Hillary Clinton’s 65% Estate Tax, Or Donald Trump’s Repeal?

Hillary Clinton wants to raise the estate tax up to an astounding 65%. Donald Trump wants to repeal it. On this issue, their views could not be more opposite. Plainly, Hillary’s savvy move could bring in droves of Bernie supporters. But is it likely to pass or to collect large amounts? Probably not. Current law exempts estates worth $5.45 million or less. Beyond that, you pay 40%.

Ms. Clinton previously called for whittling the $5.45M figure down to $3.5M, and upping the 40% tax rate to 45%. But those were modest hikes, and that was then. Now, with populist flair, she wants a 50%, 55%, and 65% rate. The 50% rate applies to estates worth over $10 million per person, 55% for estates over $50 million, and 65% for estates exceeding $500 million. The new proposed estate tax plan makes her prior 40% to 45% hike seem inconsequential. 

Hillary Clinton Tax hikes

For Bernie fans, the deep 65% tax gouge has a familiar ring. Of course, most estate planning lawyers will say that the really big estates can find ways around many rules to at least materially reduce their impact. Yet that may be changing, with new administrative rules that make valuation discounts scarce and worth less. Planning to avoid the estate tax is expensive, and requires years of pre-planning. As a result, the estate tax catches many people off guard after they have worked and paid income tax their whole lives.

It can force sales of family companies, and sales of family farms and ranches. It can be a bitter pill to swallow, especially now. Americans finally got some certainty in 2013 with a $5 million per person exemption. Indexed for inflation, it now stands at $5.45 million, $10.9 million for a married couple. Republicans still tout repeal. Conversely, House Democrats want to raise the estate tax materially. Some House Democrats want to restore the estate tax and gift tax rate and exemption level to the same amounts as in 2009.

The Sensible Estate Tax Act of 2016 would slash the estate tax exemption to $3.5 million and raise the tax rate to 45% as detailed here. Moreover, not long ago, President Obama argued that allowing a basis step up on for income tax purposes on death was a huge loophole. He proposed no basis step up, hoping to raise approximately $200 billion over the next decade. When combined with state estate taxes, the President’s proposal would yield the highest estate tax rate in the world. Small and family businesses could be particularly hard hit.

Already, it is hard for many family-owned businesses to stay afloat after the death of a key figure. Not all of the reasons are managerial. Many are financial, and taxes can force a sale. Stephen Moore of the Heritage Foundation calculated that by eliminating basis step up, we would end up with the world’s highest estate tax rate. Dick Patten, chairman of the Family Business Defense Council calculated an effective death tax rate of 57%. If you add in state inheritance taxes, the combined tax rate could go as high as 68%. The President’s simpler and fairer tax code is detailed here.

Of course, those studies were done before Hillary Clinton proposed her 50% to 65% tax. The astounding 50% to 65% rate hikes might rake in the votes. Trump wants to repeal the estate tax. Proponents of the estate tax argue that it helps to stop wealthy people from getting even wealthier. But given that income taxes must be paid on earnings that eventually make up the estate’s value, opponents claim that the tax is a true double tax having no place in America. As Trump said on August 8, 2016 in Detroit:

No family will have to pay the death tax. American workers have paid taxes their whole lives. It’s just plain wrong and most people agree with that. We will repeal it.” 

For alerts to future tax articles, email me at Wood@WoodLLP.com. This article is not legal advice.

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Wells Fargo Exec Pay Clawbacks Could Hurt Like Fake Accounts

Wells Fargo executives probably can’t command too much sympathy these days. Outrage continues over the Wells Fargo fake account scandal, and executives aren’t out of the woods yet. In fact, Congress is getting involved. Now, Senators are pushing Wells Fargo for pay clawbacks. Wells Fargo has already agreed to pony up $190 million in penalties and customer payouts over its appalling creation of accounts without customers’ knowledge.

The government apparently gets to keep most of this $190 million, with only approximately $5 million going to customers. But pay clawbacks–if they happen–would be a personal rebuke to executives. Some lawmakers want to use the fraud settlement to segue into clawbacks of compensation paid to Wells Fargo executives. One theory of clawbacks is that even if management did not actually know about the widespread account creation issue, they should have known.


