Paul L. Caron

Tuesday, February 24, 2009

More on Tax Consequences of Rahm Emanuel's Rent-Free Use of D.C. Home

Following up on last week's post:  The Next Obama Tax Kerfuffle: Rahm Emanuel's Rent-Free Use of Capitol Hill Townhouse:

Chicago Tribune:  Questions Raised About Rahm Emanuel's Housing Arrangement in D.C., by Andrew Zajac:

White House chief of staff Rahm Emanuel's Washington lodging arrangements, a rent-free basement room in a Capitol Hill home owned by Rep. Rosa DeLauro (D-Conn) and her pollster husband, have inspired debate among tax experts and in Republican-leaning parts of the blogosphere.

Tax experts are divided about whether Emanuel would have an IRS liability for the free room. The issue has aroused unusual online interest among tax experts, perhaps because arcane points of tax law rarely intersect with mainstream political events, said Paul Caron, an associate dean at the University of Cincinnati Law School and author of the TaxProf blog.

Caron said Greenberg's polling work for Emanuel and the DCCC muddies the argument that the room is a gift and thus either tax exempt or subject only to limited taxation. "The courts have been very clear. It's very hard to claim something is a gift when you have a business context," said Caron.

Joseph Dodge, a professor at Florida State University College of Law, argued that the room is not subject to tax either as a gift or as income. It's not a gift because it doesn't effectively cost DeLauro and Greenberg anything, Dodge said. Nor would it be taxable as income to Emanuel because of the couple's motive in making the room available, "which would be friendship or generosity," Dodge said.

Tax Notes Today (2009 TNT 33-2): Tax Treatment of Emanuel's Rent-Free Arrangement Divides Experts, by Sam Young:

Prof. Paul L. Caron of the University of Cincinnati College of Law, who maintains the popular TaxProf Blog, told Tax Analysts that in Dickman v. Commissioner (465 U.S. 330 (1984)), the Supreme Court "clearly held that the rent-free use of property (there, an interest-free loan) constitutes a gift for gift tax purposes."

The determination of whether a transfer is a gift is factual and based on the intent of the transferor. A statement given to the Hartford Courant on behalf of DeLauro characterized the rent-free occupancy as "hospitality between [Congress] members." Emanuel represented the 5th District of Illinois before being selected as Obama's chief of staff.

But that argument "falls apart since that is not how [DeLauro] in fact treated it," Caron said. That is, DeLauro filed no gift tax return. "To me, it is a straightforward issue -- the rent-free use of an expensive home for five years, owned by a person who provided hundreds of thousands of dollars of services for the lucky tenant, makes it very hard to argue that this is purely a gift," he concluded.

DeLauro denies that any taxes are owed. "Our house has no rental apartment and no part of the house was rented when Mr. Emanuel started staying with us in D.C.," DeLauro said in a statement sent to Tax Analysts. "There are no tax issues."

Prof. Joseph Dodge of the Florida State University College of Law also argues that there should be no tax impact at all. Dodge told Tax Analysts that the gift tax exists to back up the estate tax by preventing a taxpayer from depleting his estate. Therefore, only the transfer of income-producing property should result in gift tax. "If I let my son live in my vacation home, I'm not shifting any income to him," he said, but "if I loan you my house for a year, and you rent it out, the rents are probably a gift from me. My son can't rent it out unless I let him; it's my decision." "The failure to rent out personal use property -- failing to augment my estate -- has never been viewed as a concern of the estate or gift tax," Dodge added. "Those taxes are on property I actually have, not on property I could have had with maximum economic exploitation."

DeLauro's husband runs a polling firm for Democratic candidates, which has raised speculation that Emanuel's rent may have been in exchange for the advantage Greenberg gained by association with him. Regardless of whether Greenberg actually realized any benefit, the argument goes, any attempt by the couple to make use of the arrangement would negate the altruistic intent required for the rent to have been a gift.

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note to several posters: current inflation-indexed Sec. 2503(b) gift tax exclusion is $13,000 per donee

Posted by: nitpicker | Feb 24, 2009 4:01:00 PM

Well, let's see, the bipartisan administration is aggressively partisan, the economy is disintegrating, and its ethics appear to be not only not higher but actually lower than its predecessor. And Bush was the worst President ever? He may not even be the worst President this year.

Posted by: mike livingston | Feb 24, 2009 3:16:07 PM

I also have heard he's not paying taxes on his home in Cook County!? Why is he being protected? This started well before the Demos got the majority. Is Rahm the Spy Mega, for Israel?

Posted by: Greenleaf | Feb 24, 2009 1:58:05 PM

This is comparatively harmless - I think he can manage to do some serious self enriching rule bending elsewhere. At the same time he will be promoting more rules and rulers for the rest of us .

Posted by: arf | Feb 24, 2009 1:14:21 PM

It disturbs me that the comments on a website about tax law devolves into partisan sniping. Professor Caron is wrong that Rep. Delauro and her husband didn't treat it as a gift. They can treat it as a gift and not file a gift return if the value is less than $24k. I live in their neighborhood, and a room in a home would not cost more than $2k a month. They were well within the law not to file a return.

