How to use this Page

Speaking before the Family Research Council, the Republican nominee for president, Donald Trump, called for a repeal of the “Johnson Amendment.” The Johnson Amendment is part of Section 501(c)(3) of the Internal Revenue Code, and prohibits tax-exempt organizations such as schools, hospitals, and churches from participating in political campaigns. The Republican Party’s 2016 platform echoes Mr. Trump.

The post Churches and politics: why the Johnson Amendment should be modified and not repealed appeared first on OUPblog.

Democratic Party platform for 2016 repudiates a major provision of Obamacare – but no one has said this out loud. In particular, the Democratic Party has now officially called for abolition of the “Cadillac tax,” the Obamacare levy designed to control health care costs by taxing expensive employer health plans. Tucked away on page 35 of the Democratic platform is this enigmatic sentence: We will repeal the excise tax on high-cost health insurance and find revenue to offset it because we need to contain the long-term growth of health care costs."

The post Why does the Democratic Party want the Cadillac tax abolished? appeared first on OUPblog.

I first met Elie Wiesel in the summer of 1965. Wiesel’s book Night had been translated into English five years earlier. Night was just beginning to be recognized in English-speaking countries. Wiesel was not yet then the impressive speaker he was soon to become. As he addressed the audience that summer about the horrors of the Holocaust, Wiesel was diffident to the point of shyness.

The post Elie Wiesel: the Hillel of our time appeared first on OUPblog.

Sometimes it is gratifying to have predicted the future. Sometimes it is not. The recent postponement of the so-called “Cadillac tax” until 2020 falls into the latter category. I predicted this kind of outcome when the Cadillac tax was first enacted as part of the Affordable Care Act, popularly known as “Obamacare.” I am unhappy that events have now proven this prediction correct.

The post Deferring the Cadillac tax kills it appeared first on OUPblog.

The Little Sisters of the Poor, an international congregation of Roman Catholic women, are unlikely litigants in the US Supreme Court. Consistent with their strong adherence to traditional Catholic doctrines, the Little Sisters oppose birth control. They are now in the Supreme Court because of that opposition.

The post The Little Sisters, the Supreme Court and the HSA/HRA alternative appeared first on OUPblog.

In Freedom From Religion Foundation, Inc. v. Lew, the US Court of Appeals for the Seventh Circuit recently dismissed a constitutional challenge to the parsonage allowance provisions of the Internal Revenue Code (Code). Under Section 107(2) of the Code, a “minister of the gospel” need not pay income taxes on the housing allowance received by the minister as part of his or her compensation. According to the plaintiffs in this case, the income tax exclusion established by Code Section 107(2) violates the Establishment Clause of the First Amendment because the exclusion is available only to clergy, not to individuals who receive cash housing allowances from their secular employers.

In dismissing the case brought by the Freedom From Religion Foundation (FFRF), the appeals court did not reach the substantive merits of this constitutional claim. Rather, the Seventh Circuit dismissed the case on the basis of standing or, to be precise, the plaintiffs’ lack of standing. In procedural terms, the appeals court ruled, the FFRF plaintiffs never asked the IRS for tax-free treatment for their housing allowances:

[T]he plaintiffs were never denied the parsonage exemption because they never asked for it. Without a request, there can be no denial. And absent any personal denial of a benefit, the plaintiffs’ claim amounts to nothing more than a generalized grievance of about Section 107(2)’s unconstitutionality, which does not support standing. (Emphasis in the court’s original).

The Seventh Circuit’s decision is consistent with the trend, encouraged by the US Supreme Court, to narrow taxpayer standing in the federal courts. As I recently argued in the Hastings Constitutional Law Journal, the corollary of this formalistic trend is that First Amendment lawsuits like FFRF’s challenge to the income tax exclusion for clerical housing allowances will increasingly occur in the state courts which are generally more receptive than the federal courts to claims of taxpayer standing.

FFRF has announced its intention to press its constitutional objections to Section 107. It is thus likely that these objections will be addressed in one or more state courts with more liberal procedural rules for standing.

The US Constitution empowers federal courts to hear “Cases” and “Controversies.” Over the years, the federal courts have elaborated the Constitution’s “case or controversy” test to require what has become known as “standing.” Among other elements, such standing necessitates that a plaintiff have experienced “personal and individual” injury rather than a generalized grievance shared with others.

In dismissing the FFRF challenge to the parsonage allowance provisions of the Internal Revenue Code, the Court of Appeals for the Seventh Circuit held that the plaintiffs did not meet this exacting standard of personalized injury. As a procedural matter, the plaintiffs had not asked the IRS to exclude from their respective gross incomes the housing allowances paid to them by their secular employer. Hence, in formal terms, the plaintiffs had no individualized injury and thus no standing to pursue their lawsuit.

