Nancy Reagan's "Little Rule"

By Jacob V. Lamar

"She set her own little rule, and she broke her own little rule." With that quip, Nancy Reagan's press secretary Elaine Crispen tried to defuse the controversy that erupted last week after TIME reported that the First Lady had failed to disclose the borrowing of lavish designer outfits, a practice she had promised to stop six years ago. By week's end the question of whether borrowed outfits were hanging in the First Lady's closet had been eclipsed by the White House's gyrating attempts to explain away the affair.

When first asked about the matter two weeks ago, Mrs. Reagan stated flatly through Crispen that she had purchased every item she acquired during the past six years. After TIME's story appeared, Crispen admitted that the First Lady had continued to borrow clothes, but claimed they had all been returned. Then Crispen said that while some dresses had been borrowed, others had been received as gifts from "old friends" and hence did not have to be disclosed. Finally, Crispen declared that when the President's term expires, Mrs. Reagan will decide which dresses to keep and which to return. Those she retains, she will report as gifts. Those she returns will be considered loans and not listed.

Mrs. Reagan's failure to report the loans of dresses violates a 1982 agreement hammered out by then White House counsel Fred Fielding and former director of the Office of Government Ethics J. Jackson Walter in response to criticism of Mrs. Reagan's acceptance of designer clothing in 1981. The pact states that the Reagans "will include a listing of those items made available for Mrs. Reagan's use and of the owners/designers of those items" on the President's annual financial-disclosure reports. Fielding briefed the First Lady on her obligations under the agreement. The White House contended last week that despite Mrs. Reagan's continued borrowing, no laws were broken.

The First Lady's acquisitions may have put the Reagans in Dutch with the Internal Revenue Service. Tax experts consulted by TIME, including former Internal Revenue Service commissioner Sheldon Cohen and Harvard Law professor Bernard Wolfman, unanimously agree that gifts or loans of clothing to Mrs. Reagan represent taxable income when the donors benefit from her display of their creations. A gift is not taxable only when it is given out of "detached and disinterested generosity." The designers who loaned or gave the outfits, some valued at more than $20,000, were aware of the publicity they would receive. In a 1982 Women's Wear Daily interview, couturier James Galanos was enthusiastic about lending gowns to Mrs. Reagan, "since designers profit so much from her wearing them." Because none of the loans or gifts were listed on the Reagans' joint tax returns from 1982 to 1987, the First Couple may owe a substantial amount in back taxes.

While the President last week pooh-poohed the flap as a "cheap political shot," some conservatives have been critical. Wrote New York Times columnist William Safire: "For a public official's wife to be 'on the take' is wrong, plain and simple." After TIME's initial inquiries about the First Lady's clothes, a number of outfits that had been lent to Nancy Reagan were quietly returned to their owners.

With reporting by Jay Peterzell and Nancy ! Traver/Washington