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Wednesday, October 22, 2008

Tax Consequences of Sarah Palin's $150,000 Makeover

A tax kerfuffle has broken out over the proper treatment of the $150,000 wardrobe provided to Sarah Palin and her family by the Republican National Committee.  Politico initially reported the story:

The Republican National Committee has spent more than $150,000 to clothe and accessorize vice presidential candidate Sarah Palin and her family since her surprise pick by John McCain in late August.

Proving the adage that all things eventually have a tax angle, the mainstream media and blogosphere soon buzzed with speculation about the proper tax treatment of the expenses.  For example, on Bloomberg:  Palin's $150,000 in Makeover Expenses May Become Tax Liability, by Ryan J. Donmoyer:

Republican vice presidential nominee Sarah Palin's $150,000 makeover may raise her tax bill.

The Republican National Committee disclosed spending more than $150,000 for designer clothes, shoes, makeup and other accessories for Palin, or the equivalent of about $5,000 per day since John McCain picked her as his running mate in August. After the expenditures were reported by Politico, the campaign said it had always been the intention to donate the clothing to charity.

Palin earned $166,080 last year, according to her tax returns. Under some circumstances, the IRS may consider the clothing income taxable to her, tax experts said. As a former Goldman Sachs Group Inc. banker learned last year, the write-off for donating used designer clothing can amount to a fraction of their retail value.

"This is clearly income," said Paul Caron, associate dean of the University of Cincinnati School of Law, who edits the TaxProf Blog. "The charitable deduction will not eliminate all, or most, of the income."

See also ABC News. The RNC later attempted to quell the tax tempest: 

"With all of the important issues facing the country right now, it’s remarkable that we’re spending time talking about pantsuits and blouses," said spokeswoman Tracey Schmitt. "It was always the intent that the clothing go to a charitable purpose after the campaign."

But Linda Beale (Wayne State) notes that this may not resolve the tax issues:

For Palin, even if she doesn't get to keep them, hasn't she had the personal benefit of them--like renting a tuxedo without having to pay the rent, except that this is the clothes she's being seen in every day during the campaign, much more than just an outfit donned for a rare special event? Under that light, it appears that the fair use value, at the least, should be income to her, and that might well amount to a considerable portion--maybe as much as ninety percent or more-- of the original cost of the outfits. ...

An ongoing free-flow of discussion on the TaxProf listserve has thrown out a number of interesting ideas. Riffing on them, I'll add the following. Perhaps the use by Palin is just like actors who wear wardrobes provided by the producers, so not income at all, based on an arguably relevant analogy in the Ozzie Nelson case (a deduction for wardrobe expenses for the family's outfits on their pre-reality-shows reality show, for clothes that they claimed were too hot to be suitable for their real California lifestyle). Maybe it is like actresses who are loaned fancy designer gowns to wear for the Oscar festivities. But hey--shouldn't the use value be income to them, though? If there's no tax consequence when the boss buys you the clothes that make the man that is the man that the boss wants to hire and the man wears the clothes anytime when not in his own home sanctuary, what's to stop all the company executives and law firm partners from having their firms buy their clothes and letting them wear them on loan, taxfree? Surely that would be one boondoggle for the wealthy too many for American taxpayers to stomach.

Recall the tax controversy surrounding the loan of designer dresses to Nancy Reagan (New York Times)

Update: Stephen Cohen (Georgetown) has more.

http://taxprof.typepad.com/taxprof_blog/2008/10/tax-consequence.html

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Comments

I was wondering if there isn't a parallel to wardrobes used by TV personalities, on TV news or daytime shows, for example. Are those wardrobe costs imputed to the on-air talent as income? What about stars who borrow high-dollar designer duds for awards ceremonies? What is their tax treatment?

Posted by: Martin Vaughan | Oct 22, 2008 4:26:02 PM

For some curious reason almost no one in the media wants to discuss tax consecuences of the little trip to Kenya Sen. Obama took back in 2006. That trip -- paid in full U.S. taxpayers -- was almost entirely spent on rallies in support of Rayala Odinga, who since then has thrown Kenya into the worst polical crisis it has seen for half a century, orchesrated a henocide and planned to turn Kenya into an Islamic state. No one seems to be inetrested in dicussing this expense, perhaps because the Odinga connection could cost Sen. Obama the election had it been exposed by mass media. Odinga's "Agent of Change" motto is too hard to miss:

http://drslogan.wordpress.com/2008/10/22/kenya-barack-obamas-other-change/

Posted by: Jeff Tyler | Oct 22, 2008 7:20:28 PM

Aren't any of the tax profs disturbed by this now almost standard use of technicalities in our legal system to destroy political opponents? In the old days we used to try to beat them at the ballot box. Now we comb through hundreds of thousands of laws and regulations to find any possible violation. The public sees this for what it is: partisan persecution.

Bringing the power of government down on political opponents is something you'd expect from a banana republic or other dictatorship. Is this really OK with the taxprofs as long as it's Republicans being hounded?

If Democrats believe that the politics of personal destruction will not be used against them in the future, they have forgotten the origin of the term. For the history impaired, look up Robert Bork and Bill Clinton.

This tactic deprives the voters of their right to choose a candidate. It's fundamentally undemocratic, no matter who does it. I have contempt for anyone on either side who feeds this beast.

It's a good thing that voters are learning to judge the inquisitors more harshly than the target, a lesson that Bill Clinton taught us but the taxprofs were not intelligent enough to absorb.