The FFRF plaintiffs can now ask the IRS to exclude their housing allowances from their gross incomes and, when refused such favorable treatment, can commence their litigation again in the federal courts. Alternatively, FFRF can restart this litigation in the state courts where the tests for standing are generally more liberal than in the federal courts.

FFRF originally began its challenge to the Code’s parsonage allowance provision as a federal case in the US District Court for Eastern District of California. FFRF then refiled its litigation in the US District Court for the Western District of Wisconsin, where the FFRF plaintiffs prevailed on the merits. From there, the case went to the US Court of Appeals for the Seventh Circuit which has now ordered the case dismissed for lack of standing.

In terms of statutory law and case law, the standing rules for California’s state courts are among the most liberal in the nation. The case law of Wisconsin similarly opens the door to that state’s courts in contrast to the less welcoming standing tests of the federal courts.

California’s and Wisconsin’s respective income taxes include benefits for clerical housing allowances identical to Code Section 107. Thus, any constitutional deficiency of the federal exclusion also applies to the equivalent state income tax exclusions of parsonage allowances. So why didn’t FFRF start its litigation against the parsonage allowance in the California or Wisconsin state courts in the first place, rather than resorting to the federal courts located in those states?

Perhaps the FFRF litigants thought that a state court’s constitutional invalidation of that state’s parsonage allowance exclusion would be insufficiently influential. Or perhaps FFRF’s lawyers concluded that elected state court judges would be less receptive to their challenge than life-tenured federal judges.

In any event, FFRF says that its procedural defeat in the Seventh Circuit will not deter additional litigation concerning the alleged unconstitutionality of the favorable tax income treatment extended to parsonage allowances. Whatever the reason the FFRF lawyers chose to proceed in the federal courts, they must now be considering the advisability of litigating their concerns in the state courts, with more generous tests for standing.

On the substantive merits, I disagree with FFRF that the income tax exclusion for clerical housing allowances violates the First Amendment. As I have discussed in the Cardozo Law Review, that exclusion has both secular purpose and secular effect: In constitutional terms, Code Section 107 is a permissible (though not required) attempt to minimize the church-state entanglement which would result from taxing such allowances. While there are strong tax policy arguments against Section 107(2), those arguments don’t make that section unconstitutional.

In light of FFRF’s determination to keep litigating, it is likely a matter of time before this substantive constitutional issue will be addressed in one or more state courts with more liberal procedural rules for standing.

The post The parsonage allowance and standing in the state courts appeared first on OUPblog.

        

Related Stories

• Income inequality in the United States
• The Oxford Place of the Year 2014 is…
• World AIDS Day reading list

 

By Edward Zelinsky

Lucio Noto worked for Mobil and ExxonMobil in Virginia and Texas before retiring in 2001. In his retirement, Mr. Noto and his wife Joan maintain homes in Greenwich, Connecticut and in East Hampton, New York. For state income tax purposes, the Notos are residents of both Connecticut where they are domiciled and New York where they spend at least 183 days annually at their second home.

During his employment in the oil industry, Mr. Noto earned stock options and deferred compensation. In 2005 and 2006, he exercised these stock options at considerable gain and also received the deferred compensation he had earned earlier during his employment. Both New York and Connecticut taxed the resulting income in full without providing a credit for the income tax levied by the other. Consequently, the Notos, as dual residents of both the Empire State and the Nutmeg State, paid double state income taxes on their stock option and deferred compensation income.

The New York Supreme Court (the Empire State’s trial court) recently upheld this double state income taxation by holding that New York could tax the Notos’ income in full, even though Connecticut taxed that income as well. The Noto court correctly applied the tax and constitutional law as it today governs dual state residents like the Notos. While double taxation of dual state residents is currently legal, such double taxation is neither fair nor economically efficient.

Tax by Phillip Ingham. CC BY-ND 2.0 via Flickr.

In a recent article in the Florida Tax Review, I argue that, as a matter of both tax policy and constitutional law, it is time to apportion state personal income taxes to eliminate the double state income taxation of dual residents like the Notos. As to income which two or more states tax only on the basis of residence, such states should apportion, based on the dual resident’s relative presence in each state of residence. This apportioned approach would eliminate the double taxation of dual residents’ incomes and would comport better with modern patterns of residence and mobility.

The Noto decision illustrates the need to eliminate the double state income taxation of dual residents. In a case like the Notos’, New York and Connecticut should each tax only a pro rata share of the Notos’ option-derived and deferred compensation income based on the days the Notos spend in each of these two states of residence.

On days when a dual resident lives in his second state of residence, the first state provides no services which justify taxing the part of the individual’s income properly apportioned to the time in his second state of residence, the state which provides services on those days. Part-year benefits do not justify full-year taxation. The status quo is economically inefficient as the specter of double residence-based taxation causes unproductive tax-motivated behavior to avoid such taxation. Such economically unproductive behavior inhibits individuals from moving across state lines as they would without interference by tax considerations.

