September 12, 2005

HuffingtonPost: Arianna’s Pink-Collar Sweatshop?

BizzyBlog’s Opinion: Wealthy conservative-turned-liberal Arianna Huffington is exploiting the good will of some of those involved with HuffingtonPost by not paying them, either because she can get away with it, or because she has to show a profit in 2005 for tax reasons and can’t afford to pay them.

(Click “more” to read the detailed entry)

A clearly sympathetic Biz Weak blogger writes about the “dilemma” the Huffington Post finds itself in (entire entry follows; bold is mine):

The downside of moderated comments: Humans are slow. Arianna Huffington tells me that HuffingtonPost, the meta blog she established in May, has a backlog of 15,000 comments to the site’s 400-odd blogs. She says that volunteers are wading through the comments and posting as many as they can. But they can’t keep up.

Now just a minute. Set aside the possibly sloppy management or poor design that the above may indicate, and let’s concentrate on the person running the show.

We’re talking about the very well-off Arianna Huffington, the former sort-of conservative and now frontline Bush-basher:

  • This Salon piece about ex-husband Michael Huffington claims that he spent $30 million, or “about a third of his net worth,” on his 1994 losing bid to become US Senator from California. That means that the Huffingtons still had $60 million after the loss.
  • The couple divorced, apparently amicably, in 1997 and from all indications split their fortune down the middle, leaving Arianna with $30 million plus post-1994 investment growth.

(BTW–somebody needs to update Arianna’s laughably out-of-date Wikipedia entry–that line about her “not normally supporting Democrats” is a howler).

Now I don’t know what has happened to her fortune since then, but I doubt that it has decreased. I do know this: During her abortive run for California governor, her tax returns for 2001 and 2002 revealed that the wealthy divorcee, who decries “tax breaks for the rich,” paid almost no income tax (link is to “The Talent Show” blog; original LAT piece has been archived; an unverified repost of the article is here):

TV commentator and author Arianna Huffington, who launched her campaign for governor with criticism of “fat cats” who fail to shoulder a fair share of taxes, paid no individual state income tax and just $771 in federal taxes during the last two years, her tax returns show.

Huffington, who released her tax returns for the last two years to The Times, lives in an 8,000-square-foot home in Brentwood above Sunset Boulevard that is valued at about $7 million (before the LA County home-price runup of well over 50% in the past couple of years–Ed.). She socializes with many wealthy and prominent people.

But the returns show that at least for the last two years, her income was far outweighed by losses that she reported were incurred by Christabella Inc., the private corporation she owns and uses to manage her writing and lecturing business.

…… In an interview Wednesday, Huffington said there was no inconsistency between her campaign message and income tax record. She characterized her deductions as “very conservative” and said that any comparison between her and those whom she has criticized would be unfair.

“There isn’t any loophole here. There isn’t any dodging here,” she said. “This is basically putting your income against your expenses.”

Nonetheless, tax experts said Wednesday that Huffington’s tax profile is not one that the typical working family in California can duplicate.

“The average guy isn’t able to wipe out the taxes on his wage income because he doesn’t have millions of dollars in losses” from a private corporation, said Phil Holthouse, a partner in a Los Angeles certified public accounting firm.

If you didn’t know much about our beloved Internal Revenue code, you might think that Arianna could continue merrily along every year losing money in her business and offsetting it against what must be very substantial investment or personal trust income.

You would be wrong. If your sole proprietorship, partnership, S Corporation, or limited liability corporation (LLC) continues to lose money, The Internal Revenue Service will decide at some point that you aren’t engaged in a business; instead they’ll say you’re involved in a hobby. Quick overviews of how the distinction is made are here and here. All the losses you declared in previous years will be disallowed, and you will be stuck owing back taxes, penalties, and interest. Huffington’s speaking/writing business appears to be an S Corporation, while HuffingtonPost is an LLC. If Ms. Huffington owns 100% of both, which appears to be the case, the IRS will ordinarily combine the results of both entities to determine business/hobby status.

That doesn’t seem right or fair, but it is what it is. Ask a lot of former Amway/Quixtar (A/Q) distributors. These decidedly non-rich individuals and couples trying to make their multilevel marketing businesses turn a profit have a very hard time doing so, for reasons that are discussed in gory detail here. More than a few of them declare business losses year after year, only to find that after a few years the red lights start flashing in the IRS computers. The feds come in, audit the returns, disallows the losses ….. you know the rest. This scenario is chronicled repeatedly in “Merchants of Deception,” a free online PDF book by Eric Scheibeler, a former Amway/Quixtar distributor whom I have spoken and corresponded with from time to time during the past few months.

