Hugh Pinnock, Mark Hofmann, and Taxes

Last week I mentioned that, in anticipation of Murder Among the Mormons I was reading Victims. And I talked about Mark Hofmann’s tax planning.

I’m only a little bit further through the documentary today (I finished the first episode), but I’ve made a bunch of progress on the book. And, reading it last night, another tangential tax issue leaped out at me.

See, it turns out that when Hofmann needed to borrow money from First Interstate Bank, Elder Hugh Pinnock of the Seventy put in a good word for him. Pinnock assumed that Hofmann was a legitimate documents dealer who had a big deal in the works. And the bank apparently assumed that either Pinnock or the church itself was guaranteeing the loan.

(Pinnock may have aided in this misunderstanding: he reported that, in recommending the loan, he said something like, “We have lots of assets,” or perhaps “I’ve got assets–the Church has assets. You’ll be paid.” Now, as a practical matter, Pinnock should never have said anything like this. But also, if the bank wanted Pinnock or the church to guarantee the loan, it should have had them effect an actual guarantee.)

When it became clear that Hofmann didn’t have and wouldn’t have the money–and, in fact, that he was probably headed to jail–Pinnock felt bad. He decided to repay Hofmann’s loan himself, all $171,243.47 of it. And to repay the loan, he sold stock that he held, stock that represented “nearly all of his liquid assets.”

Which brings up two tax issues. The first is, by selling his stock, Pinnock potentially (and, honestly, probably) realized taxable gain. To the extent the stock was worth more when he sold it than it had been when he bought it, he would have owed up to 20% on his gains in federal income taxes. While Victims doesn’t lay out his basis in the stock, imagine he bought it for $100,000 and its value rose to $180,000 before he sold it. He would have $180,000 cash with which he could pay the bank, but he would also have an $80,000 capital gain. So he would owe $16,000 of taxes by virtue of his selling his shares to pay Hofmann’s debt. (Note that he’d have the same tax consequences if he transferred the securities directly to the bank rather than selling them.)

But at least he’d be able to deduct the amount he paid, right? So that takes us to our second tax point here: he wouldn’t. Most expenditures by individuals are not deductible unless the deduction is explicitly permitted by the Internal Revenue Code. Pinnock could arguably say that it was a trade or business expense, meant to protect his reputation. That would almost certainly be a losing argument, since “trade or business” is a term of art and his trade or business was, at that point, being a religious leader.

But let’s assume he could somehow shoehorn it into being an expense related to his trade or business. Even then, it’s not deductible. Quite often I teach Welch v. Helvering, a 1933 Supreme Court case. In the case, a salesman’s employer goes bankrupt. To preserve his reputation with customers, Mr. Welch voluntarily paid off his former employer’s debts. Notwithstanding his motivation being for business purposes, the Court held that he couldn’t deduct the expenses because paying another’s debts was not a common and accepted business practice.

So in paying Hofmann’s debts, Elder Pinnock faced a double tax dilemma: he simultaneously realized taxable income and was unable to reduce it by any type of deduction.

And that ends today’s installment of what-is-it-like-to-read-Mormon-history-as-a-tax-law-professor.

Comments

  1. I just checked a chart showing the Dow Jones Industrial Average during the 1960s through the 1990s, and it looks as if the lousy performance of the market might just have saved Pinnock from the tax man. The Dow hit a 30-year low in 1981-82. By 1986, the Dow reached about the same level of ten years earlier, which was substantially lower than the market’s peak in 1965.

  2. That’s rather honorable of Elder Pinnock. Though I do wonder if this example can be used as training for leaders for when they should or should not imply that they are speaking on behalf of their organization.

  3. Mark, I’ve been saved by taxes by making bad investments before; here’s hoping Pinnock was! (I have no sense for when he made his investments, so no sense of what his actual tax consequences were.)

    jader3rd, one thing that screams out at me from reading Victims is how unsophisticated church leaders were, business-wise, through this whole thing. They really didn’t know what they were doing, which is fair, but in the Utah economic world, they wielded significant amounts of influence. I’m curious if this had anything to do with the church eventually telling General Authorities not to serve on boards of directors. (OTOH, that announcement came about a decade later, so maybe not?)

  4. Matthew73 says:

    Sam, my impression (wholly unverified and unsubstantiated for now) is that the Hoffman affair was a material catalyst in the Church’s issuing new guidelines/rules/requirements that General Authorities were no longer permitted to serve on corporate boards.

  5. Could this also be viewed as a gift, which would be taxable? I don’t know what gift tax law was like in the 80’s.

  6. Bonjo, probably not, though in this case it wouldn’t matter. For tax purposes, gifts aren’t deductible by the donor and aren’t includible by the recipient. But repaid loans are also not includible in gross income, so the bank’s mostly not including anything in income in either event (other than roughly $1,000 which represented interest).

    But a gift for tax purposes has to be given out of “disinterested generosity.” Here, Elder Pinnock made the payment either to protect his or the church’s reputation or out of a sense of guilt/responsibility. That wouldn’t qualify as a gift.

  7. I seem to remember from the book “Salamander: The Mormon Forgery Murders” that Elder Pinnock was told to pay off the debt by someone higher up than he was in the church. It has been some years since I read it but I remember the distinct impression that Elder Pinnock was to fall on his sword to help distance the church from the whole mess. In other words, it was to help save the reputation of the church that I believe Elder Pinnock acted to repay Mr. Hoffman’s bad debt.

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