So far, the US Supreme Court has been unwilling to declare unconstitutional the kind of double state taxation imposed upon dual state residents like Mr. and Mrs. Noto. Moreover, most states have been unwilling to abate such double taxation by extending a credit for the tax imposed by the taxpayer’s second state of residence. The result is the kind of double taxation imposed on the Notos by New York and Connecticut.

It is easy to dismiss this type of double state income taxation as a quandary of the proverbial one percent. However, the problem of double residence-based personal income taxation, once limited to the very rich, is moving down the income scale as more individuals maintain second residences in different states, e.g., the Baby Boomer retiree who establishes a winter home in a warm climate; the dual career couple that balances the demands of work and family by maintaining two homes in different states.

In this environment, the traditional acquiescence to double state income taxation of dual residents is no longer acceptable. Congress could eliminate this double taxation through a federal law requiring states to apportion income when taxpayers are residents of two or more states. The US Supreme Court could reach the same result by requiring under the Constitution’s Commerce and Due Process Clauses that states apportion the income of dual residents. The states could, on their own, move toward such apportionment, either by unilateral adoption of rules of apportionment (including tax credits) or by mutual agreement.

The kind of double state income taxation imposed upon dual state residents like the Notos is an anomaly in the 21^st century. In the interests of fairness and economic efficiency, this anomaly should be eliminated by requiring states to apportion the income of dual residents.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

Subscribe to the OUPblog via email or RSS.
Subscribe to only law articles on the OUPblog via email or RSS.

The post The Noto decision and double state income taxation of dual residents appeared first on OUPblog.

        

Related Stories

• History strikes back: Ukraine’s past and the current crisis
• Cybersecurity and the cyber-awareness gap
• Five reasons why Spain has a stubbornly high unemployment rate of 26%

 

By Edward Zelinsky

Media reports have indicated that New York Governor Andrew Cuomo has been considering the use of public pension funds to finance the replacement of the Tappan Zee Bridge and to underwrite other infrastructure investments in the Empire State. This is a bad idea, harmful both to the governmental employees of the Empire State and to New York’s taxpayers. Using public pension monies in this fashion trades the immediate benefits of public construction for the long-term cost of underfunded public retirement plans.

If investment in the new Tappan Zee Bridge yields risk-adjusted, market rate returns, then private investors will step up to the plate and invest. Resorting to special financing arrangements with public pensions signals that a proposed investment does not pass the test of the marketplace. Market rate returns attract private capital. Such investments need not be subsidized with public pension monies.

There are projects which yield social benefits beyond their financial returns to investors. In a democracy, voters (or their elected representatives) can and should be persuaded in open deliberations to finance such projects with their tax dollars.

When governmental officials (however well-intended they may be) resort to special funding arrangements with public pension plans, it indicates that the investment in question flunks both the discipline of the market and the legitimacy of voter approval.

Such projects flout the venerable fiduciary standards for pension investments, namely, prudence and diversification.

An investment shunned by private investors is imprudent. When made by a state pension plan, such a below-market investment impairs the long-term interests of both the employees who depend on the plan for their retirement incomes and of the taxpayers who ultimately finance the plan. A prudent pension investment must, at a minimum, yield a risk-adjusted, market rate return. If pensions make investments rejected by private investors, such below-market investments are imprudent.

Moreover, an investment by New York pensions in New York infrastructure fails the test of diversification. In the private sector, it flouts the rule of diversification for a private retirement plan to invest its resources in the stock of the employer sponsoring the plan. The plan is already dependent upon the economic well-being of the sponsoring employer since the employer funds the plan. Placing the plan’s resources in the employer’s stock doubles the pension’s bet on the employer and its economic condition.

Similarly, if New York’s public pensions invest in New York projects, the pensions are doubling their bets on New York’s economy. These plans already count on New York’s economy for the tax revenues funding such plans. Concentrating New York pension investments in the Empire State is the opposite of diversification; the financial fate of these plans is already tied to New York’s ability to fund them.

The budgetary pressures on Governor Cuomo and other states’ chief executives today are severe. Those pressures make it tempting to turn to public pension funds to finance infrastructure when private investment can’t be obtained and voters cannot be convinced to pay taxes for such infrastructure.

It is precisely at such moments that the sage tests of prudence and diversification play their most important role –  protecting the long-term interests of retirees and taxpayers by precluding pension trustees from making investments which flunk the criteria for sound fiduciary decisionmaking.

The most recent reports indicate that Governor Cuomo may be reassessing the desirability of using public pensions to finance in-state infrastructure investments. Let us hope so. A new Tappan Zee bridge is a great idea. It should be pursued the right way, by formulating