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In his State of the Union address, President Obama proposed several tax increases aimed at affluent taxpayers. The President did not suggest one such increase that some Republicans might be persuaded to support: limit the estate tax deduction for bequests to private foundations. In light of the significant economic and political power wielded by the families which control such foundations, it is compelling to limit the estate tax charitable deduction for bequests to such foundations.
As I discuss in a recent paper in the Florida Tax Review, the federal estate tax charitable deduction is unlimited. In contrast, the federal income tax charitable deduction includes detailed limitations which restrict the proportion of an individual taxpayer’s income which may be deducted as a charitable contribution. Through these limits, the income tax charitable deduction implements the ethic that everyone – even taxpayers who devote their entire incomes to charity – should pay some federal income tax.
The federal estate tax should be amended to similarly restrict an estate’s charitable deduction to a percentage of the estate. Then, every estate large enough to trigger federal estate liability would pay some estate tax, even if that estate devolves in its entirety upon charitable recipients.
In the current political environment, this change does not seem feasible. However, it might be possible to garner bi-partisan support for a less sweeping reform, namely, an estate tax charitable deduction limit only applicable to bequests to private foundations.
On the one side are the policy of encouraging charitable bequests to maintain a vibrant charitable sector and the recognition that resources transferred to charity do not directly descend to the decedent’s family. On the other hand, the public fisc has legitimate claims for the services it provided during the decedent’s lifetime. The estate tax is the final accounting for the governmental benefits the decedent received while alive. Most importantly, bequests to a private foundation often, in dynastic fashion, perpetuate substantial economic and political power for the decedent’s family which controls that foundation.
Many private foundations are admirable institutions. I am a fan of the Gates Foundation and of the Buffett family’s charitable efforts. These private foundations appear to be well run, genuinely charitable enterprises.
However, other private foundations are considerably less commendable. Such foundations often serve the thinly-disguised political and economic interests of the families controlling them. Even laudable foundations, like the Gates and Buffett foundations, entail considerable political and financial power for the Gates and Buffett families.
William Gates, Sr., is an attorney and a leader of Responsible Wealth, a coalition of wealthy individuals who favor a federal estate tax. Attorney Gates has written eloquently of the need for federal estate taxation. Few, if any, Republicans will join his call for retaining the federal estate tax.
But some Republicans may be concerned about the realities of private foundations. Looking at these realities, Republicans and Democrats might agree that the estate tax charitable deduction should be limited for bequests to private foundations including the Gates and Buffett families’ foundations.
Image Credit: “Tax.” Photo by Alan Cleaver. CC by 2.0 via Flickr.
As President Obama ponders whom he will nominate as Eric Holder’s successor as attorney general, he should consider President Ford’s appointment in 1975 of Edward Levi to head the nation’s Department of Justice.
Four decades ago, the United States was reeling from Watergate. President Nixon’s first attorney general, John Mitchell, was on his way to federal prison while Ford’s pardon of Nixon remained controversial.
In this difficult environment, President Ford reached outside his official and personal circles to appoint as attorney general a preeminent legal scholar, Edward Levi.
Levi was a distinguished law professor, an accomplished dean of the University of Chicago Law School, and the widely-admired president of the University of Chicago. In a contentious political setting, Edward Levi was confirmed as attorney general by a voice vote in the United States Senate. Everyone understood that Ford had gone beyond politics as usual to choose an outstanding attorney general capable of restoring confidence in the Department of the Justice.
Ed Levi didn’t need the job. But the United States needed Ed Levi.
Levi’s tenure as attorney general did not disappoint. When Levi left the Justice Department at the end of the Ford Administration, the department’s reputation had been restored in large measure because of Levi’s integrity, professionalism, and independence.
Photograph of President Gerald R. Ford Presiding Over an Afternoon Cabinet Meeting in the Cabinet Room. Bill Fitz-Patrick, Photographer. 4 June 1975. Gerald R. Ford Presidential Library, US National Archives and Records Administration. Public domain via Wikimedia Commons.
President Obama should strive for an Ed Levi-type appointee for his second attorney general.
Many fine individuals are being mentioned to replace Holder. Most of these individuals are excellent lawyers and, under other circumstances, would be good leaders for the Department of Justice. But the United States today, like the United States in 1975, requires more than a good lawyer as attorney general. It requires someone with Ed Levi’s gravitas.
Some might retort that nothing comparable to Watergate has transpired in recent years. True. But we are a nation badly fractured on political lines. Legitimate concerns have been raised about the recent performance of the Department of Justice. In this difficult atmosphere, it is vital to reaffirm that the Department of Justice is an institution of law, not just another hyper-partisan political arena.
Like President Ford, President Obama should look beyond his official family and his circle of acquaintances to find an attorney general whose prime credentials are professional, not political. Holder’s replacement should be perceived as an independent attorney general who doesn’t need the job.
