India''s Financial Express reports IMF-directed double-counting of gold


By Jessica Holzer
Friday, June 2, 2006

WASHINGTON -- For Henry Paulson Jr., a Goldman-sized tax loophole
awaits his pleasure.

High-flying business executives almost always endure financial
sacrifice when they make a detour into public service. Paulson is no
different: The Goldman Sachs boss will see his annual paycheck
shrink from last year's $38 million to a paltry $183,500 once he
takes over the job of Treasury secretary.

But don't shed too many tears for Paulson. He has amassed quite a
fortune--a roughly $700 million equity stake in Wall Street's
premier investment banking house. And soon, he will have the chance
to diversify a good chunk of those holdings without paying a dime to
the Internal Revenue Service.

By accepting the Treasury post, Paulson is poised to take advantage
of a tax loophole that allows government officials to defer capital
gains taxes on assets they have to sell to avoid a conflict of
interest, as long as the proceeds are reinvested in government
securities or a broad array of mutual funds approved by the
government within 60 days.

Technically, the tax kicks in once these replacement assets are
sold, using the purchase price of the original assets as the cost
basis, says Tom Ochsenschlager of the American Institute of
Certified Public Accountants. But why sell when you can avoid the
tax altogether?

"The idea is never to sell," says Robert Willens, the top tax and
accounting analyst at Lehman Brothers. "If you're able to hold onto
the replacement assets until your demise, you never have to pay it."

The tax break was designed to ensure that the wealthy are not
deterred from taking posts in government because they fear a big tax
hit. But it amounts to a significant perk of public office.

Paulson's huge equity stake in Goldman served him well as he flitted
around the globe singing the firm's praises to potential clients and
investors. It was hard evidence of his faith in Goldman's continued
success. But once he is gone from the bank, such a giant
concentration of assets could be somewhat of an albatross for
Paulson, who, at 60, is surely considering the tax consequences of
diversifying his fortune.

It is not a stretch to suppose that, at the margin, the chance to
unwind his stake in Goldman Sachs tax-free may have had an influence
on his decision to take the Treasury job. After all, if he were to
completely divest himself without any tax relief, he would be
staring at a tax bill of well over $100 million, Willens says.

Paulson need only obtain a "certificate of divestiture" from the
Office of Government Ethics to sell off his 3.23 million Goldman
shares, worth about $484 million, tax-free.

But he may not escape paying taxes on the sale of the rest of his
Goldman holdings, which are made up of restricted stock and options,
depending on whether he received them as part of his pay package.
Proceeds from the sale of assets received as compensation would be
treated as ordinary income rather than a capital gain and thus would
not qualify for the tax break.

Plenty of wealthy public servants, including Defense Secretary
Donald Rumsfeld and former Secretary of State Colin Powell, have
taken advantage of the tax break since it was introduced in 1989
under the administration of President George H.W. Bush. Deputy Chief
of Staff Karl Rove has obtained a certificate of divestiture for
stock sales in 23 companies since he joined the administration.

To get the tax relief, it must be deemed "reasonably necessary" for
a public official to divest his shares, or a congressional committee
must require the asset sale, according to section 1043 of the tax

Paulson should have no trouble passing this test: A large stake in a
global financial firm would seem a clear conflict of interest with
the duties of Treasury secretary, which include ensuring the smooth
financing of the current account deficit and helping to manage
financial crises.

Even a stake in an industrial company is enough to raise eyebrows
nowadays. Outgoing Treasury Secretary John Snow, the former chairman
of CSX Corporation, dumped more than $20 million worth of his former
company's stock to avoid the appearance of a conflict of interest.
And Snow's predecessor, Paul O'Neill, the former chairman of Alcoa,
was dogged by criticism of his $100 million stake in the aluminum
giant until he finally unloaded it. That's still small potatoes
compared with Paulson's nest egg.

It is always possible that Paulson could follow in the footsteps of
fellow Goldman alumnus Robert Rubin and avoid divesting his Goldman
stake by placing it in a blind trust. But even the former Treasury
secretary, who was the richest member of the Clinton administration,
made ample use of the tax break, diversifying other portions of his

Poor Gov. Jon Corzine of New Jersey, who launched a successful bid
for the U.S. Senate after Paulson shoved him aside to become the top
dog at Goldman, wasn't so lucky. While serving on the Senate banking
committee, he was pressured to sell off his $300 million stake in
the investment bank. But alas, the tax perk is only available to
members of the executive branch.


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