.JPG)
~~~ How the president’s money man keeps $700 Million -- TAX FREE
~~~Ignored proposal…
Dear American Capitalist Reader,
Henry M. Paulson, Jr., who has been nominated for the Secretary of the Treasury and a member of President George W. Bush’s cabinet, is selling the idea that he has given up a $38 million annual salary as the CEO and chairman of Goldman Sachs Group to take a $183,500 job as a humble public servant.
This is pure claptrap.
Paulson didn’t rise to the top of that shark tank that is arguably the finest Wall Street investment bank on the planet by being a dupe.
Politicians Have Their Own RulesIf the Senate approves Mr. Paulson’s nomination -- as is expected -- he will receive a job perk that is only given to the privileged few. He will have the opportunity to take advantage of a tax loophole that will save him roughly $100 million dollars.
And, when I say save $100 million, I don’t mean tax-deferred until a later date. I mean actually keep the $100 million in his pocket.
Allow me to explain…
The Reagan/Iacocca RelationshipThroughout history, U.S. presidents have courted overachieving corporate executives to join their cabinets only to be rejected time and time again. One notable example occurred in Ronald Reagan’s second term when he asked Lee Iacocca to leave his post as chairman of Chrysler.
At the time, Reagan had an already positive working relationship with Iacocca when he was appointed by Reagan to head the Statue of Liberty-Ellis Island Foundation. Iacocca politely turned Reagan down and cited his continued mission at Chrysler as his reason for not moving to Washington.
More than a half-dozen years ago, I had lunch with President Reagan’s former press secretary, Marlin Fitzwater, and he confirmed Iacocca’s rejection but added that his reasons were more about economics than loyalty. Had Iacocca been nominated and approved by the Senate, he would’ve had to liquidate tens of millions in Chrysler stock in order to steer clear of any conflict-of-interest laws, thus resulting in a massive tax bill.
Reagan was disappointed with Iacocca’s decision, but it was understood. Going forward, though, this historical event would soon change policy as politicians realized the importance of having high-level executives fulfill roles in the executive branch.
Bush 41 Changes PolicySo, in 1989, then-President George H.W. Bush signed a bill that would grant a tax-exemption to individuals required to liquidate all or part of their stock holdings in order to accept a position in the West Wing. The purpose of this tax loophole is to allow government officials to defer capital gains taxes on assets they have to sell to avoid a conflict of interest.
The proceeds, though, have to be reinvested in government securities, like treasury bills and notes, or a broad array of mutual funds approved by the government.
Once the proceeds are diversified within the approved investments, the capital gains taxes are deferred until the holder decides to sell the securities at a later date. Think of it like a temporary tax-deferred IRA with no penalty for early withdrawal.
To make the exemption official, a cabinet nominee would need to obtain a “certificate of divestiture” from the Office of Government Ethics within 60 days of the sale of the assets. This, however, is a piece of cake considering a long list of approved options is available for investment.
A Bi-Partisan Tax LoopholeThe tax exemption has been taken advantage of in recent memory by the current Bush and Clinton administrations. The outgoing Treasury Secretary, John Snow, who was the former chairman of CSX Corporation, received the “certificate of divestiture” when he sold his $20 million worth of CSX stock. And Snow’s predecessor, Paul O’Neill, received the same treatment when he liquidated his $100 million position in Alcoa. O’Neill had served as Chairman of Alcoa before joining the Bush cabinet.
But the loophole is bipartisan as even a Clinton appointee received this favorable treatment. Goldman Sachs alumnus, Robert Rubin, didn’t sell his stake of Goldman stock, but rather opted to place it in a blind trust. But, before you think Rubin was acting patriotic by choosing to be hit with the tax liability, he still made ample use of the tax break by diversifying other portions of his vast fortune.
So, you think this tax loophole should be abolished because it provides the fattest of the fat cats with an unfair advantage over the common American? Well, there’s no chance of it going away anytime soon.
But, I haven’t even mentioned the most outlandish part of this tax loophole…
A Way to Never, EVER Pay the TaxIf the government official receives the “certificate of divestiture” and allocates their holdings into a government approved list of securities, thus deferring any capital gains taxes, and then dies, the official will forever escape the tax.
That’s right. If you hold the new securities until your demise, you will never owe the IRS a single nickel. Wow. What a deal!
A Chance to Stiff Uncle Sam Out of $100 MillionNow, let’s fast-forward to 2006, and take a look at Mr. Henry Paulson. Paulson owns 3.23 million shares of Goldman Sachs stock, worth an estimated $484 million dollars. He also has a truckload more in restricted stock and options worth another $200 plus million dollars.
If he were to sell his Goldman holdings, he would be staring at a tax bill well over $100 million dollars, according to Robert Willens, the top tax and accounting analyst at Lehman Brothers.
Once his nomination is approved, Paulson will most likely take advantage of the tax break, but he’ll also be thinking of these holdings for the rest of his life. Paulson is only 60 years of age, and will have a once-in-many lifetimes opportunity to offer his heirs a tax break of colossal proportions.
One has to wonder how much this tax break played into Paulson’s decision into taking President Bush up on his offer for the Treasury job. After all, Paulson had originally turned the President down, only to change his mind a week later. One must wonder if his former colleague, Mr. Rubin, took him out to lunch and suggest he take advantage of this legal policy while he has the chance. Who knows?
