Tax loophole for Trump’s rich picks at risk

President Trump has assembled the wealthiest Cabinet in modern U.S. history — $4.5 billion by one estimate.

The top five richest:

  Wilbur Ross, Secretary of Commerce — $2.5 billion

  Betsy DeVos, Secretary of Education — $1.25 billion

  Rex Tillerson, Secretary of State — $325 million

  Steven Mnuchin, Secretary of the Treasury — $300 million

  Andy Puzder, Secretary of Labor — $45 million

Besides a plump net worth, these men and women have another thing in common: The benefit of an obscure tax law created as part of “The Ethics Reform Act of 1989.”

First, some background …

President H.W. Bush signed the Act on Nov. 30, 1989.

Key reforms included:

  The extension of post-employment “revolving door” restrictions to the legislative branch

  A ban on receipt of honoraria by Federal employees (except the Senate)

  Limitations on outside earned income for higher-salaried, noncareer employees in all branches

  Increased financial disclosure

  Creation of conflict-of-interest rules for legislative branch staff

  Limitations on gifts and travel

Bush also wanted to avoid penalizing individuals who must sell assets to take on a public service role, such as Cabinet-level positions.

That gave birth to …

Section 1043 of the Internal Revenue Code

Section 1043 is for people who are forced to divest holdings to meet federal conflict-of-interest rules. It gives them the ability to defer paying capital-gains tax on the sale.

That is, as long as they reinvest the money in investments approved by the government, which include U.S. Treasuries and highly diversified mutual funds.

This can be a lucrative benefit for ultra-wealthy appointees.

How lucrative?

Former Goldman Sachs CEO and George W. Bush’s Treasury Secretary Henry Paulson used Section 1043 in 2006 to avoid paying an estimated $200 million tax bill, according to The Economist.

Now Tillerson is one of the Trump nominees who will surely jump on board the same deal …

The former Exxon Mobil (XOM) CEO directly owns $54 million of the oil giant’s stock. Using Section 1043, Tillerson can sell those shares and buy Treasuries or diversified mutual funds while deferring millions in capital-gains taxes.

Note that I said “deferring,” not “avoiding forever.”

The money Tillerson receives from selling XOM, and any additional appreciation on it, is tax-free as long as he keeps it invested. And that could be forever if he doesn’t touch it before he dies. Then at that point his heirs would receive the funds, including growth, income-tax free.

Through Tillerson’s $180 million XOM retirement package, the equivalent value of 2M unvested shares will go into a trust, and he can sell off his 600,000+ vested shares that are valued at about $54 million.

And even if Tillerson pulls his money out of the government-approved investments after leaving office, those dollars will have compounded faster since they were growing tax-free.

In addition to avoiding taxes for years, or even decades, Tillerson is able to better-diversify his portfolio so it isn’t so tied to only one company.

Mnuchin will likely use Section 1043, too, when he is forced to sell his Berkshire Hathaway (BRK), AT&T (T), Microsoft (MSFT) and Goldman Sachs (GS) stocks.

On the other hand, investors like Ross may actually lose money on some of the assets he has to sell. Much of his holdings are in illiquid assets, like private-equity funds, that he may have to sell at a discount.

There are those in Congress, however, who want to prevent the mega-rich from reaping huge tax benefits from their new government jobs.

“Public service is an honor, and billionaires shouldn’t require federal tax breaks for their service.” — Sen. Dianne Feinstein (D-CA)

And several Senators have introduced the …

‘No Windfalls for Government Act’

This legislation (S.13) would limit the amount of capital gains that can be deferred under Section 1043 to $1 million.

S.13 was sponsored by Sen. Sheldon Whitehouse (D-R.I.). He said,

“As Donald Trump prepares to nominate what could be the wealthiest Cabinet in history, this bill would prevent billionaires from reaping enormous tax benefits from their new jobs. The ultra-wealthy do not need a financial incentive to enter public service.”

Sen. Elizabeth Warren (D-Mass.), one of the three co-sponsors, said,

“Not only is Donald Trump giving a gang of billionaires control of our government, he’s offering them a special tax break just for signing up. This bill would stop billionaires from getting yet another special favor from Donald Trump.”

Another co-sponsor, Sen. Dianne Feinstein (D-Calif 2vzp62i.) noted,

“It’s inappropriate for the federal government to provide excessive tax breaks to Cabinet members in return for complying with ethics rules. Public service is an honor, and billionaires shouldn’t require federal tax breaks for their service. This bill appropriately limits tax benefits for wealthy Cabinet members who must remove their own conflicts of interest.”

The third co-sponsor, Sen. Tammy Baldwin (D-Wisc.), summed it up with,

“When billionaires move through the revolving door from the private sector to public service, they should not be rewarded with tax loopholes. President-elect Trump has every right to fill his Cabinet with billionaires and he has, but these wealthy insiders should not be allowed to dodge paying their fair share of taxes.”

As of this writing, the “No Windfalls for Government Service Act” (S.13) has been referred to the Committee on Finance.

How do you feel about wealthy government appointees who can delay paying capital-gains taxes to conform to conflict-of-interest rules?

Should public service be an honor without financial incentives … a way to give back to the country that has been so good to you?

Or perhaps you favor a cap, such as the $1 million in the proposed Act, to better help middle-class individuals avoid the financial burden of transitioning into government service.

You can let your Senators know by clicking here.

And while you’re at it, please share your views with us and other readers in the comment section below.

Best,

Brad

1 Response to Tax loophole for Trump’s rich picks at risk

  1. The law as it stands seems reasonable if generous in some cases. Forcing appointees to divest and take
    capital gains would dissuade many from serving.
    Your story omits to point out that cabinet members
    having invested in treasuries and mutual funds per
    the current law will realize taxable income from those
    investments during their terms of service. The senators you quote are up to their usual wealth-bashing. I hope their bill fails.

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