Person:

Halperin, Daniel

I have been involved in pension law and policy for more than fifty years as a private practitioner, as a government official, as a professor, as a board member of the Pension Rights Center, and as an author of more than a dozen articles on the subject.1 In preparation for the Drexel Law Review Symposium, ERISA at 40: What Were They Thinking?, held on October 25, 2013, I read for the first time in many years my first pension article written in 1976, a surprisingly in-the-weeds discussion, which I called Retirement Security and Tax Equity: An Evaluation of ERISA . ... Returning to the Treasury, eventually as Deputy Assistant Secretary, gave me an opportunity to be involved in some ERISA regulations and Reorganization Plan 4, as well as the series of events that led to 401(k)s. ... Of course, the major change in the landscape of qualified plans over the last forty years has been the increasing dominance of defined contribution plans and the shift to elective contributions and employee control of investment choice under section 401(k). ... I now believe it makes more sense to talk in terms of allocation of risk--for example, as to investment return, early termination of the plan or of employment, and unexpected growth in salary. ... Since I worried about encouraging a shift to DC plans, I did assert in 1976 that a case could be made for plan termination insurance with respect to certain types of DC plans, primarily target benefit plans. ... While I worried about pre-retirement distributions and loans endangering retirement security, I focused my ire on the favorable tax treatment of lump sum distributions, which I felt provided an unfortunate incentive for forgoing lifetime distributions. ... I was influenced by a feeling that lack of vesting "is less of a problem if those who forfeit benefits are younger employees . . . who would not have ordinarily saved for retirement" during the period, and by the fact that the ERISA standard was not only a substantial improvement over prior law, but also compared favorably to the cabinet committee proposal as well as most of the proposals that had surfaced along the way. ... I wrote that " the only sensible way to improve retirement benefits for low-income households may be to increase their lifetime income through some redistributive device which would enable low-income workers to have more retirement income without a significant cut in their wages during their working years."

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.

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.

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.

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.