The Case for Reform of the Estate and Gift Tax Treatment of Political Contributions
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Mr. Soros Goes to Washington: The Case for Reform of the Estate and Gift Tax Treatment of Political Contributions Eric G. Reis Partner Thompson & Knight L.L.P. 1700 Pacific Avenue, Suite 3300 Dallas, Texas 75201 214/969-1118 214/880-3183 (fax) [email protected] Mr. Soros Goes to Washington: The Case for Reform of the Estate and Gift Tax Treatment of Political Contributions ∗ Eric Reis I. Introduction Politics is a billion-dollar growth industry.1 Despite Congressional efforts to restrain political spending, individual donors continue to make multi-million-dollar contributions.2 These contributions are often made through lightly-regulated “527” organizations, named for the section of the Internal Revenue Code that governs their operations.3 Like any surging business, 527 organizations and more conventional campaign funds attract contributors who have a keen interest in short-term success.4 But long-term political movements have also developed, soliciting funds for projects that will continue long after the rise or fall of a particular politician. The National Rifle Association actively solicits very long-term gifts and bequests to its sister charity, the NRA Foundation,5 with significant success.6 The political purpose of these bequests is only thinly veiled.7 More conventional political ∗ Partner, Thompson & Knight LLP, Dallas, Texas. A.B. 1992, Harvard University; J.D. 1996, The University of Texas School of Law, Austin. 1 See Center for Responsive Politics, 2004 Election-Overview: Stats at a Glance, at http://www.opensecrets.org/overview/stats.asp?cycle=2004 (reporting total campaign contributions of $1.35 billion to all candidates for federal office in the 2004 election cycle); Institute on Money in State Politics, Follow the Money, at http://www.followthemoney.org/database/power_search.phtml?sl=10 (select “All States” and “2004”) (reporting total campaign contributions in excess of $1.6 billion to candidates for state office in the 2004 election cycle). 2 See, e.g., Center for Responsive Politics, George Soros Contributions to 527 Committees, 2004 Election Cycle, at http://www.opensecrets.org/527s/527indivsdetail.asp?ID=11001147458&Cycle=2004 (reporting contributions by Mr. Soros of over $12 million to Joint Victory Campaign 2004, $7.5 million to America Coming Together, $2.5 million to MoveOn.org, and smaller amounts to other organizations); Center for Responsive Politics, T. Boone Pickens Contributions to 527 Committees, 2004 Election Cycle, at http://www.opensecrets.org/527s/527indivsdetail.asp?ID=11001162782&Cycle=2004 (reporting contributions by Mr. Pickens of $2.5 million to Progress for America, $2 million to Swift Boat Veterans for Truth, and $100,000 to the Club for Growth). 3 I.R.C. § 527. 4 Rick Klein & Charlie Savage, Some Democrats Decry Kerry’s Unspent $16M, BOSTON GLOBE, Nov. 19, 2004, at A2 (reporting criticism of Senator John Kerry for retaining campaign funds past election day in 2004). 5 The NRA Foundation, Estate Planning/Heritage Society, at http://www.nrafoundation.org/giving/ planned_giving.asp. 6 See National Rifle Association, NRA Foundation Receives Record-Breaking $1 Million Bequest, at http://www.nra.org/Article.aspx?id=2345 (“Longtime NRA member Andrew Burns of Wysox, PA has left a record-breaking bequest of $1 million to The NRA Foundation, helping to preserve America’s legacy of freedom for future generations.”). 7 See id. (“Many individuals are concerned that the freedom they have enjoyed under the Second Amendment may not last for their children or grandchildren to experience and cherish. That’s why they have provided a legacy of freedom in their estate planning by contributing to the programs and activities of The NRA Foundation.”). - 1 - organizations, such as Senator John Kerry’s 2004 presidential campaign, also now appear to solicit and retain contributions with an eye toward more than one election cycle.8 This growing interest in long-term political giving mimics an older trend in charitable giving. Nearly every large charity (including such well-known institutions as the United Way, American Red Cross, Boy Scouts of America, and Harvard University) has a “planned giving” program to encourage donors to make long-term and testamentary gifts in the most tax-favored manner.9 Charities with strong political interests (including Planned Parenthood and the libertarian Cato Institute) have also established such programs.10 It seems only a matter of time before purely political organizations develop similar programs. Curiously, however, the current estate and gift tax treatment of political contributions is based on the premise that donors do not have long-term political interests and will not attempt to make deferred gifts and bequests for political causes.11 Bequests to political organizations are subject to estate tax, for no apparent policy reason.12 On