(Photo by Joe Raedle/Getty Images)

Wells Fargo’s board may have to consider whether to cancel or claw back any incentive compensation. One target could be Carrie Tolstedt, who is now-retired. As for Well Fargo’s CEO John Stumpf, Democratic Senators Jeff Merkley of Oregon and Elizabeth Warren of Massachusetts called for his resignation. Sen. Warren said that Mr. Stumpf should give back his salary and be criminally investigated.

Returning pay for services you’ve performed can create major tax problems. The Dodd-Frank Wall Street Reform and Consumer Protection Act (PL 111-203) expanded SEC regulatory authority, particularly in the area of clawback liabilities that directors and officers face after a financial restatement. Paybacks can be required even when directors and officers had no knowledge of wrongdoing.

Clawbacks are not new. Section 304 of the Sarbanes-Oxley Act also has a clawback remedy. Yet it applies only to the CEO and CFO, and only for one year’s compensation prior to a restatement. Sarbanes-Oxley’s clawback provision also requires bad intent. If you have to give back pay, how does it affect taxes? Does the tax code allow you to undo a prior transaction? Every tax year stands on its own and requires an annual tax return, but the giveback usually happens in a later tax year. Can you be made whole by a tax deduction in a subsequent year?

Often, the answer is no. Besides, how can you get payroll taxes back? If an executive returns a bonus, does he give back only his net check after payroll deductions? Normally, the executive has previously included the payment in income and returns it in a subsequent year. The tax filing choices include business expense deductions, amending the prior year tax return, salary or bonus offsets, or deductions under tax code Section 1341. The latter is usually best, but it is complex.

An executive required to give back pay surely can claim a business expense deduction, right? Usually it would only be a miscellaneous itemized deduction, subject to the 2% adjusted gross income floor. Plus, there is phase out and alternative minimum tax. Amending a prior year tax return might seem considerably easier. However, taxpayers can amend returns only within three years of filing the original return or within two years of the date the tax was paid, whichever is later. The pay giveback might be later.

Plus, amending a prior return is generally allowed only to correct a mistake. A pay giveback may not be a ‘mistake.’ To effect a pay giveback, the company could agree to reduce the executive’s current year salary. Of course, this works only for current employees, and many repaying persons are former employees. Plus, it isn’t clear if an offset would achieve the same public relations or legal effect.

Section 1341 embodies the “claim of right” doctrine, and attempts to place the taxpayer back in the position he would have been in had he never received the income. Other deductions can be subject to limitations, phase outs and floors. To claim a deduction under Section 1341, the taxpayer must have included money in income in the prior year because he had an unrestricted right to it then. The taxpayer must learn in a later year that he did not have an unrestricted right to it after all (i.e., he has to give it back).

If you are being urged to give back pay but not required to, it isn’t clear how these rules apply. The tax headaches one will face on having to give back money can be palpable.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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EpiPen Executive Pay Skyrocketed Too; Should It Be Tax Deductible?

Companies are in business to make money, but some price hikes can have a backlash. The skyrocketing prices for Mylan EpiPens is that way. As the public and Congress have reacted, perhaps the taxman should too. After all, it appears that Mylan’s CEO saw a pay raise of over 600% while EpiPen prices rose 400%. The market isn’t exactly happy that as lifesaving EpiPens were increasingly being priced out of reach, the EpiPen maker was dispensing outsize pay.

In fact, the company had the second-highest executive compensation among all U.S. drug and biotech firms over the past five years. According to a Wall Street Journal analysis, Mylan paid a staggering $292.1 million in pay for its top five executives over the five years ended last December. That outpaced industry rivals several times its size, including Johnson & Johnson, Pfizer Inc., Bristol-Myers Squibb Co. and Eli Lilly & Co. Since tax laws are often used to alter behavior, you might wonder where the tax law is in all of this.



