Paulson’s Taxes

What happens to a tax deferred? President Bush’s new nominee to be treasury secretary, Henry Paulson, is about to find out. To comply with government ethics rules, Mr. Paulson will likely have to sell off a significant chunk of his stock holdings in Goldman Sachs, valued at $484 million. Ordinarily that would incur a hefty capital gains tax, even under the reduced rates pushed by Mr. Paulson’s new boss. Under a provision in the 1989 law governing the ethics of presidential appointees, however, Mr. Paulson can put in for a certificate of divestiture stating that he is selling the stocks to comply with the rules. As long as he uses the proceeds of the sale to re-invest in ethics-approved assets like mutual funds, he defers capital gains taxes until he sells the mutual fund, at which point the basis for capital gains calculation becomes the original purchase price of his stocks. The certificate effectively allows him to defer payment of capital gains taxes.