With pseudo free services such as Flickr, you have to abide by their terms of service. Expect them to err on the side of caution rather than risk litigation by large companies. My guess is they were more worried about Time magazine being referenced than the president. According to their terms of service:
"You acknowledge that Yahoo! may or may not pre-screen Content, but that Yahoo! and its designees shall have the right (but not the obligation) in their sole discretion to pre-screen, refuse, or remove any Content that is available via the Yahoo! Services. Without limiting the foregoing, Yahoo! and its designees shall have the right to remove any Content that violates the TOS or is otherwise objectionable. You agree that you must evaluate, and bear all risks associated with, the use of any Content, including any reliance on the accuracy, completeness, or usefulness of such Content. In this regard, you acknowledge that you may not rely on any Content created by Yahoo! or submitted to Yahoo!, including without limitation information in Yahoo! Message Boards and in all other parts of the Yahoo! Services."
Note the phrase "otherwise objectionable". Nice vague language to give themselves the right to remove just about anything. Even though the image was probably copyrighted, it might not have been removed if the rest of Time magazine cover had not also been reproduced. Some might argue that that was implying that Time some how shared the views of the poster (granted that is a bit of a stretch).