Sophisticated Taxpayers

In the financial world there is a classification often used by the Securities and Exchange Commission called a "sophisticated investor." It's used to differentiate between the guy on the street who may not understand the risks involved in a particular class of securities from an experienced investor who does, or at least should. So, for instance, Warren Buffet or a PhD in Finance can be sold these securities because they presumably understand the risk, while a short order cook making his first foray into market could not be. That term came to mind during the fiasco that is the Obama cabinet appointments.



Three of Obama's high profile picks were suddenly found to be, or have been tax deficient. All three, in my estimation would qualify as sophisticated taxpayers. Tom Daschle, the former Senate majority leader apparently filed amended returns as soon as he was offered the job to head Health and Human Services. The original story was that he had not declared the use of a car (limousine) and driver that had hauled him around Washington DC the past 3 years. (You mean he didn't go back to live in South Dakota?) At first glance this seems plausible even to those who know that it should be considered income. It was just an oversight. But after withdrawing his name from contention, the story started to add a few details. The first tip was that the back taxes amounted to $120,000 plus $11,000 in interest. The problem with that number is that it doesn't match up. If we were to assume he's at a marginal rate of 35%, that would make the value of the car and driver around $350,000. I don't think so, even if they gave him the limo. Then it came out that part of the liability came from consulting fees he received and failed to declare as income, and that he "took more in charitable deductions than he should have." Which sounds like he fabricated them. I think in most peoples view, those are both more aggressive actions that would constitute tax evasion. But wait, there's more.

His pick for the newly created productivity czar was one Nancy Killeher. She had worked for the huge international consulting firm, McKinsey & Co. While they are not CPA's, their expertise is in finance and budgeting. What little is out there on this story is total bullshit. It seems that as soon as she was named, the AP did a little digging and discovered that she had a tax lien filed against her house for non-payment of workers comp insurance for a domestic employee. The tax lien was filed in 2005 and was paid off 5 months later. Taking that information at face value, I cannot believe it is at the heart of her withdrawal. A lien of less than $950 is filed against her house 4 years ago, and she paid it off long before she got the nomination. What's the big deal? Obviously this was not about that particular issue, and Obama's team isn't talking. We can only hope that the real reason comes out, but that's doubtful. I can't see anybody pursuing it on a nominee who withdrew. We'll see. But wait there's more!

Timothy Geither was the head of the Federal Reserve Bank of New York when Obama picked him for Treasury Secretary. But he had previously worked for the International Monetary Fund. But he was apparently paid as a contract employee for those 5 years and not as an employee. That meant he got a 1099 instead of a W2 and would have been required to pay self employment taxes of around 15%. It is absolutely impossible that he did not understand what his tax situation or status was. In fact, the IMF, well aware of this, would "gross up" his pay each year. That is, they gave him an additional bonus that equaled that 15% and it was for the express purpose of providing him with the cash with which to pay those self employment taxes. For all 5 years, he took the supplemental tax bonus and pocketed it, never paying any self employment tax. Furthermore, when he finally got caught by the IRS at the end of the 5 years, he only paid the tax on the last three because the statute of limitations had run out on the other two. He also tried to write off his son's summer camp as a business expense. It was only after getting the nomination for Treasury that he went and paid off those years where the statutes had run out.

But what really makes this whole thing stink is that Geither who by any measure was far and away the worst offender with the least of a defense, particularly ignorance, is the one who got confirmed while the others hastily withdrew their nominations. We may never know what it is, but there is FAR more to this story than we know now.