Friday, May 03, 2013

NEW TESTAMENT: PAUL'S FIRST LETTER TO THE REVENOOIANS


The new mayor announced his management team today.

There must have been at least three or four people in town who did not already know that the designated Director of Administrative Services (A/K/A Deputy Mayor) was Paul Havermalel and that Paul was the General Manager of a corporation and a named principal involving a butt pile of Federal tax Liens, Levies and other fun IRS stuff.

Two things should be said up front.  I have known Paul since childhood and I like him.  Further, I have known about this tax problems for a very long time and argued strongly against any airing of them in the recent  political contest.  (Not that any political insiders really gave a rat's ass what I think...but that is a topic for another day.)

Once Paul was designated by the mayor- elect for his important job, Channel 7 had no real choice but to commit an act of journalism and publicize Paul's tax mess (and make no mistake about it it is Paul's tax mess.).

I have not made any attempt to drill down into the nature of Paul's specific tax liability. More on that shortly.

As a general rule, an incoming Chief Executive should be entitled to select his management team and have them confirmed without a hassle. If the Chief Executive is going to be responsible, he needs to be able to select his management team. I make three exceptions to this general rule: First, if the nominee has a problem involving moral turpitude, that is, straight up antisocial or corrupt behavior; Second, if, for whatever reason, the Chief Executive's own party is not unanimous on the nominee; and, third, if the nominee is demonstrably baseline incompetent.

Since the DAS role is inherently subjective, the third one does not apply to Paul.

The issue with the failure to pay taxes is complex. Not all tax defaults are created equal. One form of tax is simple income tax. Taxpayers pay estimates and sometimes they don't estimate enough. Sometimes, taxpayers just choose to use for lifestyle what they should pay for estimates . This is probably poor judgment and certainly bad financial management but is not tinged with any moral turpitude. In terms of the impact of collection, the taxpayer is not hurting anyone but himself. Internal Revenue will eventually get the money with interest and the society is not harmed.

Alas, there is another category of tax that an employer must pay, the dreaded 941 tax.  It is hugely different.

Oversimplified, employers take employee withholding out of the employees' pay for federal tax, Social Security and Medicare. They hold this money from the employee in trust, then match the Social Security and Medicare portions with the so-called "employer contribution." Depending upon a number of things, the employer then has a deposit schedule, sometimes known as a "schedule B" deposit schedule. The employer sends this money to the federal government and withholding is credited to the employee. The employee also gets credit for Social Security and Medicare contributions.

This is vital and it is something the employee has earned. The handling of this kind of tax is completely different from general, federal income tax. The employer is holding the employee's earnings in trust. Those earnings, while paid to the government, are technically the property of the employee while being held by the employerbefore deposit. In other words, whether the employer acknowledges it or not, the employer holds one of the most significant positions in our society, the employer is a trustee.

When a trustee converts assets from a trust to its own use, that is one of the vilest acts of conversion that can happen in Western society. When the Chief Financial Officer in Dixon stole all those millions of dollars, it was basically theft from a trust. When you occasionally read of a lawyer taking personal injury money or estate money, as happened here a year or so ago, that is a theft or conversion from a trust. Taking money that does not belong to you when you are a trustee of that money is, frankly, an act of moral turpitude. There is no way to put a happy face on it.

It is not too strong to say that, when an employer does not pay 941s, he is stealing from his employees. He is stealing in real time because he is taking their federal tax contributions. Moreover he is stealing a portion of their future because he is depriving them of Social Security and Medicare contributions. Indirectly, he is affecting everyone in the Medicare pool because he is reducing the amount of general contributions and that changes the actuarial calculations. The failure to pay 941s, in addition to being a breach of trust, is an act of negative citizenship (this is a lousy term that I am using to avoid saying "anarchy.")

Again, if these are 941 taxes, a contention that they were not being paid to "protect the employees" is disingenuous at best and baseline dishonest. If the employer's failing to pay the 941s he is taking money that is already the property of the employees, earned once and using it to pay the employer's payroll obligations and to maintain the benefit of the labor of the employees.

The argument that not paying 941s is some kind of act of grace toward employees is simply incorrect, tantamount to saying one had to destroy the village to save it.

This raises a whole different issue.  Paul's explanation is that he made these difficult choices to save jobs.  If the taxes are 941's, Paul's explanation is unacceptably dishonest.  If he holds a public job, who is going to believe a word he says.  If someone will lie about his employees, he will lie about anything.  Is not a presumption of credibility an important asset in a Deputy Mayor?

I do not know whether there are 941 taxes in Paul's obligation. If there are, they constitute an issue of fitness for duty.  A man who takes money from his employees' trust and then says he did it for the good of his employees is not worthy of the public trust.

Paul deserves a hearing on that issue.  Perhaps the taxes aren't 941's.  Perhaps, notwithstanding his title as 'General Manager," he is not legally responsible for all this (although one wonders why the liens are out against him personally.)