Tax Breaks for Them — Not UsIs this not right? Well, considering we are running the country on a deficit, spending billions on an unpopular war and are paying more taxes than ever before, it doesn’t sit well with Americans to know that somebody who has a treasure chest worthy enough of buying an NFL team is going to be granted the opportunity to bypass a tax bill that somebody else is going to have to pay for. And, it’s going to be people like you and me who have to make up the difference.
I’m surprised this topic hasn’t grabbed more headlines, especially considering we’re coming upon election season and some politicians may want to play the “rich people don’t pay enough taxes” card. Perhaps it’s because these same politicians may want to take advantage of this tax loophole for themselves one day or the finance is too complicated for the packs of journalists who would rather report on celebrities having babies.
Everybody should have a beef with a government that continues to change the rules as we go along. It almost seems unconstitutional that a member of the United States executive branch could receive such an opportunistic gift of not paying taxes, while the rest of the American population continues to see its income erode more and more by the government.
With all of this, though, Mr. Paulson is sure to do a great job in the Treasury because he’s smart enough to spot a great deal when it comes around. Of course, who wouldn’t take the job? You only have to work a couple of years, go to a handful of state dinners, shake some hands and you get a monster-size gift from the IRS.
Guess it’s nice work if you can get it.
Sincerely yours,
Todd M. Schoenberger,
Editor, Red Zone Network
Editors Note: Todd M. Schoenberger began his career in the financial services industry as a broker with Merrill Lynch & Co. where he specialized in helping individual investors achieve financial independence. After Merrill, Todd joined Legg Mason Wood Walker as an institutional trader where he was responsible for managing over US$140 million of cash for several publicly traded technology companies, and then went on to become a Rydex Funds manager.
Todd’s new newsletter, Diligent Investor, guides readers away from the hype of Wall Street, giving readers a blueprint for investment success. Readers gain a vision, with a mixture of very conservative stocks for the backbone of your portfolio, and a few juicy stocks to rack up consistent gains that turn into huge investment returns. By exploiting the technologies of tomorrow, readers can safely and effectively bank solid returns.
Learn more about Diligent Investor here…
Over to Ian Cooper with more…
Ignored by the United States…
You’re going to love this. When we were busy invading Iraq on March 19, 2003, Iran offered to begin talks with the United States, “recognize Israel and end support of Palestinian terror organizations,” according to Sunday’s The Washington Post. The proposal, according to reports, came in through fax with a letter of authentication from a Swiss ambassador.
But you’ll never guess what happened with the proposal -- was it (a.) welcomed with open arms, (b.) responded to, or (c.) ignored? If you guessed “c,” you’re right. The document, reportedly received by the Post was “confirmed as genuine by both American and Iranian officials.”
The Iranians probably saw what we did in the beginning of our Iraqi invasion, and we’re so scared they had to run home to change shorts before issuing an ignored proposal.
We missed an obvious opportunity to prevent Iran’s nuclear ambitions. Now, it’ll probably cost us another few hundred billion dollars to destroy what could have been prevented. Nice.
Also according to reports from The Jerusalem Post, “the documents detail Iran’s aims: ending sanctions, development of nuclear technology for peaceful purposes, and a recognition of its ‘legitimate security interests.’”
Iran also agreed to discuss a number of U.S. demands: full cooperation on nuclear safeguards, “decisive action” on terrorism, coordinated efforts in Iraq, cessation of “material support” for terror organizations, and accepting the 2002 Saudi solution to the Israeli-Palestinian conflict.
Top 5 U.S. Stocks
1. CFC International Inc. (CFCI:NASDAQ)
(+45.58%)
2. Qiao Xing Universal Telephone (XING:NASDAQ)
(+23.23%)
3. Pro-Fac Cooperative (PFACP:NASDAQ)
(+22.12%)
4. IGI Inc. (IG:AMEX)
(+20.37%)
5. Sunday Communications (SDAY:NASDAQ)
(+12.00%)
CFC International tops the list after agreeing to a buyout offer from a unit of Illinois Tool Works. The deal, valued around $76 million, offers $16.75 a share for the company, or a 48% premium over yesterday’s closing price.
Qiao Xing Universal Telephone traded higher after reporting earnings. The company grew revenue 42% to $356 million, while profit jumped 987% to $31 million.
IGI Inc. rebounded after announcing its compliance plan to remain on the AMEX exchange. The company had announced on Friday that it could be delisted.
Sunday Communications gained after a report claimed that its parent company, PCCW, might sell the company, along with the rest of its media and telecom assets, to Macquarie Bank of Australia for $5.2 billion.
Top 5 Global Markets
1. Hungary BSE
(+1.24%)
2. Brazil Bovespa
(+0.57%)
3. Belgium BEL-20
(+0.38%)
4. China Shanghai
(+0.38%)
5. Germany DAX
(+0.23%)
Asian markets retreated overnight, in the wake of yesterday’s poor showing on Wall Street. Investors were also worried that North Korea’s missile tests would destabilize the region. Personally, I think that Kim Jong-Il was just upset that his country had been supplanted in the news by Iran, and wanted to make international headlines again. Resource companies declined as commodities prices fell. Tech shares were also among the day’s losers.
European markets were mixed, with more decliners than advancers, but with no index moving more than 0.70% either direction. Steel companies gained after Mittal’s chairman said he was confident that his company would buy Arcelor. Pharmaceuticals were among the region’s winners.
Earnings Announcements
Actuant Corporation, Apollo Group, Progress Software Corporation, and Sonic Corporation are releasing earnings
