Faculty Bibliography
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Daniel I. Halperin proposes an innovative way to achieve realization, without any added tax burden at gift, death, or sale: collecting an equivalent tax in present value during the period the asset is held.
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Halperin presents another look at choice of entity under the Tax Cuts and Jobs Act. He offers a conceptual approach to fully appreciate the actual rate of tax on corporate and passthrough income, following up on three earlier Tax Notes articles over the past eight years that had a similar goal.
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This Article discusses the justification for income tax exemption for organizations qualifying under § 501(c)(4). It explores why these organizations are entitled to exemption on their entire income though they are deemed unworthy of the charitable contribution deduction. The Article notes that income tax exemption generally only benefits entities that accumulate funds and points out that the subsidy from income tax exemption for long term accumulation can exceed the benefit of the charitable deduction. It concludes that full income tax exemption under § 501(c)(4) cannot be justified either on the grounds that it is relatively unimportant or by analogy to the treatment of mutual organizations, whose exemption has been circumscribed. However, exemption for income from performance of services related to the exempt purpose and for a limited amount of investment income may be appropriate in some circumstances.
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Daniel I. Halperin, Corporate Tax Reform – the issues and the choices, 154 Tax Notes 705 (2017).
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In this report, Halperin attempts to clarify what is at stake in choosing among the various recent proposals for corporate tax reform. He addresses the issues of limiting any preference for corporate income to business income as opposed to income from services or investments, the ability to provide equivalent treatment for passthrough investors (which, surprisingly, can be achieved by taxing only the return on reinvested earnings at the low corporate rate), and the difficulty of achieving full taxation at the shareholder level.
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There is considerable support for reducing the corporate tax rate but not for a corresponding reduction in individual rates. Since it seems likely that corporate rate reduction would have to be financed by reduction or even elimination of many tax preferences for business income equitable treatment of pass-throughs is a vexing problem. The article suggests a possible approach to fairness to pass-throughs which follows from recognition of the actual benefit of reducing corporate rates that I described in 2010. I showed that under the assumption that the combined rate of tax on corporate income (the corporate level tax plus the tax on distributions) is equivalent to the individual marginal rate applied to partnership income, the impact of reduced corporate rates was SOLELY to permanently reduce the tax burden on the RETURN ON REINVESTED EARNINGS to the lower corporate rate, whether or not these earnings were distributed. The return on INVESTED CAPITAL would continue to be taxed in full at individual rates even if distribution is deferred. If this is so, we can achieve equivalent treatment of pass-throughs if we can identify earnings from the reinvestment of business profits and, similar to the treatment of capital gain, limit the tax rate on these earnings to no more than the corporate rate.
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The goal of this brief note is to clarify the role of deferral in income taxation by introducing a distinction between pure deferral and counterparty deferral. Pure deferral (such as a current deduction for a capital expenditure) is equivalent to an interest-free loan from the government and, under certain assumptions, to a tax exemption for investment income. Counterparty deferral (such as qualified or nonqualified deferred compensation) shifts taxation of investment income to another party or account, so the advantage depends on the counterparty’s tax rate. Failure to understand these relationships can lead to erroneous conclusions. For example, it is sometimes said that capital gain property will suffer a tax disadvantage if placed in a qualified retirement account because the gain will be subject to full ordinary rates on withdrawal. Similarly, deferral of the employer’s deduction is often said to offset the benefit of deferring an employee’s inclusion of nonqualified deferred compensation. The note demonstrates that both of these statements are erroneous under standard assumptions.
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Daniel I. Halperin, A Better Way to Encourage Gifts of Conservation Easements, Tax Notes, July 16, 2012, at 307.
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The author’s proposal would repeal the deduction for the appraised value of a conservation easement that is allowed by current law. Congress should consider replacing the subsidy with a program of direct grants or limited-budget tax credits administered by an expert agency. If the deduction is continued, eligible donees should be only large institutions with a large portfolio of easements and resources and motives to enforce the easement, there should be an excise tax on nonenforcement of the easement, and there should be another government agency other than the IRS involved in enforcement. The special higher allowances for the deduction of appreciated property allowed by current law should be repealed. The proposal is offered as a part of the Shelf Project, a collaboration of tax professionals to develop proposals to raise revenue without a VAT or a rate increase. Shelf Project proposals raise revenue while making the tax system more efficient and reducing deadweight loss. Shelf projects follow the format of a congressional tax writing committee report in explaining current law, what is wrong with it, and how to fix it.
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Halperin talks about tax-policy concerns relating to the charitable deduction for conservation easement donations. The conflict of interest between charity and other owners raises a concern that the charitable deduction would not reflect the ultimate charitable benefit. The deduction for conservation easements is the principal exception to this rule despite the significant potential for abuse and the distinct possibility that the public benefit may be less than anticipated.
