Wealthy individuals sometimes join the government out of a sense of noblesse oblige. That is, they give up high paying jobs in the private sector and serve the public for a relative pittance, perhaps a tradition begun by George Washington who declined his $25,000 salary as the first President of the United States.
Certainly, Henry Paulson, the Secretary of Treasury, seemed to fall into that category. He made millions (literally) as CEO of Goldman, with his investment portfolio worth somewhere around $700 million. In becoming Treasury Secretary, he was consigned to less than $200,000.
But it turns out that not all is how it seems. Section 1043 of the Internal Revenue Code allows individuals who are forced to sell stock to meet federal conflict-of-interest rules to defer capital gains tax so long as the proceeds are reinvested in specifically designated investments. As the NY Times noted back in 2006:
- If confirmed, Mr. Paulson is expected to give up control of at least $700 million, a fortune built largely from Goldman Sachs stock, by putting those assets in a blind trust. Then, it is likely that Mr. Paulson will be required to sell his Goldman Sachs shares to avoid any conflict of interest. The tax provision, accounting specialists said, represents an opportunity for Mr. Paulson to use the sale to diversify his holdings without paying capital gains tax on the bulk of those Goldman shares, which have almost tripled in value since the investment bank's initial offering in May 1999.
- Ellis does point out a fascinating quirk in tax law: wealthy political appointees who put their assets into blind trusts needn’t pay capital gains taxes on any sales. So public service isn’t always a low-paying sacrifice; it can also help outwit the tax man. Ellis estimates Paulson could have saved as much as $200 million this way.