Posted by: AMTbuff | Oct 22, 2008 7:45:53 PM

The clothes etc. presumably were provided to Palin to serve the purposes of the RNC -- namely for her to make a better appearance in public to further the goals of the RNC that its ticket be elected. While the expense also benefits Palin, there is substantial authority that when an expense in paid by one party for its own purposes and not as compensation, the fact that it also benefits another party will not cause it to be income to the latter. Palin can be seen as an incidental beneficiary of an expense paid by the RNC to accomplish a noncompensatory goal of its own.
If the clothes etc were not given to Palin in fee, but were merely loaned to her for her use during the campaign, then she was never given ownership of the clothes, but merely had use of them for a limited time. If the terms of the transfer to her were that the clothes were to be donated to a charity at the end of the campaign, then Palin will merely be acting as an agent for the RNC when she transfers the items to the charity. She will not receive a charitable deduction because the gift will be made by the RNC.As indicated above, Palin should have no income because of her use of the clothes at the behest of the RNC, but if she has income, it would be only for the rental value of the clothes.

Posted by: Douglas Kahn | Oct 22, 2008 8:43:00 PM

"For Palin, even if she doesn't get to keep them, hasn't she had the personal benefit of them--like renting a tuxedo without having to pay the rent, except that this is the clothes she's being seen in every day during the campaign, much more than just an outfit donned for a rare special event? Under that light, it appears that the fair use value, at the least, should be income to her, and that might well amount to a considerable portion--maybe as much as ninety percent or more-- of the original cost of the outfits. ..."

That is bizarre, even by Prof. Beale's standards.

Hmmmm, I wonder if Prof. Beale pays income taxes on her office, a definite benefit to her, her Lexus-Nexus subscription, the free coffee probably found in the faculty break room, .............. ad nauseum

Posted by: save_the_rustbelt | Oct 22, 2008 8:43:47 PM

First it was revealed (albeit with a show of delicacy) that Mrs. Palin is essentially a crook, and now we learn she's a fake Sacks-clad "hockey mom." I find it truly frightening that the United States could soon be presided over by an eccentric "maverick" who chose this individual as his running mate. If McCain wins, this nightmare will not only predictably lead to a constitutional crisis, but will ultimately do even more harm to the reputation of the evangelical Christian movement than the outrageous scam put on as a Dead Sea Scrolls exhibit last year at a "natural history" museum in San Diego. See

http://www.nowpublic.com/culture/did-christian-agenda-lead-biased-dead-sea-scrolls-exhibit-san-diego

Posted by: View from Here | Oct 22, 2008 11:03:16 PM

Her employment is as governor of Alaska (from whom she presumably gets an office, Lexis-Nexis, and coffee). Running for VP isn't employment.

Posted by: Joe | Oct 22, 2008 11:32:53 PM

AMT Buff is wrong at every turn. Why bother commenting based on politics/emotions on a technical matter? No value in that- it's available everywhere 24/7.

Facts and circumstances are a safer path when analyzing tax implications.

Posted by: bean counter | Oct 23, 2008 9:09:00 AM

While this was clearly a political miscalculation, the tax problem (to the extent it exists) seems easy to solve. Gov. Palin is now a celebrity, as evidenced by the well-documented explosion in demand for her eyeglass frames, hairstyle, and shoes. Notwithstanding the fact that a charitable deduction might be significantly less than original cost, I have no doubt (due to her celebrity) that these items could be sold on e-bay for at least their original cost. The taxes could be paid from those proceeds with the remainder going to charity as a cash donation.

Posted by: GCF | Oct 23, 2008 10:27:51 AM

This was clearly a political miscalculation, but the tax problem (to the extent it exists) seems easy to solve. Gov. Palin is a celebrity, as evidenced by the well-documented explosion in demand for her eyeglass frames, hairstyle, and shoes. Therefore I have no doubt that these items could be sold on e-bay for at least as much as their original cost. The proceeds from this sale would be used to pay the tax, with the remainder going to charity... a far more efficient tax answer than contributing the items to charity in kind.

Posted by: GCF | Oct 23, 2008 10:31:24 AM

I agree with GCF. There are enough rich Palin fans to buy the clothes on eBay to cover the tax liability.

However, nobody has mentioned Federal Election Commission regulations yet. The FEC could introduce a complication, since in some cases there are rules about how regulated campaign funds may be spent. I believe Congress disallowed campaign funds to be used for the personal enrichment of candidates. So if Palin turns clothes into cash, would that raise FEC questions?

Posted by: Tim | Oct 23, 2008 11:46:24 AM

It seems like you'd need a special depreciation table for every article of clothing when you're talking about such expensive stuff: if, after the campaign, she returned the clothes and paid the RNC 'rent' of $50,000 or something, it would be hard to tell whether she'd overdone it or evaded taxes.

They could probably sell the clothes for more than the original price, as GCF noted, but then we have a new question: shouldn't Palin's tax bill reflect the value of the clothes she wore, not their cost?

Posted by: Taxrascal | Oct 23, 2008 4:57:07 PM

Is/isn't there an argument that the clothes were only usable in the presidential campaign and therefore don't constitute income? Wasn't there a case with Dinah Shore or someone like that on this issue? I seem to recall that costumes (say, The Tin Man) are deductible but presumably Palin can sit down in her new clothes . . . if she can find the time to.

Posted by: michael livingston | Oct 25, 2008 5:39:54 PM

Obama supporters who trashed Palin from day one are ranting about her wardrobe and other petty matters, while an anti-American Socialist / Marxist racist is about to highjack our government, with the help of voter fraud, and a corrupt biased media. You'd better wake up America ... or, this country is about to experience an ugly 4 year long nightmare under Obama/Biden !!!

Posted by: Howard | Oct 26, 2008 1:24:50 PM

Didn't Nancy Reagan have to pay taxes on gowns that she wore to State funcitons. Wasn't there a dispute with the IRS about it which she lost?

Posted by: M. Kelly Tillery | Nov 4, 2008 11:31:07 AM