Interestingly, it’s usually not a matter of having profits offset losses over the long haul (though those of us who must actually live on business profits obviously want to have one every year). You can lose a lot of money in the bad years and have nominal profits in the good years and normally (but not always) have little to worry about from IRS.

Which brings me back to Ms. Huffington. Now I don’t doubt for a minute that Arianna gets the best tax and personal finance advice that lots of money can buy, and I’m sure they are well aware of the dangers I have just cited, and of this general guideline (about 60% down the page) IRS auditors tend to use as a starting point (the guidance I found is in a section about retailers, but it is one the IRS uses across most lines of business):

Under IRC Section 183(d), an activity is presumed to be engaged in for profit if the gross income derived from the activity exceeds the deductions attributable to the activity for three or more of five consecutive taxable years.

It gets more detailed and complicated (this IS the tax law, after all), but the benchmark nonetheless exists, as does its informal converse, which is: If the business doesn’t show a profit for three out of five years, it is very likely to be considered a hobby and not a business.

Why could this be important? Because Arianna may need to show a profit this year, and may have a difficult time doing so in light of HuffingtonPost’s likely-hefty startup costs. We know she lost money in 2001 and 2002. It appears from the not-verified LA Times article that 2003 and 2004 were going to be profitable years, but that still leaves 2005. If she doesn’t make a profit this year, she won’t be batting 3-for-5. Her defense against an audit will be seriously weakened, and she could be socked for hundreds of thousands, and perhaps millions, in back taxes, penalties, and interest.

So what’s with those unfortunate souls assigned the task of reading through the thousands of unmoderated posts for no pay?

  • It could be that she has been advised that she can’t without seriously jeopardizing her tax situation, based on the possible need to show a profit this year.
  • OR, if the business projections look good for showing a profit this year (or if I’m all wet about potential tax problems, which is possible with a clever-enough corporate structure), she’s exploiting the good will of volunteers who are providing her valuable services who are deserving to be compensated.

Neither answer makes Arianna Huffington look like the noble crusader she wants us to believe she is. Most of the greedy rich she so despises wouldn’t think of taking advantage of well-meaning people the way she is.

(Imagine the reaction if a similarly wealthy conservative was having his or her blog’s [or company's] dirty work done by volunteers.)

I think there’s a word for a person not getting paid for doing valuable work deserving of compensation for a multimillionaire. It’s a synomym for “lollipop.”
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UPDATE: Michelle Malkin notes that Arianna is in an “evil” SUV–at an environmental conference.

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3 Comments

  1. The celebrity politics of energy

    Arianna Huffington, Robert F. Kennedy, Jr., and Paul Newman: What they say, and what they do.

    Trackback by Mister Snitch! — September 17, 2005 @ 1:44 pm

  2. Many factual inaccuracies here. Your casual calculation of Arianna’s wealth, for one. In the state of California (where they were married; I know they lived in Washington, D.C. while Michael was in Congress), a spouse is not entitled to the inheritance of her partner. She is only entitled to half of the income of the partner during marriage. As Michael’s “$60 million” (quoted because it’s an estimate) was an inheritance, Arianna would not be entitled to any of it. To be sure, you received a nice divorce settlement. I would bet you anything, though, that it was FAR less than $30 million.

    And it’s all downhill from there.

    Comment by Truth — November 9, 2005 @ 7:01 pm

  3. As I said: “The couple divorced, apparently amicably, in 1997 and from all indications split their fortune down the middle, leaving Arianna with $30 million plus post-1994 investment growth.”

    My memory is that they did split his fortune down the middle, or awfully close to it. Even if I’m wrong about that, I didn’t figure in any investment returns from 1994-1997, which should have been substantial.

    The central point, that a lot of unpaid staffers were at the time of the post sweating it out for no pay at an employer who clearly has the money to pay, stands. Whether she’s still sitting on $2 million or has $52 million almost doesn’t matter.

    And just imagine if a conservative for-profit business (which HuffPost is supposed to be) tried to take advantage of large amounts of unpaid labor as she is. They would not be getting the sympathetic free pass this Biz Weak person gave Arianna.

    Comment by TBlumer — November 9, 2005 @ 7:50 pm

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