Well, apparently the Globe has its talons dug deep into the burning question whether various state officials’ campaigns have paid required state and federal taxes on investment earnings from campaign funds that were invested in vehicles like certificates of deposit. Not exactly the kind of hot-button issue that makes voters’ heads explode, but obviously, taxes owed should be paid.
What’s the upshot of all this? Several campaigns – Martha Coakley’s, Tim Cahill’s, Tim Murray’s, and Guy Glodis’s – appear to have made more or less the same mistake in terms of not paying the required taxes. The mistakes shouldn’t have been made, but they were. The correct reaction is the reaction from the Coakley, Cahill, and Murray campaigns: we screwed up, we owe the taxes, and we are going to pay them. That is how to make the story go away quickly, and for those three campaigns, it seems very likely to do so.
The story that threatens to stick around longer than a day or two comes from the Glodis campaign, which is taking an unusual approach, particularly when the candidate is running for Auditor:
Glodis argued that he did not have to pay federal taxes on income his committee earned. He asserted the Internal Revenue Service code governing political committees allows them to deduct fund-raising expenses, which in his case, he said, were greater than the interest income….
“My committee sought opinions from two separate certified public accountants over a four-year period, both of whom advised the committee that there was no tax liability for interest earned on certificates of deposit because fund-raising expenses exceeded interest earned on the CDs, according to IRS instructions attached to the applicable tax form,” said Glodis, whose committee at times has held as much as $428,000 in certificates of deposit over the past four years.
This interpretation appears to conflict with the instructions accompanying IRS Form 1120-POL, the tax return for political organizations. It specifically states: “No deduction is allowed for general administrative or indirect expenses.” It does allow deducting for expenses incurred in making investments….
Secretary of State William F. Galvin, whose committee has paid $30,000 to $40,000 a year in state and federal taxes, said he has no doubt the IRS code does not allow deducting for administrative or fund-raising costs. “My reading of the instructions does not allow me to do that,” Galvin said. “Believe me, if I thought I was entitled, I would take it.”
Big, big mistake on Glodis’s part. First, he’s practically begging the IRS to audit or otherwise make unpleasant inquiries into the situation. Second, he is begging dogged reporters to figure out who the CPAs were who gave these opinions, and whether they have any connection to Glodis’s impressive political operation. Third, he appears to be trying to take advantage of a highly technical interpretation (some might call it a “loophole”) in the IRS regulations that ends up being financially very favorable to his campaign – all the while, campaigning for an office whose basic purpose is to make sure that money ends up where it’s supposed to be.
Glodis has the money. He’d be smart just to pay the federal taxes and be done with it.
Here’s a rather strongly-worded statement from the Bump campaign (email, no link).
<
p>
The Bump campaign posted the statement here on BMG.
It’s what makes Glodis Glodis. Look no further than #3 on my Odious Glodis top ten list — based on a Cape Cod Today article from 2006:
<
p>
<
p>
Her campaign screwed up and paid the taxes owed in 2009. The announced the screw up yesterday. To me that seems a bit slow in the announcement department and not very transparent. She has also, inadvertantly, impacted her fellow Dems campaigns by delaying her announcement that she paid back taxes in 2009.
<
p>Had she announced this in 2009 it is very likely that Murray, Cahill and maybe even Glodis would have paid their taxes and announced the resolution back in late 2009 or early 2010. No story. Her delay has helped make it a story.
<
p>As for Glodis, he is proving, almost daily, why he is not fit to be Auditor. Let’s hope the electorate sees this too.
How often does ANY candidate make a pro-active announcement – ‘Look at ME! I made a MISTAKE!’ I would think that most candidates would assume that they are alone in making this error, and would not want to trumpet it.
<
p>I wonder if Frank couldn’t find any Republicans, or he is just holding that back until closer to election to make a better scandal? Of course, Republicans don’t tend to have the union/lobbyist-fed war chests of Democrats to the point where they are not merely accepting donations, they can invest them as well. I’d think twice about giving if they have so much on hand they have to find ways to stash the money.
<
p>BTW – about Glodis – if they IRS thinks it can prove fraud or deliberate deceit, they can go back FURTHER than three years…and only Glodis seems to be saying that he KNEW about the tax and didn’t pay it anyway. The others seem to claim ignorance/honest error.
on this very site. Maybe Odious Glodis got one of those guys. The guy on the masthead even looks like him.
And my guess is a story on Romney. Baker will suddenly have no comment on unpaid-tax-on-campaign-account-investment-earnings-gate.
If Frank thinks he’s got a 2012 treasure trove, this is the kind of thing that would be checked NOW and paid. Besides – the SIZEABLE war chest would be the Federal one rather than the state accounts he’s been checking. And THAT could open a whole NEW can of worms vis-a-vis the Congressional delegation, even Kennedy.
<
p>For this investment plan to work, you need a long multi-year war chest with sizeble regular donations that can be depended upon, so there’s no need to keep cash on hand for expenses. The only war chests I can think of that fit that are the union funded Democrats.
While acknowledging that the Internal Revenue Code is, by design, complex and obtuse, it sure looks to me like the above “appears to conflict with” paragraph from the Globe might just be BS.
<
p>The statute allows a deduction for the costs directly connected to the production of the income, which sounds a lot like what Glodis said.
<
p>That “instruction” on the form sounds a lot like the IRS trying to embarrass candidates into paying taxes that aren’t due. Good for him for challenging it.
26 U.S.C. § 527(c)
<
p>As near as I can figure, and I could be wrong, is that the campaigns are taxed on the portion of their income that isn’t received, in essence, by donation– e.g., the interest earned while donations sit in the bank, and are allowed to deduct from this only expenses related to the production of that income.
<
p>So, the IRS says that seeking donations has no direct connection with interest earned after the donation goes into a bank account. A “directly related” expense would be limited to paying someone to look for the best interest rate, sez them.
<
p>Glodis says, how can the cost of raising X not be directly related to interest that is and can only be earned because X was raised?
<
p>That doesn’t sound outlandish to me, but Power Wheels, who knows more than I do, thinks it is.
<
p>In any event, I don’t think it is going to have much bearing on my vote.
the statute specifically distinguishes between costs directly connected to producing gross income (i.e. the interest income) and costs directly connected to producing exempt function income (i.e. the political donations), and says that only the former is deductible. I can’t see how he could possibly find a tax professional who would give him an opinion that fundraising costs are deductible against investment expenses.
when it comes to this stuff, at least.
He just didn’t pay it.
<
p>The proper procedure would have been to ask for a Letter of Determination, saying his advisors had reached a different conclusion and he wanted to clarify what he owed.
<
p>But he just treated his advice like a Get Out of Jail Free card and didn’t ISSUE a challange.
IRC sec. 527 imposes a tax on “political organization taxable income” that is calculated by excluding “exempt function income” and allowing “deductions … which are directly connected with the production of the gross income (excluding exempt function income).” And “exempt function income” includes contributions of money and “proceeds from a political fundraising or entertainment event.” So expenses associated with contributions and fundraising events are clearly disallowed as deductions for purposes of sec. 527.
<
p>I can’t see any way the IRS instructions aren’t upheld against Glodis’ challenge. And they really should go after him for penalties too.