This heavyweight appointee could, like Ed Levi, come from academia or could come from the private sector. Another potential source for such an attorney general is the judiciary. Among those meeting the Ed Levi-test would be such personages as Justice Sandra O’Connor and Judges Richard Posner, Jon Newman and Jose Cabranes of the U.S. Court of Appeals.
President Ford’s historical reputation improves with each passing year. His pardon of Richard Nixon, widely condemned at the time, is now seen as an act of statesmanship which helped to move the United States beyond Watergate. Ford’s appointment of Edward Levi as attorney general was similarly an act of high statesmanship which reaffirmed America’s commitment to the rule of law. President Obama should make a comparably outstanding appointment for his second attorney general.
The sad story of Casey Kasem’s last illness is now over. Casey Kasem was an American pop culture icon. Among his other roles, Mr. Kasen was the disc jockey host on the legendary radio program, American Top 40. He was also the voice of Shaggy Rogers of Scooby-Doo.
Unfortunately, for many Americans Casey Kasem is now known as the subject of a bitter dispute between his widow Jean and his children from his first marriage. In the face of Mr. Kasem’s debilitating dementia, Mrs. Kasem wanted to continue medical care while his three children from his prior marriage had concluded that care was pointless and should be discontinued. Mr. Kasem’s children prevailed in the California courts based on a document Mr. Kasen had signed in 2007. Life support was accordingly withdrawn and Casey Kasem died shortly thereafter.
At one level, it is surprising is how rarely we hear today of such stories of conflict over end-of-life care. Cases involving Nancy Cruzan, Karen Ann Quinlan, and Terri Schiavo were once prominent in our public discourse.
An unheralded accomplishment of the American political and legal systems is the largely successful privatization of end-of-life health care decisions. Through documents variously denoted as living wills, health care proxies, medical powers of attorney, and health care instructions, an individual while mentally competent can plan for the end of his life. Central to such planning is the designation a medical decisionmaker and the specification of the criteria to be applied by such decisionmaker if an individual becomes incapable of making medical decisions for him- or herself.
These planning procedures, while not panaceas, have largely ensured that end-of-life decisionmaking will be made, not in courtrooms, but where such decisions belong: by the dying individual’s designated loved ones.
Two important lessons emerge from the Kasem family’s unfortunate experience. First, spouses are not automatically medical decisionmakers for each other. Spouses should formally designate each other as medical decisionmakers, if that is what they want.
Unfortunately, debate over same-sex marriage has confused matters, leading many individuals to erroneously believe that, simply by virtue of marriage, spouses are automatically each other’s medical decisionmakers. They are not. For example, Michael Schiavo’s status as husband did not guarantee him the right to make medical decisions for his wife Terri.
It is sensible to require that spouses must formally designate each other as their end-of-life medical decisionmakers. To take the most obvious case, suppose that spouses are estranged and that a healthy spouse will gain financially through an inheritance on the death of a wealthy, ill spouse. We would not want the healthy spouse in this setting to terminate medical care unless the ill spouse had signaled that that was what he wants. Or, to take a more benign situation, spouses may love each other but still think that other persons, e.g., the children from prior marriages, will be better decisionmakers under the stress of an end-of-life situation.
The bottom line is that spouses should execute the formal instrument of their respective state, however that instrument is designated, if they want each other to be health care decisionmakers. Marriage, by itself, is not legally sufficient to make spouses medical decisionmakers for each other.
The second lesson of the Kasem story is that, even if all of the proper documents have been signed, terminating medical treatment at the end of life is a difficult and painful decision. For example, one commonly used formula specifies that medical treatment should be withdrawn when an individual’s condition is “terminal.” Unfortunately, the physicians advising in end-of-life settings do not always agree when a conditional is “terminal.” If consensus exists, it is still painful to withhold medical care even if an ill individual previously authorized such withholding while he was healthy and competent to decide.
Casey Kasem left Americans with wonderful memories. His parting contribution to the American people was to remind us of the need for proper end-of-life planning and to demonstrate that, even with such planning in place, medical decisions at the end-of-life can be painful and difficult.
As the American public debated the legislation ultimately enacted into law as the American Taxpayer Relief Act of 2012, no person was more influential than the Oracle of Omaha, Warren Buffett. Much attention was given to billionaire Buffett’s complaint that his federal income tax bracket was lower than his secretary’s tax rate. President Obama invoked “the Buffett Rule” to bolster the President’s successful effort for the Act to raise income tax brackets for high income taxpayers.
In his most recent letter to the shareholders of Berkshire Hathaway, Buffett issued another oracular pronouncement about America’s fiscal health. Buffett warned that many public pension plans are dangerously underfunded:
Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford….[A] gigantic financial tapeworm…was born when promises were made that conflicted with a willingness to fund them….During the next decade, you will read a lot of news –- bad news – about public pension plans.
