Originally published on Forbes.com.
Donald Trump’s running mate, Mike Pence, beat Green candidate Jill Stein in the disclosure race, releasing full federal returns for ten years (2006 – 2015) to her release of just the two main pages of her 2015 return. And the Republican couple, Mike and Karen Pence, makes less money and gives more to charity than the Rohrer-Steins. Go figure. The item that I particularly took note of has largely gone unremarked. That is the allusion in the 2006 return to Kiel Brothers Oil Company. It is really the only big number on all ten returns and the only matter that approaches being complicated.
Form 6198
The big number shows up on the eleventh page of the copy of the 2006 Pence return released by the Trump campaign. A loss of $673,797 on Form 6198. That number does not make it to page 1 of the return. If you look at the top of Form 6198 you will see that the title of the form is At-Risk Limitations, which we can make the subject of the tax lesson for today.
As I explain in this article , in order to post a negative number to the front page of your Form 1040, there are five hoops that you have to jump through. And you have to do them in order. They are for profit, allocation, basis, at-risk and the passive-activity loss rules. Even though, Form 6198 says at-risk, the Kiel Brother loss is more than likely stuck at basis. It is very unusual for basis and at-risk to be different in the case of an S corporation.
So there was $673,797 of Kiel Brothers loss allocated to Mike Pence that he could not deduct because of basis. Those losses might have, and probably did, accumulate over a few years. On his personal disclosure forms Pence had been showing his interest in the company as being worth between $100,000 and $250,000 with income from dividends of between $15,000 and $50,000. Then it drops off in 2004 with a note that the company is out of business.
About Kiel Brothers
This all seemed rather exciting, although nothing compared to what Donald Trump has had going on, so I dug into it just a bit. Kiel Brothers Oil Company and a related C corporation KP Oil Inc ran over 200 convenience store gas stations in Indiana and surrounding states. Edward Pence, Mike’s father had spent his career there and Gregory Pence, Mike’s brother, was CEO towards the end. It was a family business, but not really a Pence family business. The original Kiels were still around.
In 2006 Barry Welsh of the Daily Kos wrote a story “IN-O6 Pence Family Owed 9 Million to Indiana Citizens (NEW SCANDAL)” which made this out to be scandalous, but I don’t really see it. This was interesting enough to get me to spend money on PACER and I frequently mention what a cheapskate I am, but the bottom line is that it appears that Mike Pence’s father laboring long in the Kiel family’s business was rewarded with some equity which found its way to Mike either by gift or inheritance (Edward died in 1988).
There is some speculation that Pence’s odd views on cigarettes and his resistance to the notion of global warming might be related to profiting from the sale of cigarettes and gasoline but that is kind of a stretch.
Just Missed A Big Tax Windfall
The way basis in an S corporation works is that you start with your initial basis, which in Pence’s case might have been the value in his father’s estate, although there are other possibilities. Income passed through to the individual return increases basis. Loss decreases it. Exempt income and non-deductible expenses also affect basis – increasing and decreasing respectively. Distributions decrease base.
Basis never goes below zero. Losses in excess of basis are deferred and distributions in excess of basis produce gain. Here is where there is an interesting wrinkle with S corporations going bankrupt around the turn of the millennium. Remember that exempt income increases basis. Some clever people thought that this also applied to income from the discharge of indebtedness, which is exempt when it takes place in bankruptcy. And in Gitlitz V Commissioner, the Supreme Court agreed with the taxpayers.
That ruling would have made the $673,797 deductible to Mike Pence, which could have wiped out his taxes for three or four years. Unfortunately for him, Congress plugged that hole in 2002 with the Job Creation And Worker Assistance Act of 2002. Congressman Mike Pence voted “Yea” both times on that bill when it came to the House. So here, we have a Congressman who voted in favor of a bill that ended up costing him, by my back of the envelope computation, nearly $100,000. I really can’t tell whether he saw it coming, but we should probably give him just a little credit for that.
No Hobby Loss
The initial reports had me hoping that Karen Pence’s watercolor business might have opened the gates for a hobby loss discussion like we had in the 2012 campaign thanks to Mitt Romney’s Olympic dancing horse Rafalca, but no such luck. There are profits and losses from one year to the next without anything getting much over a thousand.
Kind Of Like The Guy
I did just a little Mike Pence research as part of this project and was interested to learn that we are more or less of the same tribe – Catholic parochial school boys with an Irish immigrant grandparent and history majors. He met his wife, Karen, at a Mass, where she was playing the guitar. Guitar Mass, wow. Born in 1958, Mike might be a bit young to remember the Catholic peace movement and the likes of Father Daniel Berrigan, who just passed away this year, but I find the Guitar Mass story kind of touching.
The other thing to like about Pence is that he used the same local CPA firm – Cadick Williams McAllister Ford for nine straight years. He did make a switch in 2015 to Michael Associates LLC which does not seem to have a very high internet profile. I’ll have to suspend judgment on that.