04.19a Kerry's $500,000 Painting Investment; Two Possible Mistakes in Kerry's Tax Return; Reasons for Politicians to Release Tax Returns. Senator Kerry's 2003 tax return , though not his wife's, has been made public. He clearly made one mistake, which resulted in an underpayment of about $11,000, and may have made another, underpaying $2,000. Kerry's biggest source of income was the capital gain on the sale of a $500,000 investment in a painting. Byron York writes in "How Did He Make That Money? Questions about the senator�s book and art deals":
The couple acquired the painting, by the seascape artist Adam Willaerts, in May 1996 for $1,000,000. They sold it in March 2003, recording a capital gain of $350,000. Kerry reported his half of that gain, $175,000, on his 2003 return. It was his largest single source of income that year; his Senate salary for 2003 was $147,818.
National Review Online asked Meehan whether Kerry, whose 1996 income was $143,795, actually paid $500,000 for his half of the painting in the original purchase.
"They jointly held the painting for investment purposes," Meehan said.
Asked again whether Kerry paid for his half of the picture, Meehan answered, "I can tell you that it was Sen. Kerry's and his wife's painting that they held together since 1996."
Teresa Heinz Kerry, whose late husband John Heinz was heir to the Heinz ketchup fortune, is thought to be worth between one-half and three- quarters of a billion dollars. Teresa Heinz Kerry and John Kerry file separate tax returns, and the campaign did not release any information about Mrs. Kerry's income or taxes.
Meanwhile, spokesman Meehan is declining to say whether Kerry paid for his one-half interest in a 17-century Dutch painting that he and his wife, multimillionaire heiress Teresa Heinz Kerry, sold last year for $1,350,000.
The painting's tax treatment is a bit puzzling. Most likely, it just a gift from his wife. There is no gift tax between spouses, so this would clear up the tax treatment.
Taxprofblog pointed me to Jack Bodganski (Lewis & Clark), who has a couple of interesting things to say. One is:
Kerry's accountants miscalculated the tax on the gain on the sale of the painting. It should have been taxed at 28 percent, instead of the 20 percent rate that they used. Kerry has already filed an amended return and paid another $11,577 in tax to clean up this blooper, for a revised federal tax bill (before foreign tax credit) of $102,236.
That is amazingly sloppy, isn't it? Or is there something complicated going on here with capital gains that I don't know about? It might be interesting to see Senator Kerry's Massachusetts state returns too. That state has horrifically complicated capital gains tax rules. If he got the federal return wrong, I'm sure he got his Massachusetts return wrong.
Kerry also may have gotten his royalty tax wrong:
Kerry received a $89,220 royalty during the year (on his book, apparently) via the Helen Reese Agency in Boston. Unlike Lynne Cheney, who paid Medicare tax on her book royalties, Kerry took the position that his author activities are sufficiently limited that the royalties do not rise to the level of "net earnings from self-employment." Very interesting. If Kerry had reported the royalties the way Cheney had, he would have paid well over $2,000 in additional tax on them.
This would be forgiveable if he did his own taxes, since the instructions are not very clear. I do my own, and had to puzzle out that my book royalties shouldn't be reported as "royalties" on Schedule E, but as self-employment income, on Schedule C. Schedule E is for capital income, not labor income-- for royalties received on a copyright inherited from an uncle, for example. But Kerry did it wrong if he wrote the book himself, so this is labor income, and any accountant should have known that. Or is it that he did not write the book himself, but rather paid someone else for the copyright? Then the royalty would be capital income, like from any investment, and the price paid would not have to be reported unless the copyright were sold some day for a capital gain or loss.
Also, if someone only writes a book occasionally, rather than making it is his main job, then tax law might allow the income to not count as self-employment income. I'm not sure what the theory would be for this, since the income is the result of a person's time spent writing, but I suppose tax law doesn't have to make sense. The Schedule E instructions do say "If you are in business as a self-employed writer, inventor, artist, etc., report your royalty income and expenses on Schedule C or C-EZ, " but that begs the question of who is in business as a self-employed writer. Having a steady main job doesn't mean a person can say he doesn't have any self-employment income.
What are we to make of all this? To answer that question, we need to think about why a candidate's tax returns are worth making public in the first place. It isn't so we can spot tax fraud-- though I guess having this custom does make a tax cheat less likely to run for office, in anticipation of having people see his returns. Rather, there are two purposes:
1. To look for conflicts of interest-- major sources of income that might affect his policies.
2. To learn more about the candidate's ability and beliefs-- how well he obeys the law, how well he manages his own finances, how much he donates to charity, and so forth. You can tell a lot about a person from his tax returns.
On point (1), the $500,000 painting investment shows that we have learned very little about Senator Kerry's conflicts of interest from his tax return, because his personal finances are overwhelmingly dominated by his wife's, and he has refused to release her tax return. It is just as if a housewife were running for office and she released her own tax return, with a little interest income and no wage income, but refused to release her husband's return. I seem to recall that Lyndon Johnson used some gimmick like this-- that his wife was extremely wealthy by virtue of coming into possession of the only TV station allowed by the federal government in Austin, Texas (richer than JFK!) but Johnson himself looked to be below average income for a senator.
On point (2), we see that Senator Kerry doesn't have the sense either to do his own taxes properly or to hire a competent accountant. He and his accountants knew that his tax returns would be looked at by outsiders this year, to his potential embarassment, but they nonetheless underpaid thousands of dollars. It is of some significance, too, that the mistakes involved underpayment. Overpayments would also be mistakes, but they could at least be justified as arising from conservatism due to the prospect of publicity.
If Kerry can't find someone competent to fill out his tax forms, how can he run a government?
[in full at 04.04.19a.htm]
To return to Eric Rasmusen's weblog, click http://php.indiana.edu/~erasmuse/w/0.rasmusen.htm.