the other hand, lifetime gifts to a political organization are wholly exempt from gift tax, without regard to when the contribution may actually be used.13 Once one accepts that some taxpayers do have an interest in long-term or deferred political giving on a large scale, serious weaknesses in the current estate and gift tax regime for political contributions become apparent. In this article, I argue that the current regime is both too strict and too lenient in its approach to such contributions. The regime is too strict, in that it flatly denies any estate tax deduction for bequests to a political organization.14 This is contrary to good public policy, as a bequest at death is less likely to have a corrupting influence on public officials than a gift made during lifetime. Conversely, the regime is too liberal, in that it allows an unlimited gift tax exclusion for contributions made during lifetime.15 This unlimited exclusion could be used to facilitate very large nonpolitical transfers to a donor’s family, much as other gift tax exclusions 16 and deductions were used prior to the adoption of restrictive rules. 8 BOSTON GLOBE, Nov. 19, 2004, at A2. 9 See United Way, Welcome to the United Way Planned Giving, at http://www.uwgift.org/ plgive_main.jsp?WebID=GL2002-0020; American Red Cross, Planned Giving, at http://www.redcross.org/donate/plngiv; Boy Scouts of America, Welcome to the Boy Scouts of America Planned Giving, at http://www.bsagiftplan.org; Harvard University, Harvard University Planned Giving, at http://post.harvard.edu/harvard/pgo/html/index.htm. 10 See Planned Parenthood Federation of America, Inc., Bequests and Planned Gifts, at http:// www.plannedparenthood.org/pp2/portal/files/portal/getinvolved/donate/learn_pp_gifts.xml; Cato Institute, Welcome to Planned Giving at Cato, at http://www.cato.gift-planning.org/index.php. 11 See Carson v. Comm’r, 71 T.C. 252, 261-62 (1978) (“The vicissitudes of politics make political candidates an unlikely object for a decedent to “settle” his estate on, and an aspiring politician planning to finance his political ascendancy on testamentary campaign contributions may not rise far or fast.”), aff’d, 641 F.2d 864 (10th Cir. 1981). 12 Carson, 71 T.C. at 262 (“[I]t is quite clear that a legacy to a campaign fund would form part of the taxable estate.”); see generally I.R.C. §§ 2051-2058 (specifying the particular items that may be deducted in computing a decedent’s taxable estate, which items do not include political contributions). 13 I.R.C. § 2501(a)(4). 14 Carson, 71 T.C. at 262. 15 I.R.C. § 2501(a)(4). 16 See, e.g., Hipp v. United States, 215 F. Supp. 222, 223, 228 (W.D.S.C. 1962) (allowing a large gift tax charitable deduction for a gift in trust, where the trust was required to pay only an uncertain amount of - 2 - In Part II of this article, I explore the planning techniques that were used to exploit the gift tax charitable deduction prior to the adoption of restrictive rules in the Tax Reform Act of 1969, and to exploit the exclusion for “retained interests” prior to the enactment of Chapter 14 of the Internal Revenue Code in 1990. I also note that these techniques may still be used to exploit the gift tax annual exclusion under present law. In Parts III and IV of this article, I analyze the structure of the gift tax exclusion for political contributions and consider how this exclusion might likewise be used to facilitate tax-free transfers to members of the donor’s family. In Part V, I examine the estate tax treatment of bequests to political organizations, and describe how taxpayers can effectively avoid tax on such bequests even under existing law (making this tax little more than a trap for the unwary). Finally, in Part VI, I argue for several significant reforms. These reforms include the adoption of rules limiting the gift tax exclusion for political contributions, and the enactment of an estate tax deduction for bequests to political organizations.17 II. A History of Artificial Valuation To understand how the gift tax exclusion for political contributions might be used, it is helpful to consider how similar deductions and exclusions were manipulated under prior law.18 A. The Gift Tax Charitable Deduction Before enactment of the Tax Reform Act of 1969, charitable contributions of “partial interests” in property were generally deductible for federal gift tax purposes.19 (A “partial interest” consists of some, but not all, of the bundle of rights constituting ownership of property.20) Taxpayers soon found ways to exploit this deduction. income to charity, for a limited period of time, and then distribute the principal to the taxpayer’s children); Saltzman v. Comm’r, 68 T.C.M. (CCH) 1544, 1556, 1567-68 (excluding over half the value of the taxpayer’s contribution to a trust from gift tax, where the trust paid very little income to the taxpayer for a limited period of time and then distributed the principal to the taxpayer’s son), rev’d on other grounds, 131 F.3d 87 (2d Cir.