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.