Paul L. Caron

Sunday, July 10, 2011

WSJ: The Gift and Generation-Skipping Taxes May Save John Edwards

Form 709

Wall Street Journal, Surprising Tax Lessons From John Edwards's Indictment, by Laura Saunders:

Could two obscure taxes paid by a wealthy heiress save a former politician from prison? Quite possibly, say tax- and election-law experts. The curious tale offers a lesson for ordinary taxpayers as well.

In June, former senator and presidential candidate John Edwards was indicted by a North Carolina grand jury on charges of violating campaign-finance laws. The six-count indictment involves more than $925,000 in secret payments allegedly made by two donors to conceal his mistress, Rielle Hunter, during his 2007-08 presidential campaign. ...

Although the indictment doesn't name the donors, it says "Person C" gave about $725,000 and "Person D" gave more than $200,000 to hide the pregnant Ms. Hunter. Lawyers involved in the case identify ... Person C as Rachel "Bunny" Mellon. Mr. Baron died in 2008. Ms. Mellon, 100 years old, is the daughter of a founder of Warner-Lambert pharmaceuticals, as well as the widow of philanthropist Paul Mellon. ...

Ms. Mellon paid both gift and generation-skipping taxes on the amounts she gave Mr. Edwards—underscoring that they were personal gifts and not campaign contributions. In 1932, Congress imposed taxes on gifts to prevent end runs around the estate tax, and later it added the generation-skipping tax to forestall end runs in the form of bequests to much-younger heirs. Ms. Mellon's alleged gifts to Mr. Edwards triggered generation-skipping tax because he was more than 37½ years younger than she.

The rate for gift and generation-skipping taxes at the time was 45%—and you must pay a separate gift tax on generation-skipping tax. Thus, the effective tax rate on such gifts can be greater than 100%. Attorney Howard Zaritsky of Rapidan, Va., estimates the heiress paid $799,000 in tax to make her $725,000 gift. "It's pretty clear the tax exceeded the gift," he says.

If Ms. Mellon paid the gift taxes, does that mean the donations weren't campaign contributions, and Mr. Edwards didn't violate campaign-finance laws? The law is cloudy, and the case is unprecedented.

But as written the law takes seriously the "specific intent" of donors, says election-law expert Richard Pildes of New York University. Thus Mrs. Mellon's gift tax could help Mr. Edwards's case. On a blog, Mr. Pildes said: "The money spent here was almost certainly not a 'contribution' within the meaning of the election laws" for a criminal case. ...

"Most people never think about the gift and generation-skipping taxes, but in this case, scrupulous attention to the law could make a big difference," says Paul Caron of the University of Cincinnati Law School.

Prior TaxProf Blog coverage:

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This strikes me as an argument based on language rather than law, and indeed a language argument with a rather large whole in it. Is there case law, or are there statutes, that say "campaign contribution" and "gift subject to tax" are mutually exclusive categories, such that proof of one disproves the other?

Posted by: Beldar | Jul 11, 2011 5:42:18 PM

So, was it a bribe in anticipation of future considerations, an illegal campaign contribution, or a "gift?"

Posted by: MarkD | Jul 11, 2011 10:03:52 AM

People always want liberals to put their money where their mouth is regarding higher taxes. Here is a woman that did it, and bought a few haircuts to boot :) Seriously, I have no problem with anyone funneling money to campaigns if they make an equal donation to the government. Maybe that could be the rule for ALL donations.

Posted by: Matt | Jul 11, 2011 10:01:21 AM

She was willing to pay $1.524M in order to provide $.725M to John Edwards?

It doesn't matter that she paid the gift tax. Otherwise anyone could get around campaign finance limits by giving "gifts" to candidates. And most of us wouldn't even incur tax consequences.

A side effect of campaign finance reform is that people can't give giant gifts to politicians.

Posted by: Daryl Herbert | Jul 11, 2011 7:28:42 AM

This scumbag was within one stolen election of being our nation's Vice President and second in line to the President.

Posted by: Woody | Jul 10, 2011 8:54:52 PM

The WSJ's sister publication in England was giving cash to cops for tips on tabloid stories. Will it help Rupert Murdoch if he shows that he filed gift tax returns for these payments?

Posted by: Bob | Jul 10, 2011 1:28:47 PM