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Article considers whether income tax exemption for charities is consistent with normal income tax. It finds that exemption for contributions is not special treatment and that exemption for income from sale of goods or performance of services related to the purpose of the charity is special treatment only if profits are used for expansion. It concludes that a subsidy for expansion can be justified. Most importantly the article finds that exemption for investment income is a subsidy. It concludes that exemption for such income depends on a value judgment as to whether public policy should favor less accumulation and more current spending by charites. It suggests that the exemption for investment income and the charitable deduction should be limited in certain circumstances.
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This paper examines the concern over large endowments from the perspective of tax policy as it applies to the income tax exemption for charitable organizations. It suggests that because unlike other subsidies, income tax exemption only affects those charities that accumulate funds for the future, such exemption does not follow automatically from the charitable deduction but requires a showing that accumulation is appropriately treated. The paper concludes that unlike the treatment of gifts and income from related goods and services, exemption of investment income from an endowment, represents a departure from normal tax principles. Whether a subsidy is nevertheless appropriate depends upon whether one believes that current accumulation is likely to be excessive. I believe that the bias of donors, trustees and key employees indicates that endowments may well exceed the level that public policy would suggest and recommend a tax based on assets and a reduced limit on the charitable deductions for the largest endowments. While a mandatory distribution level is considered, I conclude that such a requirement is both intrusive and unlikely to have a significant impact on the level of accumulation.
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The tax rules governing deferred compensation, codified at section 409A, are harsh and complex. The rules are focused on the least important policy considerations and overlook the most important. Professors Halperin and Yale suggest a different approach, one that would make the law simpler, fairer, and more effective.
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Daniel Halperin, Income Taxation of Mutual Nonprofits, 59 Tax L. Rev. 133 (2006).
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Section 501 of the IRC exempts at least twenty-eight categories of nonprofit entities from income tax. Most attention is paid to Section 501(c)(3). Many of the organizations exempt from income tax under Section 501(c), however, are what state law refers to as mutual benefit organizations, which exist primarily to serve their members. While many mutuals are exempt from income tax, contributions to mutuals are generally not deductible as charitable contributions, nor are mutuals entitled to other benefits, such as real estate or sales tax exemption or lower postal rates, generally available to organizations exempt under Section 501(c)(3). This suggests that the income tax exemption for mutuals would not be justified on the basis of benefit to the public. In the case of business mutuals, steps should be taken to eliminate or mitigate the deferral advantage. It is concluded that consumer mutuals generally ought to be taxed at least on their investment income and on profits from dealings with nonmembers, as is currently true of social clubs. Otherwise, members of consumer mutuals enjoy opportunities for untaxed consumption.
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Daniel I. Halperin, The Unrelated Business Income Tax and Payments from Controlled Entities, Tax Notes, Dec. 12, 2005, at 1443.
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The unrelated business income tax now applies to deductible payments of interest, rent, or royalties received from controlled entities. The Tax Relief Act of 2005, as just passed by the Senate, would modify that rule to tax only those amounts that exceed the sum that would be paid if the transaction were at arm's length. Although, that is meant to achieve consistency with third-party arrangements, it creates an advantage for the use of subsidiaries as opposed to direct ownership. Thus, he says, fully consistent treatment of all alternatives is impossible. Moreover, he adds, the difficulty of enforcing an arm's-length standard is obvious and unquestionably the IRS will not be fully able to preclude the exclusion of payments in excess of arm's-length prices. Since it has not been shown that self-dealing between the parent and the subsidiary, as opposed to actually contracting with unrelated parties, is substantially more efficient, the report concludes that the proposed change would make the law considerably more complex and difficult to administer without any clear gain in efficiency.
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Based upon his presentation at the University of Illinois College of Law’s Elder Law Lecture, Professor Daniel Halperin provides a clear outline of goals for the future of employer-based retirement plans, which currently fall below ideal expectations and leave low- and moderate-income workers with inadequate savings for retirement. Professor Halperin argues for tougher standards regulating the private employer-based plans and additional government subsidies to retirement savings for low-income workers in order to make these goals possible. His proposals include widening coverage by requiring that all employees be eligible, limiting the role of integration with Social Security, restricting testing for discrimination by comparing projected benefits, preserving benefits for retirement by immediate vesting, and transferring investment risk to employers.
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Daniel Halperin, A Charitable Contribution of Appreciated Property and the Realization of Built-in Gains, 56 Tax L. Rev. 1 (2002).
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Daniel Halperin, Commentary, A Capital Gains Preference Is Not EVEN a Second-Best Solution, 48 Tax L. Rev. 381 (1993).
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Daniel I. Halperin, Special Tax Treatment for Employer-Based Retirement Programs: Is It "Still" Viable as a Means of Increasing Retirement Income? Should It Continue? 49 Tax L. Rev. 1 (1993).
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Daniel I. Halperin, Interest in Disguise: Taxing the "Time Value of Money", 95 Yale L.J. 506 (1986).
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