Senate Democrats are gearing up for a fight against Scott Bessent, President-elect Donald Trump’s pick for Treasury secretary, with questions about his fitness to hold the office based on a review of his tax returns. The billionaire hedge fund manager has largely flown under the radar among a field of more controversial nominees, but that may change when he appears before the Senate Finance Committee for his confirmation hearing Thursday. A confidential vetting document prepared by Senate Finance Democratic staff alleged Bessent avoided paying hundreds of thousands of dollars in self-employment taxes, while claiming questionable deductions. Meetings between Bessent and Democratic senators have also been rocky, according to sources familiar with the process. With 52 Republicans currently in the Senate — 53 once Ohio Gov. Mike DeWine names a GOP successor to Vice President-elect JD Vance — Democratic votes aren’t needed to confirm Bessent. But they could make the process more difficult and drawn out. Senate Finance ranking member Ron Wyden, D-Ore., is preparing to whip votes against the nominee, sources said. The memo to Senate Finance Democrats highlighted issues within Bessent's tax returns and financial disclosure “determined appropriate to bring to the attention of Committee members.” Many of the issues stem from Bessent’s payment of self-employment taxes on income earned through his hedge fund, Key Square Group LP, and losses he claimed from All Seasons Press, a conservative publishing house he owns. 'Limited' or 'active' involvement? Democratic committee staff claimed Bessent avoided paying more than $900,000 in Medicare taxes on income earned through Key Square Group over the three-year period. Bessent took the position that as a limited partner in the fund under state law, he was not liable for taxes on certain income earned through the fund, according to the memo. Senate Finance Democratic staff took issue with that stance in the memo, pointing out that Bessent was actively involved in the activities of the fund. The earnings of individual business owners are currently subject to 2.9 percent self-employment tax that goes into the Medicare trust fund; if they earn over $200,000, or $250,000 in the case of married couples filing jointly, there's an extra 0.9 percent tax on the excess. But owners of "pass-through" businesses, whose profits are taxed at the individual owner level, can avoid self-employment taxes in certain instances other than on "guaranteed payments" like salaries. Other distributions of income from the business aren't subject to self-employment taxes, which take the place of payroll taxes paid by employees, although they face income taxes. The rules are complicated, but the Treasury Department and IRS in recent years have taken the position that certain "limited partners" in a business should still face self-employment taxes if it can be shown that they actively participated in running the business. As founder and CEO of Key Square Group, Democratic staff argued Bessent was clearly "actively involved" in his firm's business. Partnership rules are a little different from those for subchapter S corporations, another form of pass-through business structure. But under the same principle, critics for years have questioned the ability of S corporation shareholders to get out of paying Medicare taxes on their share of business income, including in high-profile instances surrounding former Speaker Newt Gingrich, R-Ga., and former presidential candidate and Sen. John Edwards, D-N.C. Both the Obama and Biden administrations proposed in their budgets to get rid of the "Gingrich-Edwards loophole" and ensure partnerships and S corporations pay their full share of self-employment tax. But Congress never went along. Biden himself used an S corporation to shelter some of his book and speech income from the Medicare tax before he became president, which Republicans attacked him for on the campaign trail. 'Meritless claims' A Trump transition spokesman dismissed the allegations in an emailed statement. "Scott Bessent has paid his taxes. After providing thousands of pages of records through an exhaustive process, neither Sen. Wyden nor his staff are able to provide any evidence that Scott violated the Internal Revenue Code," the spokesman said. "Instead, they have resorted to a subjective interpretation of the tax code, including taking positions that are contrary to the views of the broad majority of tax professionals, accountants and lawyers, in an effort to mislead the public," the statement continued. "These meritless claims should be dismissed for the partisanship they represent.” A spokesperson for Senate Finance Chairman Michael D. Crapo, R-Idaho, declined to comment on specific allegations in Democrats' memo. “Mr. Bessent has followed the law and provided thousands of pages of documentation as part of the committee’s rigorous vetting process," Amanda Critchfield, communications director for Finance Republicans, said in a statement. Publishing firm losses Finance Democrats also claimed Bessent improperly fully claimed losses from All Seasons Press, a conservative-leaning publishing firm, in 2021 and 2023. Bessent told Democratic staff he was active in the business those two years, allowing him to claim the losses against his full income to lower his tax liability. But Bessent on other occasions has claimed little involvement in the publishing company, according to the memo. If that were the case, Bessent could only claim losses from the publishing company against income it generated, not income earned from other sources. Democratic staff also raised issues around a $500,000 bad debt deduction Bessent claimed on his 2023 tax return. The deduction applies to business loans that go unpaid, but not personal loans. Senate Finance staff was unsatisfied with Bessent’s answer when they asked for proof the deduction was taken on a business loan. In his response to the committee, Bessent said he “originated a business loan in pursuit of a Media/Technology business that Taxpayer believed would have potential synergies with his existing media holdings.” The memo also accused Bessent of using a pass-through entity to sidestep the $10,000 cap on state and local tax deductions, which was a fixture of Trump's 2017 tax law. Trump now agrees with blue-state House Republicans who want to loosen the cap, arguing it's too onerous on their constituents.