Should all of this be tax deductible? It isn’t a silly question. The main qualifier for tax deductible pay is that the pay has to be “reasonable.” But what does that mean anyhow? These days, no one talks much about reasonable compensation. It can seem like an oxymoron for judging tax deductions. But it turns out that there’s a special language with public companies. Thus, Section 162(m) of the tax code generally limits tax deductible compensation to $1 million. This section applies only to public companies.

It denies a deduction for any compensation paid in excess of $1 million in any tax year to a company’s top five employees (as listed in the annual proxy summary compensation table). Well then, how on earth can Mylan get away with deducting these vastly larger sums on its taxes? It turns out there is an exception that eats up the rule. Compensation arrangements that satisfy standards for “qualified performance-based compensation” are not subject to the $1M cap. The standards are less demanding than you might think.

Typically, a compensation committee of the board of directors will establish performance goals that are approved by shareholders. The compensation committee will then have responsibility to ensure that particular executives meet these goals prior to a payment or vesting event. With these relatively simple safeguards, the award is likely to be tax deductible, whatever the amount.

Not unlike the amorphous standards for “reasonableness,” the overall question is whether the performance-based compensation met the criteria. Almost by definition, performance-based compensation must be set up in advance by looking at benchmarks. In a sense, the mere fact that the executive ended up with outsize payments—which might not be viewed as reasonable in the overall scheme of things—may not really matter.

The IRS regulations indicate that compensation does not lose its performance-based halo if it is payable prior to the attainment of performance goals upon one of three events: death, disability or a change in control. Note, however, that these three blessed circumstances (in which payments can be made under a performance based plan notwithstanding failure to perform) must still be tested against the $1 million limit.

With most corporations, all pay (to executives as well as rank-and-file workers) is deducted by the corporation as a business expense.  That means no corporate tax is paid on the money. It is deducted, and tax is paid only by the recipients. What happens if the corporation pays out $10 million for the CEO when he’s really only worth $3 million? The answer can complicated and depends on many variables.

But in practice, many things can be brought within the pretty large net of performance-based pay. And that should make it tax  deductible by the company. Of course, the situation is trickier if the business is closely-held. To take an example, what if Joe owns 100% of the corporation’s stock and is the CEO? If Joe will receive all the money in any event, Joe might have the company pay him deductible salary and bonus. That way, he only pays tax as an individual–the corporation would deduct all that compensation as a business expense.

If the company paid Joe a more modest salary and bonus, the company could have paid him the rest of the money as a dividend. The corporation receives no tax deduction for dividends, so the corporation would first have to pay tax on it. Then Joe would pay personal income tax. For that reason, the IRS monitors compensation by closely-held companies. With closely-held (especially family) companies, the IRS has a keen eye for who is getting paid too much.

The assumption is that some of the money being paid out and called “compensation” is probably a disguised dividend. But with public companies, the market is supposed to be at work. And the supposed $1 million cap on compensation that was put into the tax law was supposed to be effective. Only performance-based pay could go beyond this. But sometimes, it might seem fair to ask if the rules are working as they are supposed to.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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Dear Clinton Foundation: If A Charity Enriches Its Founders, Is It Still A Charity?

It must be said that the Clinton Foundation has done good works. In fairness, it should also be said that Bill and Hillary Clinton may well have intended only the best and most charitable goals, both when they started out, and since then in the Foundation’s operations. They may never have intended to reap big personal benefits from the Foundation and their stewardship. Yet, intent may not be that relevant. With a swirl of confusing facts about allegedly undisclosed donations, big speeches, pay-to-play, amended tax returns, and administrative expenses, a few eyebrows are still up. It’s no wonder.

No matter how lofty the goals or how altruistic the founders, some basic questions still ought to be considered. There is no question that the Clintons and their organizations are immensely successful when it comes to fundraising. As just one example, there are reports that the Foundation collected $100 million from Gulf sheikhs and billionaires. It is not unfair to ask whether there were any promises made. Those are really political questions more than they are tax questions.

