Allowable Deductions

By Richard Lacayo

Bill Clinton probably winces every time he hears that the Whitewater affair has raised "another question." And he probably never believed that he would lay all the questions to rest last week when he released his tax returns for 1977 through 1979. But here's a question he may not have expected to raise: Because the returns go some way to support the White House version of events on Whitewater, why didn't he simply release them sooner?

During the 1990 Arkansas governor's race, the Clintons made public their tax records dating back to 1980. They drew the line there, which meant that the first two years of the Whitewater investment, which they began in 1978, were out of bounds. That kind of defensive perimeter is just the thing to get reporters sniffing. Earlier this year James McDougal, the Clintons' former partner in Whitewater, made matters worse when he began suggesting that the First Couple had never invested more than $13,500 of their own money. That sounded suspiciously like Whitewater was a sweetheart deal in which McDougal, who later headed a buccaneering S&L, made most of the payments in return for . . . just what, exactly? White House aides insisted that the Clintons had invested enough to claim $22,000 in Whitewater-related interest deductions on their 1978 and 1979 tax returns. But when reporters asked time and again to see the returns, which were handed over to the special counsel, they were told to wait until he had issued his report.

When the returns were finally released last week, they did indeed show a total of about $22,000 for 1978 and 1979 in Whitewater-related interest deductions on two loans. Those included $10,131 that the Clintons say they paid in 1978 to Great Southern Land Co., a company mostly owned by McDougal that he now says handled payments to the Whitewater lending institutions at that time. In the following year, the returns show the Clintons paying $11,749 directly to "banks and loan companies," as well as $238 to McDougal. A new accounting of the Clintons' Whitewater investment released Friday shows payments totaling $46,636 -- the latest figure that the President gives as the sum he and his wife lost on Whitewater. (Of the $46,636 the Clintons say they lost, $41,000 was deducted and thus yielded tax benefits offsetting their out- of-pocket Whitewater investment.)

Clinton's recollection of the $46,636 figure has been rather fluid. At his press conference last week, the President admitted to something like a recovered memory when he announced that he and his wife had not lost $68,900 on Whitewater, the figure they have claimed since 1992. While reading the manuscript of his late mother's forthcoming autobiography, Clinton said, he remembered taking out a loan to help her buy property and a cabin in Arkansas. When questions about Whitewater first arose during the 1992 campaign, Denver attorney James Lyons, who was hired by the Clinton campaign to examine and report on the deal, had included that loan as one related to Whitewater. It became part of the figure that he calculated was their loss on the deal. But even if the $20,700 payment was not related to Whitewater, it would still be legal for Clinton to claim it on his taxes, presuming that it was, as he asserts, a legitimate loan-interest payment.

Deductions were especially handy for the Clintons in those years, when they were needed to offset gains made by Hillary Clinton's foray into commodity trading. She added $26,541 to the family income in 1978 and $72,436 in 1979. Even with deductions, the growth of the Clintons' tax payments outpaced the rise of their income. For 1977, they paid taxes of $8,194 on an adjusted gross income of $41,731. By the next year, their income more than doubled, to $85,214, but their taxes grew faster, to $22,627. For 1979, when their reported income was up about 90%, their taxes increased nearly 300%, to $59,388.

McDougal is embarrassed to have claimed that the Clintons were not making Whitewater payments. "My face is red, I have to admit," he says. "I think those are legitimate deductions. I am now convinced that I have substantially underestimated the amount they put in Whitewater." There may be more to be embarrassed about. Though the Clintons' tax records show that they paid more than $10,000 to McDougal's Great Southern Land Co. in 1978, records examined by TIME indicate that the banks received no more than $5,752 in interest that year. Just how was McDougal handling the Clintons' payments?

Auditors may also question whether the Clintons could deduct the interest on the main Whitewater loan from their personal income tax report for interest payments made after September 1979, when the corporation took responsibility for the loan.

So, Mr. President, will you take another question?

With reporting by Richard Behar/Little Rock and Suneel Ratan/Washington