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A Return Look At Past President’s Taxes

One of the dullest news stories of the year is reported every April. It goes something like this:

“President Fumblehorn released his tax return today, showing that the President and Mrs. Fumblehorn made less than $1 million last year. The Fumblehorns paid more in taxes than you and I did, because even though they made less than $1 million, they made much more than most journalists, readers or viewers. They also gave more to charity. There was nothing questionable about the Fumblehorns’ tax return. We know this because, in an off-the-record briefing in the White House press room, the Fumblehorns’ accountant said so.”

The release of the president’s tax return, and the dry-facts reporting on it, has been a ritual since the Carter administration. Earlier, Richard Nixon disclosed four years’ returns in a fruitless effort to put his ethical issues behind him. Franklin Delano Roosevelt’s returns for 1934 through 1937 are among his personal papers that have been made public. So we have quite a bit of presidential tax history at our disposal. You can find these returns at www.taxhistory.org/presidential/.

Is there anything interesting in these old returns? Because I thought so, I plowed through the stack recently. My observations about the returns released by the current president and vice president were reported in the January issue of Sentinel. This issue, I will look at the returns made public by earlier presidents.

William J. Clinton

The Rev. Jerry Falwell might have prayed for the Clintons if he had seen their tax returns while they occupied the White House.

It is no secret that Bill and Hillary Clinton did not have much money after she left her partnership at the Rose Law Firm and they paid their many legal bills. During their White House years they relied, more than other recent presidents, on his government salary. Unfortunately for the Clintons, presidents do not get raises very often. Clinton’s $200,000 salary was the same compensation Richard Nixon received when he took office in 1969. But things could have been worse. The Republic’s original presidential salary of $25,000 was established for George Washington in 1789 and did not get raised, to $50,000, until 1873.

The presidential salary doubled as soon as Clinton left office. President George W. Bush receives $400,000.

Unlike the two Presidents Bush and Vice President Richard Cheney, who were domiciled in states that have no personal income tax (Texas and Wyoming, respectively), the Clintons paid Arkansas tax on their earnings throughout their tenure in Washington. They did not always benefit from a federal tax deduction on these state taxes, because the Clintons were subject to Alternative Minimum Tax in 1998 and 1999. We do not know about 2000 because that return was completed after Mr. Clinton left office and has not been released.

The Clintons made a point of donating income from outside sources to charity. Mrs. Clinton thus directed her after-tax royalties from her book It Takes A Village. Unlike other recent occupants of the White House, Mrs. Clinton treated her book royalties as self-employment income that was subject to Social Security tax.

Mrs. Clinton said she also donated to charity the $12,000 per year she received beginning in 1993 from a trust set up under the 1912 will of Henry G. Freeman Jr. Mr. Freeman stipulated that after certain members of his family died, his trust fund would make annual payments to the spouse of the president of the United States, to supplement what Mr. Freeman believed at the time was an inadequate salary. Transcripts of White House briefings in the mid-1990s indicate that this “pin money fund,” as Mr. Freeman’s will called it, became active around 1992 or 1993. Laura Bush continues to receive those payments. The current administration has not said what she does with the money.

George H.W. Bush

As noted in my January article, George and Barbara Bush did not sign their own tax returns while in the White House, a practice that also has been followed by George W. and Laura Bush. The first President Bush released an Internal Revenue Service letter granting permission to have a trustee sign the returns under a power of attorney. Similar permission presumably has been given to the current President Bush, though the authorizing letter has not been made public.

George H.W. and Barbara Bush each received literary royalties while Mr. Bush was in office. Neither paid Social Security tax on those royalties. Mrs. Bush’s writing was by far the more lucrative. She received nearly $900,000 in 1991 alone for Millie’s Book, a tale (no pun intended) of White House life as seen by the family dog. The 1991 tax return appears to show that $100,000 of the royalties was paid in turn to a co-writer, with the balance used to fund the Barbara Bush Foundation for Family Literacy.

The Bushes’ 1989 return contained an unusual deduction for about $8,600 of salary and payroll taxes apparently incurred for someone who worked for the Bushes personally. The White House released a cryptic statement at the time asserting that the Bushes had claimed that same deduction since 1981, “subject to annual audits” by the IRS. The next year, the deduction was gone — but miscellaneous deductions claimed by the First Family’s blind trust, without elaboration, increased by roughly the same amount. The deduction would be perfectly legitimate under some circumstances, such as if the Bushes employed a personal bookkeeper. But the White House never explained who was paid or what services that person rendered.

Ronald W. Reagan

If Ronald Reagan wanted to reduce the size of government when he entered the White House, he was probably even more convinced of the need by the time he left. His returns indicate that the IRS audited his taxes virtually every year.

Ronald and Nancy Reagan signed their own returns, which were prepared by Los Angeles attorney Roy Miller. The Reagans’ 1987 return is the last presidential Form 1040 known to be handwritten.

The Reagans did not take aggressive steps to avoid taxes. They paid substantial state income taxes as California residents. They did not report deductible mortgage interest after 1983, even once the 1986 tax reform Mr. Reagan championed began to phase out their modest deductions for personal interest on life insurance loans.

In 1982, the Reagans sold their Los Angeles home and built a new abode in the Santa Ynez Mountains near Santa Barbara. They reported a capital gain of about $720,000 on the old home. Under the law at that time, if they had claimed that the Santa Barbara home was being used as their principal residence, they could have deferred tax on sale proceeds rolled over into the cost of the new home. But the Reagans paid tax on most of the gain, opting only to exclude the $125,000 that was permitted to them because they were over age 54. This makes sense, as it would have been difficult for someone occupying the White House to claim that he was using a California dwelling as his principal residence. Difficult, but not unprecedented, as we will see when we come to Richard Nixon’s tax returns.