Clinton Foundation

It pales by comparison, but it may not be unimportant that the Clinton Foundation reportedly arranged a $2 million pledge to a firm owned by Bill’s ‘friend.’ It seems predictable that the Clinton Foundation would help Hillary and Bill’s friends. From one viewpoint, there is nothing wrong with that. And yet, charitable organizations with the highest public charity IRS tax exemption must benefit the public interest. Not only that, but the charity must operate exclusively for charitable purposes. That standard is unforgiving. And that is where the question of private inurement to Bill and Hillary Clinton gets much more interesting. How did they do it? 

The Clintons were described as “dead broke” on leaving the White House. Their finances quite literally exploded after that. The power couple has collected well over $100 million in earnings since that time, building a vast net worth. Part of their income comes from lucrative speeches that no one is talking aboutQuestions of private inurement or private benefit may seem less serious for a political candidate than email security concerns. Still, the IRS normally polices the exclusively charitable issue pretty well. And after all, it is hard not to notice that the Clintons became wealthy.

Peter Schweizer’s book “Clinton Cash” does more than intimate that the Clintons personally collected staggering sums. And any income connection to the public Foundation is sensitive. Many charities get tripped up on these kinds of private inurement issues. And the scale with the Clintons is decidedly off the charts. Often–if not most of the time–the problem is the founders themselves who end up getting enriched. And it may not be the bulk of they money. The IRS states that:

any transaction between an organization and a private individual in which the individual appears to receive a disproportionate share of the benefits of the exchange relative to the charity served presents an inurement issue. Such transactions may include assignments of income, compensation arrangements, sales or exchanges of property, commissions, rental arrangements, gifts with retained interests, and contracts to provide goods or services to the organization.”

Even a small amount of private inurement can lead to the loss of the charity’s tax exemption. Perhaps the law should be otherwise, but these issues are real. And sometimes the enforcement can seem harsh. For example, in Spokane Motorcycle Club v. U.S., refreshments, goods and services amounting to $825 (representing some 8% of gross revenues) were furnished to members. That was too much for the IRS.

The IRS says that “a common factual thread running through the cases where inurement has been found is that the individual stands in a relationship with the organization which offers him the opportunity to make use of the organization’s income or assets for personal gain.” And make no mistake, the burden of proof is on the organization to establish that it is not organized or operated for the benefit of private interests.

After considerable prodding, the IRS has said—seemingly begrudgingly—that it is looking into the Clinton Foundation. The IRS investigation of the Clinton Foundation will almost surely not be completed until after the election. Even fierce critics of the Foundation and of the Clintons may not be expecting the IRS report card on the Foundation to end up being too critical. Yet even if the results are entirely post-election, it is worth asking how this will turn out.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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IRS Slaps Nelly With $2.4M Tax Lien

Nelly—the Grammy winning Hip Hop star whose real name is Cornell Iral Haynes Jr.—has been hit with an IRS tax lien for more than $2.4 million. The federal lien amount is $2,412,283, reports TMZ. But TMZ also says that Nelly is trying to work it out with the IRS. His State of Missouri tax troubles reported earlier this year are much smaller. A number of other tax notices normally precede a lien filing, so in that sense, the tax debt is usually not a surprise.

Yet some might find the size of the tax debt surprising given the recent diamond certification Nelly’s album Country Grammar received. Diamond certification means 10 million units in physical and digital sales and sales equivalents. That should mean lots of tax money too. Tax liens are the IRS’s way of making sure that the IRS gets paid no matter what. Indeed, IRS tax liens cover all property, even property that you may acquire after the lien filing. The idea is for the government to have a claim against everything. Of course, tax lien filings are public and can be embarrassing. IRS tax liens can spoil your credit, prevent real estate closings, and damage your reputation.


(Photo by Ethan Miller/Getty Images)

The IRS files a notice of lien so creditors know the IRS will be waiting for payment no matter what. In some cases the IRS even moves to execute. Notably, tax liens are sometimes not promptly removed, even after you have paid off the IRS in full. One government report admits that some IRS lien notices are mishandled, with IRS notices going awry, appeal rights not explained, and similar gaffes. Still, the report says in most cases the IRS mailed out the lien notices explaining the taxpayer’s appeal rights. The IRS can file a Notice of Federal Tax Lien only after the IRS assesses the liability; sends a Notice and Demand for Payment; and you fail to pay in full within 10 days.