Many of those who heeded Buffett’s call for higher tax brackets for the wealthy ignore his current warning about the parlous financial condition of public pension plans. One of the problems of being an oracle is that your listeners will pick and choose which prophecies to follow.
Attached to Buffett’s most recent shareholders’ letter was a 1975 memo on pensions Buffett sent to Katharine Graham, then chair of The Washington Post Company. Buffett’s observations in this now released memo are as compelling today as they were forty years ago. It is easy to grant pension benefits payable in the future while failing to fund that pension promise today as “making promises never quite triggers the visceral response evoked by writing a check.” Typical defined benefit formulas, which gear pensions to an employee’s final salary before retirement, are particularly expensive for the employer to finance since higher final salaries will, at the end of an employee’s career, escalate his pension entitlement. It is tempting, but futile, to assume that the underfunding of defined benefit plans can be remedied by every plan continuously earning above average returns on pension assets: “yes, Virginia, maybe every football team can have a winning season this year.”
All of this explains why many of the nation’s public pension plans are today seriously underfunded: Elected officials promise pension benefits without properly funding them and rely on unrealistic assumptions about future rates of return to deny the reality of underfunding.
Buffett’s observations resonate with particular force in Connecticut where I live. Connecticut competes with Illinois for the distinction of being ground zero in the public pensions crisis. In this election year, neither the Governor nor the legislature will acknowledge that the Nutmeg State’s public pensions are seriously underfunded.
Consider in this context Buffett’s warning that pension plans should not assume that they will earn superior investment returns. Connecticut contends that its pension plans will earn 8% annually. Most other states make similarly optimistic assumptions. The National Association of State Retirement Administrators has recently determined that the average state public pension plan currently assumes that its investments will earn an annual rate of return of 7.72%.
More realistic assumptions about rates of return would expose the underfunding of public pensions described by Buffett. Under the Internal Revenue Code, private sector pensions this month must calculate their obligations to pay retirement benefits using interest rates ranging from 1.19% (for pension benefits payable soon) to 6.76% (for pension benefits payable furthest down the road). If Connecticut or any other state with similarly underfunded pensions assumed these more sobering rates of return (as they should), Buffett’s dire assessment of pension underfunding would be dramatically confirmed.
Equally instructive is the recent contract settlement brokered by New York Governor Andrew Cuomo between the Metropolitan Transportation Authority (MTA) and Local 100 of the Transport Workers Union (TWU). With much fanfare, Governor Cuomo announced that TWU workers will receive increased wages but that the MTA will not elevate fares to cover these increased wages. Only after the cheering stopped did we learn how this alchemy is to be accomplished: by reducing the MTA’s scheduled contributions for pensions and retiree health care costs. Governor Cuomo, the MTA, and the TWU have decided to underfund pensions for MTA workers. No doubt, they will justify this underfunding by predicting superior investment returns on the pension’s investments.
The Oracle of Omaha is, unfortunately, right. Many states and localities will soon have to choose whether to pay pensions promised to retired workers, or whether to put police on the streets and teachers into classrooms, or whether to increase taxes significantly to pay pensions and maintain public services.
It is regrettable that many who marched under Buffett’s banner when he favored higher taxes on the rich ignore his message about the troubled state of public pensions.
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Image credit: Pension pension or retirement concept with word on business office folder index. Photo by gunnar3000, iStockphoto.
Telecommuting benefits employers, employees, and society at large. Telecommuting expands work opportunities for the disabled, for those who live far from major metropolitan areas, and for the parents of young children who value the ability to work at home. Telecommuting also removes cars from our crowded highways and enables employers to hire from a wider and more diverse pool of potential employees.
It is thus anomalous that New York State’s personal income tax discourages interstate telecommuting by taxing the compensation non-resident telecommuters earn on the days such telecommuters work at their out-of-state homes. Under the misleading label “convenience of the employer,” New York subjects telecommuters to double income taxation by their state of residence as well as by New York – even though New York provides non-resident telecommuters with no public services on the days such interstate telecommuters work at their out-of-state homes outside of New York’s borders.
Some of New York’s elected officials profess interest in making New York tax policy more rational and family-friendly. These officials, however, have shown no willingness to repeal the “convenience of the employer” rule to stop New York’s double state income taxation. Taxing non-resident, non-voters for public services they do not use is just too politically tempting for Albany to resist.
Fortunately, federal officials have begun to recognize the unfairness and irrationality of the double state income taxation inflicted on non-residents by New York’s “convenience of the employer” rule. Most recently, US Representative Jim Himes, joined by his House colleagues Elizabeth Esty and Rosa DeLauro, introduced H.R. 4085, The Multi-State Worker Tax Fairness Act of 2014.