It is unfair to ask the City Council to digest this in one night.  The duty of clarity and transparency is on Paul and the new Mayor.  That begins with a document dump.  The Aldermen should have  the full tax package and the opportunity to ask questions of Paul until they are satisfied this is just an income tax issue.  If this is a 941 issue, he should not occupy a position of trust.

I am not accusing Paul of failing to render 941 taxes.  My hope is that he didn't engage in any of that.   I am saying that the Council deserves to know which it is.  If the unpaid taxes include long term 941s, both a conversion from trust and a dishonest explanation have taken place.  Those are not character traits fitting a second in command.

This is an agonizing decision and the Council should not be required to digest it in five minutes.  If a delay inconveniences Paul or the Mayor-elect, that is the product of Paul's utterances and actions and the Mayor's late announcement of his Deputy-designate.  The Council should take whatever time it needs to examine this.  If it is determined that the back taxes are 941s, then and only then is Paul unqualified on grounds of moral turpitude or simple dishonesty.

For the Council not to make that inquiry would breach their public trust.  And, yes, this is a very uncomfortable situation.  The burden of fixing it is on the nominee and the Mayor, not the Council.

UPDATE:  The Whig this midafternoon has revised its online version (after publishing the hardcopy) to include the following:

Paul Havermale said ASI fell behind by about $400,000 in payments to cover employer and employee Social Security and Medicare taxes, employee federal withholding taxes and the business' federal unemployment taxes between 2001 and 2011. The IRS assessed fines and penalties that increased the total owed to $745,698.87, he said.

In English, this means that Paul's business was not paying 941 taxes (Employees' Money) and not paying federal unemployment tax, kind of a floor for the national Unemployment Scheme that supports displaced and terminated workers while they look for new work.

If you have already read through the original post, you realize that, if true, this means that Paul's business was taking money from its employees' checks and not sending that money in whole to the Treasury.  Again, if this description is accurate, Paul's press release explanation about "standing up" for his employees is beyond deceptive.  It is duplicitous.

If the allegations in the newspaper are correct (and they are likely taken from public documents) the question asks itself "Is this the guy you want making policy for 300 plus employees?"

9 Comments:

At 1:54 PM, May 03, 2013, Anonymous Anonymous said...

Isn't this the same thing the owner of Elders went to prison for?

 
At 3:25 PM, May 03, 2013, Blogger UMRBlog said...

Anon 1354,

No, not at all. That was tax fraud, very willful.

It appears at some point ASI actually filed returns, which pretty much defeats fraud, even if the "taxpayer" doesn't remit with the return.

TYFCB

 
At 10:03 AM, May 04, 2013, Anonymous Anonymous said...

nominee must withdraw saturday, which protects the mayor. if this goes to the council, both lose.

 
At 9:32 PM, May 05, 2013, Anonymous Anonymous said...

Bad start for the young mayor and his cronies. Maybe he could beg the very capable Jeff Steinkamp to come back as DAS?!!

 
At 4:41 PM, May 06, 2013, Blogger UMRBlog said...

2132,

Tragic mistake re appointed officers. Steinkamp should have been quietly told his day was coming and an orderly search for a replacement done. It's funny now often "humane" and "practical" intersect.

Steinkamp's crime or shortcoming? Oh, it has nothing to do with engineering or Department Head performance. He is the brother-in-law of Dick Durbin's Chief of Staff. I think he's been married for about thirty years so that was a real "Manchurian Candidate" move. This plan must have already been set in place when Jeff got married.

"Cronies" is too strong. Alderman Mann, Holbrook, Farha, Sassen, Rein , Lepper Mussolino and Brink are all reasonable people. If you are talking about his consigliere and barhopping puppies from his campaign staff, well, maybe.

TYFCB

 
At 8:21 PM, May 08, 2013, Anonymous Anonymous said...

Many people in the local engineering community would differ with your assessment that Steinkamp's dismissal had nothing to do with the engineering department.

 
At 8:22 PM, May 08, 2013, Anonymous Anonymous said...

Doesn't it have something to do with the fact that Steinkamp is an Electrical Engineer by training and the City really should have a Civil Engineer such as Marty on its payroll?

Would you want a Patent Attorney representing you in a Human Resources matter?

I think the City has been under served by Mr. Steinkamp for years.

This is a classic illustration of Nepotism.

 
At 7:00 AM, May 09, 2013, Blogger UMRBlog said...

Anon 0821,

And local engineering firms, who compete for contracts with the City, are totally free from bias and prejudice. They have no conflicts of interest and no grudges. They are just neutral arbiters of engineering merit. Right.....and Tinker Belle is my FedEx driver, too.

Notice, I have NEVER said S'kamp should not be REPLACED. Just that his balked termination was butchered. I'm all for the Mayor having his team. Just follow the statutes, ordinances and constitution. That's not a lot to ask.

TYFCB

 
At 7:36 AM, May 09, 2013, Anonymous Anonymous said...

Any ordinance that protects cronies should be abolished. Mayor should be allowed to freely bring in his team.

That being said, even stupid rules sometimes need to be followed.

 

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