Jimmy Carter

President Carter came to office on a pledge to restore trust in government after the Nixon scandals and Gerald Ford’s pardon of Nixon. He began the custom of releasing the president’s personal tax returns, and put his assets in a trust even before that step was required under the Ethics in Government Act that was enacted during his administration. President Carter’s trust, however, was administered by one of the president’s closest confidants, Atlanta attorney Charles Kirbo. This relationship might raise eyebrows today, but did not at the time.

The Carter returns are the last by a U.S. president to use penny amounts — not surprisingly, given Mr. Carter’s famous penchant for detail. Jimmy Carter was the only president to release a detailed personal balance sheet as well as a tax return. His 1979 balance sheet showed a net worth of $893,000 after allowing for future taxes on the sale of investments.

At the beginning of Mr. Carter’s presidency, his position carried a $50,000 taxable expense allowance in addition to the $200,000 salary. Because he paid tax on the expense allowance, President Carter was entitled to deduct the expenses he paid with it. For that reason, we can see that the teetotaler president who decried the “three-martini” business lunch regularly claimed expenses for entertaining his staff. After 1978, the presidential expense allowance was made non-taxable, thus eliminating the need to report these deductions on tax returns.

Richard M. Nixon

In November 1973, as the collage of scandal known by the catchall “Watergate” label built toward its climax, President Nixon famously told 400 Associated Press managing editors: “I am not a crook.” A month later, he tried to back up this claim by releasing all of his personal income tax returns from 1969, when he took office, through his most recent filing for 1972.

It didn’t help. The returns fueled controversy by demonstrating how Nixon claimed a $576,000 deduction in 1969 for donating some of his vice presidential and congressional papers to the Library of Congress, ostensibly just before the law was changed to bar such deductions. In 1970 and 1971, Nixon paid less than $1,000 in income taxes each year, partly the result of carryover benefits from the donation of his papers, and partly of large depreciation deductions he claimed for improvements to his homes in San Clemente, Calif., and Key Biscayne, Fla. A House subcommittee later found that the government may have improperly spent up to $17 million on improvements to Nixon’s homes. It is not clear whether Nixon or the government paid for the improvements for which Nixon claimed depreciation deductions.

Nixon had bigger problems than his taxes, of course. The House Judiciary Committee approved three articles of impeachment in the summer of 1974 even as it rejected a fourth article for alleged tax evasion (and a fifth for extending the Vietnam War to Cambodia without congressional authorization). Less than two weeks later, Nixon resigned.

Nixon’s returns show other positions that were, to say the least, aggressive, though they attracted little notice at the time.

His 1969 return reports a gain of about $143,000 on the sale of a principal residence that was acquired in 1963. This apparently referred to a New York condominium that the Nixons occupied while Nixon was a partner in a Manhattan law firm between his failed run for California governor in 1962 and his successful bid for the White House in 1968.

Nixon avoided paying tax on the gain by rolling it into the purchase of a new “principal residence,” that being the $1.5 million San Clemente estate he acquired in July 1969. The rules at the time required that the new residence be purchased and used as a principal residence. This is not easy to do while one spends most of one’s time at 1600 Pennsylvania Ave. in Washington, D.C.

Nixon paid state income taxes in 1969, which is consistent with the idea that he was a part-year resident of New York and a part-year resident of California. But in 1970 he apparently decided that San Clemente was not his principal residence after all, because he stopped claiming federal deductions for state income taxes that year. Nixon seems to have taken the position, once the tax on the 1969 gain was avoided, that his true principal residence was his Florida home. Florida has no income tax.

Franklin D. Roosevelt

FDR, as far as we know, was the last president to actually prepare (rather than merely sign) his own tax returns. Roosevelt’s returns for 1934 through 1937, written in what appears to be his own hand, are in the public domain.

We probably should say that Roosevelt tried to prepare his own returns. Even in that simpler time, tax calculations were a daunting task for the nation’s chief executive. His 1938 plea for help, directed to the commissioner of internal revenue, accompanies this story.

There are some interesting tidbits in the Roosevelt returns. To begin with, FDR is the only president known to have filed separate income tax returns from his wife while in office. Eleanor Roosevelt’s returns for those years, if she was required to file any, are not in the public record.

Roosevelt’s $75,000 salary was his primary income in those years. He also reported a few thousand dollars annually of interest and dividend income and, in 1934, nearly $8,000 in book royalties. He did not have to worry about Social Security tax on the royalties, however, because FDR did not get around to establishing Social Security until 1937.

The New Dealer had a few tax shelters. He claimed several thousand dollars of annual losses on rental property. In 1937 he wrote off a $1,400 bad debt with the notation, “Note — 1923 — maker dead no funds.”

But the real curiosity of the Roosevelt returns appeared in 1936. He claimed a $4,300 deduction with this explanation: “Settlement Agreement tort accident against minor child.”

I could not find any biography of FDR that explained what happened in 1936. Raymond J. Teichman, the supervisory archivist at the Franklin Delano Roosevelt Presidential Library and Museum in Hyde Park, N.Y., checked the institution’s records and found nothing on the identity of the minor child or the nature of the “tort accident,” either.

There is a lot we can learn from presidential tax returns, and we are fortunate that modern presidents voluntarily put their personal finances on the public record. But, as the mystery of FDR’s 1936 tort settlement shows, the Tax Man still keeps some secrets.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.