Representative Himes, and his colleagues, are to be commended for introducing this much needed legislation. If enacted into law, H.R. 4085 would make the tax system safe for interstate telecommuting.
In previous incarnations, legislation along these lines was denominated as The Telecommuter Tax Fairness Act. The legislation’s goal remains the same. For Congress, using its authority under the commerce clause of the US Constitution, to forbid New York and other states from double taxing no-nresidents’ incomes on the days such non-residents work at their out-of-state homes.
Consider in this context the spate of service stoppages experienced by MetroNorth railroad commuters this winter. During these stoppages, public officials quite sensibly urged MetroNorth commuters to work from home rather than clog the already crowded highways to reach Manhattan. However, no public official spoke candidly about the tax penalty such commuters triggered by working at their Connecticut homes.
New York’s double taxation of non-resident telecommuters is not limited to those who live and work at home in the northeast. Under the banner of employer convenience, New York projects its taxing authority throughout the nation. In widely reported cases, New York imposed its personal income tax on Thomas L. Huckaby for days he worked at his home in Tennessee, on Manohar Kakar for days he worked at his home in Arizona, and on R. Michael Holt for days he worked at his home in Florida.
Nor is the threat of double taxation limited to New York’s personal income taxes imposed on non-resident telecommuters. Fortunately, many states recognize that double taxing non-resident telecommuters is ultimately self-destructive, driving telecommuters and the firms which employ them to states with more welcoming tax policies. However, other states emulate the Empire State’s tax hostility to interstate telecommuting. For example, Delaware taxed Dorothy A. Flynn’s income for the days she worked at her Pennsylvania home, even though Ms. Flynn did not set foot in Delaware on these work-at-home days.
The unfairness and inefficiency of the double state income taxation of interstate telecommuters has led a broad national coalition to favor federal legislation like H.R. 4085. Among those supporting such legislation are the American Legion, the Christopher and Dana Reeve Foundation, the National Taxpayers Union, The Small Business & Entrepreneurship Council, the Association for Commuter Transportation, The Military Spouse JD Network, and the Telework Coalition.
Representative Himes, along with Representatives Esty and DeLauro, are to be commended for introducing H.R. 4085. If enacted into law, this much needed legislation would make the tax system safe for interstate telecommuting by forbidding double state income taxation of non-resident telecommuters.
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Image credit: Metro-North EMD FL9 leaving Stamford, CT. Public domain via Wikimedia Commons.
In a unanimous decision, New York’s Court of Appeals, the Empire State’s highest court, recently held that John Gaied was not a New York resident for income tax purposes because he had no New York home.
Mr. Gaied was domiciled in New Jersey and had a business on Staten Island to which he commuted daily. He purchased a multi-family apartment building near his business in New York, both as an investment and to house his parents who lived in the building’s first floor apartment.
New York’s tax commissioner claimed that this Staten Island building made Mr. Gaied a New York resident for tax purposes. The New York Tax Appeals Tribunal and the New York Appellate Division affirmed the commissioner’s determination that this building constituted Mr. Gaied’s “permanent place of abode” in New York – even though Mr. Gaied personally did not lived there.
The good news is that Mr. Gaied ultimately prevailed. The bad news is that he had to fight his way to New York’s highest court to prevail. As that court held, “in order for a taxpayer to have maintained a permanent place of abode in New York, the taxpayer must, himself, have a residential interest in the property.” Since it was Mr. Gaied’s parents who lived in the first floor apartment, not Mr. Gaied himself, he was not a New York resident for tax purposes.
Mr. Gaied’s lawyer, Timothy P. Noonan of Hodgson Russ, LLP, is entitled to be proud of this victory for tax sanity in New York. The problem is that such sanity is all too rare. Mr. Gaied had to go to New York’s highest court to establish the common sense proposition that a “place of abode” is a location at which the taxpayer actually lives.
Unfortunately, the kind of irrationality manifested by New York’s tax commissioner in Gaied is endemic to New York’s tax system. Consider, for example, New York’s insistence that the modest beach house owned and used by Mr. John J. Barker for a handful of vacation days each year transforms Mr. Barker into a New York resident, even though his permanent home is in Connecticut. Or consider New York’s “convenience of the employer” doctrine under which New York taxes the income earned by nonresident telecommuters on the days such telecommuters work at their out-of-state homes and don’t set foot in the Empire State. There is much that is irrational and self-destructive in New York tax policy.
Governor Cuomo has eloquently proclaimed that New York can no longer be “the tax capital” of the United States. The Governor is right. Hopefully, Gaied will signal to New York’s policymakers the need to reform New York’s self-destructive approach to personal income taxation. Repairing New York’s definition of residence and abolishing the “convenience of the employer” doctrine would be good places to start.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the 