The courts use it to establish priority in bankruptcy proceedings and real estate sales. IRS liens last 10 years, and usually release automatically if IRS has not refiled them. However, you’re better off to get them removed immediately. Getting the IRS to release a lien usually involves: (1) paying the tax, interest and penalties; or (2) posting a bond guaranteeing payment.

Even then, the IRS may take 30 days. State or local government charges to file and release the lien are added to the amount you owe. The IRS explains how to request a release of federal tax lien. Liens and seizures aren’t the same. The lien just makes sure the IRS eventually gets paid. A seizure involves forced collection so the IRS can sell property and get paid. That’s usually a bad thing, but if you want to travel, paying the IRS might not be such a bad idea.

Under a recent expansion of IRS power, the tax agency can revoke passports for tax debts. The new section of the tax code is called ‘Revocation or Denial of Passport in Case of Certain Tax Delinquencies.’ The law says the State Department actually does the revoking, for anyone the IRS certifies as having a seriously delinquent tax debt in an amount in excess of $50,000. That could mean no new passport and no renewal. It could even mean the State Department will rescind existing passports.

The State Department will act when the IRS tells them, and the list of affected taxpayers will be compiled by the IRS. The IRS will use a threshold of $50,000 of unpaid federal taxes. But this $50,000 figure includes penalties and interest. And interest and penalties can add up fast. The rules are not limited to criminal tax cases or where the government thinks you are fleeing a tax debt.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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Real Basket Of Deplorables? Hillary Clinton Tax Hikes

Perhaps Hillary Clinton was trying to compliment half of Trump supporters with her ‘basket of deplorables’ remark. While labeling one-half, she seemed to be extending the hand of understanding to the other half of her opponent’s followers. Of course, that’s not how her remarks settled in with Republicans, many of whom reacted angrily. Not unlike Mitt Romney’s remarks about the 47%, Hillary Clinton’s comment about deplorables provoked responses. She issued a regrets statement. But she doesn’t seem to be walking back any of her proposed tax hikes. And they are big indeed.

Trump has warned family farmers that a Clinton presidency would mean tax hikes and regulations. Trump hasn’t always stayed on message, even falsely claiming that Clinton wants to raise taxes on African-American businesses by 50 percent. Some voters may not even want to hear him talk about taxes until he releases is personal tax returns. But that seems increasingly unlikely. Even so, there is plenty for him to attack in Hillary Clinton’s proposed tax increases. Americans for Tax Reform’s HighTaxHillary.com lists some of Ms. Clinton’s sweeping tax proposals. Ms. Clinton has said that she wants to raise taxes at the top, and not on middle income Americans making less than $250,000 a year.

Hillary Clinton Tax hikes

Hillary Clinton (AP Photo/Carolyn Kaster)

To begin with, Clinton vows estate tax hikes, while Trump vows repealYou can read here how Clinton would slash the estate tax exemption to $3.5 million, and raise the tax rate to 45%. Clinton is pushing, and many Democrats could go even further. President Obama has argued that allowing a basis step up on death–for income tax purposes–is a huge loophole. He proposed no basis step up, hoping to raise approximately $200 billion over the next decade. When combined with state estate taxes, President Obama’s proposal would yield the highest estate tax rate in the world. Small and family businesses could be particularly hard hit.

Clinton has also said she would be fine with a payroll tax hike on all Americans. She also has endorsed a steep soda tax, and even endorsed a 25% national gun tax. Ms. Clinton’s campaign manager John Podesta has also said that she would be open to a carbon tax. Once again, that could impact many people, directly or indirectly. They suggest that these proposals would cost at least $1 trillion over ten years. A key campaign issue is just who gets stuck with paying these increased taxes

Ms. Clinton has also called for a tax hike of at least $275 billion through a number of business tax reforms described in a campaign  document. In large part, businesses have to wait for details on this. She has also proposed a new “exit tax” on income earned overseas. Her goal is to stop inversions of U.S. companies. Yet many observers say that reducing U.S. corporate tax rates would do considerably more to remove the incentives that make U.S. companies want to invert. This tax is supposed to raise $80 billion.