No one has made a strong argument otherwise. They only make snide partisan comments. Grow up.

Posted by: Kris | Feb 24, 2009 12:43:25 PM

Nevermind taxes. It doesn't matter if it was a gift. This is a kick-back. Emanuel is/was head of a committee that contracted for services with Greenburg's firm, and donors to that committee had a right to expect that his judgment would not be affected by reciprocal favors to him personally. If Rumsfeld had received free lodging from a high executive at Halliburton, would anyone have thought that was a problem? Like the old Bolsheviks, our new overlords think that because they are "on the side of the people" the rules do not apply to them. Cf: Daschle, Rangel, Dodd, numerous lobbyist waivers, etc. etc.

Posted by: Mahon | Feb 24, 2009 11:01:28 AM

I hope Professor Dodge is suffering from bad editing, because he doesn't come off very well in these articles. Yes, the purpose of the gift tax is to back up the estate tax, but that's not how the gift tax works. Any transfer for less than full and adequate consideration is a taxable gift (before the annual exclusion and other deductions) unless the transfer was in the ordinary course of business. (There are exceptions to this general rule for transfers for medical care and education, but those exceptions do not apply here.) Professor Dodge raises the argument that was made by the taxpayers in Dickman -- forgone rent or interest is not a gift. This argument was rejected by the Supreme Court. There the Court held that the forgone interest was a gift -- despite the fact the parent's estate had not be "reduced" because the parents still owned the principal loaned to their children. Dodge might have a good argument about what the law should be. As an explanation of what the law is, he's flat out wrong.

All of this misses the fact that the parties originally claimed that Emanuel was renting the apartment. (Otherwise, Emanuel's Congressional disclosure statements would have been in error. Even if the rent-free use of the property were not a gift for tax purposes, it WOULD BE a gift for these other purposes.) The parties quit claiming Emanuel had rented the room when they could not document the rental payments and when it was pointed out the rental would have been illegal under local law. No matter what explanation they come up with, it's clear these people did not care what the law was nor did they feel any obligation to abide by the law.

Posted by: David Walser | Feb 24, 2009 10:24:30 AM

A basement room? How apropos.

Posted by: jdogg92056 | Feb 24, 2009 10:18:55 AM

Why wouldn't this be a form of barter? "I provide you with a tangible asset -- a rent free abode -- while you provide me with a valuable association that increases the value of my services."

Posted by: Dadmanly | Feb 24, 2009 9:58:35 AM

As a CPA doing tax work, I would not advise any client that this is taxable as income though it might require a gift tax return if the fair market value of the gift exceeds $24,000 ($12,000 for both Mr & Mrs. DeLauro). Even in expensive DC, I doubt a room would rent for $24,000. I don't understand why the $12,000 deduction hasn't been mentioned by the tax experts.

Posted by: TexasCPA | Feb 24, 2009 9:16:23 AM

You forgot the other relevant fact - Emanuel is a Democrat. If he was a Republican, his lodging would be taxable, but he's not. Democrats are supposed to get free houses.

Posted by: Andy Freeman | Feb 24, 2009 8:52:09 AM

Has anyone called the IRS tip line to report this as a tax fraud matter? Then we could have an official IRS ruling on the issue and have a determination if another BHO buddy ignores the tax law or is not liable and the issue goes away.

Posted by: djm | Feb 24, 2009 8:35:32 AM

A politician who controls spending for a Congressional campaign committee makes sure that a publicity firm gets more than $500k per year. Then out of "detached and disinterested generosity" by the principal in the firm he receives a rent free apartment for 5 years.

If the politician was a sales rep for a large company, is there any doubt that the IRS would conclude the rent-free apartment was a taxable kickback? Any professor who suggested otherwise would be scorned as being "in the tank" for the sales rep.

As I see it, this is just a continuation of the "culture of corruption" under new management.

Posted by: Dale Newland | Feb 24, 2009 8:09:13 AM

I would think that once Rahm moved from the legislature to the executive branch that the fundamental relationship changed between guest and homeowner. Now, there is a big advantage to the homeowners for having Rahm live at their household, in a business where access to the President is an expensive commidity. While it may have been simply a matter of "two people in the same company" sharing a gift, this changed in January.

Posted by: Pablo Panadero | Feb 24, 2009 7:41:19 AM

"any attempt by the couple to make use of the arrangement would negate the altruistic intent required for the rent to have been a gift."

This seems perverse -- the more calculating and less altruistic an action, the less taxable it is?

It makes a wierd sort of sense, but the episode is still disturbing all around.

Posted by: Darren | Feb 24, 2009 7:17:39 AM

Doesn't a gift have to be in excess of X dollars per year (currently $12,000) to be reportable?

Posted by: Slade | Feb 24, 2009 7:07:21 AM

How about his home in chicago..I have read that that place is a registered charity so he does not pay taxes.

Posted by: m.leonard | Feb 24, 2009 7:05:16 AM