single individual gift to the Democratic Party, $7 million toward a new party headquarters in Washington.

Saban also donated $5 million to Bill Clinton’s presidential library, on top of providing the short-term $10-million loan to the Little Rock, Ark., project.

The corporate partnership making the Clinton library loan, Titanium Acquisition Corp., was created as the vehicle for Saban’s tax shelter. Officials of the William J. Clinton Foundation said they did not know about Saban’s tax maneuver or Titanium’s role in the strategy at the time of the loan.

The loan, which was made in December 2004 and repaid the following March, was arranged to help the library bridge a temporary cash-flow problem related to construction, a Clinton spokesman said. The 2.48% interest on that loan was forgiven, Saban’s spokeswoman said.

The Hollywood billionaire’s brashness also has long attracted attention. As he recounted to the Washington Post in 2000, he was determined to rank as the top donor to the Democratic Congressional Campaign Committee that year. Told that another donor exceeded his total by $250,000, he submitted his own check for $250,000 to the committee -- and attached to it a $1 bill.

Earlier this year, he offered an outspoken defense of Hillary Clinton after the Clintons’ much-publicized split with longtime supporter David Geffen. Saban told The Times: “David knows in his heart of hearts that Hillary is the most qualified person to be the next president of the USA.”

Saban declined to be interviewed for this report. The scope of his tax scheme and his relationship with the Clintons and their foundation were pieced together through interviews, congressional documents and other public records.

He is a native of Egypt with dual Israeli and American citizenship. Saban made his fortune in the entertainment industry as the producer of the successful children’s television show “Mighty Morphin’ Power Rangers” in the 1990s. More recently, he joined a consortium of private investment houses to buy the Spanish-language media company Univision Communications Inc. from A. Jerrold Perenchio for $12.3 billion.

Saban served as a University of California regent from 2002 to 2004 and is well-known in Southern California as a philanthropist. In 2003, he and his wife donated a record $40 million to Childrens Hospital Los Angeles, part of a total of $100 million in gifts they made to health and educational institutions in the U.S. and Israel during that period.

Under questioning by Senate investigators, Saban conceded he was embarrassed by the tax controversy. “You have before you a very disappointed person, who feels misled, lied to, cheated,” he said.

But Sen. Frank R. Lautenberg (D-N.J.) chided Saban and others for employing questionable shelters, saying that paying taxes is a civic duty.

“You sought the shelters, you got the shelters,” Lautenberg said. “And now, when they’re out here in the public light, they don’t look nice.”

wally.roche@latimes.com

michael.hiltzik@latimes.com