Ms. Clinton’s published plan calls for “between $400 and $500 billion” by “restoring basic fairness to our tax code.” These proposals include a “fair share surcharge,” the taxing of carried interest capital gains as ordinary income. She proposes higher capital gains taxes too. Forget short term and long term. She wants six different rates that climb high. Ms. Clinton’s proposed new tax on stock trading remains controversial. Although its target is Wall Street, its effect could impact millions of Americans who buy and sell, even in their 401(k)s and IRAs. It is not yet clear what this one will cost.

Even if these ideas do not come to pass, Ms. Clinton has proposed plenty of other tax hikes. Mostly, they would hit the upper end of the income chart. But not everyone who is going to be paying these is likely to think they are fat cats than can afford it. She has proposed a $350 billion income tax hike in the form of a 28 percent cap on itemized deductions. You can think of this as a kind of new version of the alternative minimum tax (AMT). You might think you can deduct something because the law allows it, but not if you make too much money. How much this one will really cost you remains to be seen.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.


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Forget Trump’s Presidential Tax Returns

Donald Trump once offered $5 million for President Obama’s birth certificate. More recently, a Republican offered $5 million for Donald Trump’s tax returns. That didn’t work either. For a time, there was even a legislative attack on Trump. The Presidential Tax Transparency bill did not pass. If it had, it would have required Trump to hand over his tax returns. And if Trump refused, the U.S. Treasury Secretary would have handed them over.

How much does the American public really care about Trump’s tax returns? He is running for President, so the conventional answer is that Trump should release them. There is no legal requirement that he do so, and Trump breaks more than a few rules. That is part of his appeal to his core supporters. Still, some people care a lot. Warren Buffett challenged Trump: I’ll show my tax returns if you’ll show yours. Hillary Clinton and Tim Kaine have attacked in force. But Trump’s supporters probably do not care in large part.


Appearing to ignore the audit, Trump has tied his tax returns to Hillary Clinton’s missing emails. One Trump interview said he did not plan to release his tax returns before the general election. Later, he said he would release the tax returns after his audit. But there seems little incentive for him to do it now, unless he could swap them for Hillary Clinton’s emails. 

Trump is unapologetic about paying as little in taxes as he can. Warren Buffett agrees with this mantra. At every turn, Trump calls out the wasteful spending that is rampant in government. For example, Trump highlighted the $4 billion in IRS refunds to illegals, and many other abuses. President Trump would surely not follow in the footsteps of the IRS, encouraging illegals to steal Social Security Numbers

Trump breaks with many traditions, including by not releasing his tax returns. Many tax professionals agree that releasing returns under audit is not wise. Everyone would pick through them mercilessly, giving the IRS ideas. Even tax returns that are not under audit could be impacted. Someone with complex returns is likely to have carryover items from one year to the next. Even closed years can be impacted.

Yet, some people have said that Trump’s tax returns are more important that primary votes. Before the Republican Convention, some people argued that convention delegates should abstain from voting if Trump failed to produce his tax returns. Others have warned that if Trump fails to hand over his returns, someone (at the IRS or elsewhere) will leak them. That would be a crime. Trump has already suggested that the IRS might be targeting him with audits. Just imagine his attack on the IRS if an IRS surrogate released his returns.

Mr. Trump is not the only one this election season to get pilloried over tax returns. Bernie Sanders finally endorsed Hillary, but don’t forget that Hillary badgered him relentlessly about transparency. He finally managed to release at least his 2014 tax return, but it was slow in coming. Trump said in an interview that he did not plan to release his returns before the general election. But later he said that he would release the tax returns after his audit. And now the Clinton emails could motivate him. But do Trump supporters really care about the really huge returns? Not hardly.

For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.

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