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Ronald Reagan Presidential Library
Digital Library Collections
This is a PDF of a folder from our textual collections.
Collection: Roberts, John G.: Files
Folder Title: JGR/Pro Bono (11)
Box: 45
To see more digitized collections visit:
https://reaganlibrary.gov/archives/digital-library
To see all Ronald Reagan Presidential Library inventories visit:
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Contact a reference archivist at: [email protected]
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105 Box 45 - JGR/Pro Bono (11) - Roberts, John G.: Files
SERIES I: Subject File
THE WHITE HOUSE
WAEHINGTON
October 10, 1984
MEMORANDUM FOR FRED F. FIELDING
FROM:
JOHN G. ROBERTS 826
SUBJECT:
Expiration of Section 120
of the Internal Revenue Code
On September 19, I submitted draft replies for your
signature to letters Mr. Baker received from ABA President
Wallace D. Riley and former ABA Presidednt Morris Harrell.
Riley and Harrell wrote Baker to urge that the
Administration act to prevent Section 120 of the Internal
Revenue Code from expiring. As I explained in my
memorandum, Section 120 grants preferred tax treatment for
employer-funded legal assistance programs for employees.
Unless extended by Congress it will expire at the end of
this year pursuant to a sunset provision.
The draft replies I submitted noted that the Administration,
in Treasury testimony, opposed extension of Section 120.
You wrote back that the replies were difficult for you to
send, because you needed the support of Riley and Harrell on
another matter. The attached revised draft omits the
reference to the Administration position, simply thanking
the two for their views and assuring them that they will be
appropriately considered.
Attachments
THE WHITE HOUSE
WAEHINGTON
October 10, 1984
Morris
Dear Mr. Harrell:
Thank you for your letter to White House Chief of Staff
James A. Baker, III, concerning the expiration of Section
120 of the Internal Revenue Code. In that letter you
expressed your support for extension of Section 120, which
provides special tax treatment for group legal services
plans.
We appreciate having the benefit of your views on this
matter, and I certainly recognize your particular interest
and that of the American Bar Association. Please be assured
that I will share your views and concerns with appropriate
officials at the Department of the Treasury.
Sincerely,
Orig. signed by FFF
Fred F. Fielding
Counsel to the President
Morris Harrell, Esquire
4200 RepublicBank Tower
Dallas, Texas 75201
FFF: JGR:aea 10/10/84
bcc: FFFielding/JGRoberts/SUbj/Chron
THE WHITE HOUSE
WAEHINGTOR
October 10, 1984
MEMORANDUM FOR PETER J. WALLISON
GENERAL COUNSEL
U.S. DEPARTMENT OF THE TREASURY
FROM:
FRED F. FIELDING Orig. signed by FFF
COUNSEL TO THE PRESIDENT
SUBJECT:
Expiration of Section 120
of the Internal Revenue Code
The attached correspondence to James A. Baker, III, together
with copies of my replies, is referred for whatever review
and additional reply, if any, you consider appropriate. The
correspondence, from the two most recent Presidents of the
American Bar Association, concerns the imminent expiration
of Section 120 of the Internal Revenue Code.
Attachments
FFF: JGR:aea 10/10/84
CC: FFFielding/JGRoberts/Subj/Chror
THE WHITE HOUSE
WAEHINGTON
October 10, 1984
Dear Mr. Riley:
Thank you for your letter to White House Chief of Staff
James A. Baker, III, concerning the expiration of Section
120 of the Internal Revenue Code. In that letter you
expressed your support for extension of Section 120, which
provides special tax treatment for group legal services
plans.
We appreciate having the benefit of your views on this
matter, and I certainly recognize your particular interest
and that of the American Bar Association. Please be assured
that I will share your views and concerns with appropriate
officials at the Department of the Treasury.
Sincerely,
Orig. signed by FFF
Fred F. Fielding
Counsel to the President
Wallace D. Riley, Esquire
American Bar Association
American Bar Center
Chicago, Illinois 60637
FFF:JGR:aea 10/10/84
bcc: FFFielding/JGRoberts/SUbj/Chror
THE WHITE HOUSE
WAEHINGTON
October 10, 1984
Dear Mr. Riley:
Thank you for your letter to White House Chief of Staff
James A. Baker, III, concerning the expiration of Section
120 of the Internal Revenue Code. In that letter you
expressed your support for extension of Section 120, which
plans. provides special tax treatment for group legal services
We appreciate having the benefit of your views on this
matter, and I certainly recognize your particular interest
and that of the American Bar Association. Please be assured
that I will share your views and concerns with appropriate
officials at the Department of the Treasury.
Sincerely,
Fred F. Fielding
Counsel to the President
Wallace D. Riley, Esquire
American Bar Association
American Bar Center
Chicago, Illinois 60637
FFF: JGR:aea 10/10/84
bcc: FFFielding/JGRoberts/SUbj/Chron
THE WHITE HOUSE
WAEHINGTOA
October 10, 1984
Dear Mr. Harrell:
Thank you for your letter to White House Chief of Staff
James A. Baker, III, concerning the expiration of Section
120 of the Internal Revenue Code. In that letter you
expressed your support for extension of Section 120, which
plans. provides special tax treatment for group legal services
We appreciate having the benefit of your views on this
matter, and I certainly recognize your particular interest
and that of the American Bar Association. Please be assured
that I will share your views and concerns with appropriate
officials at the Department of the Treasury.
Sincerely,
Fred F. Fielding
Counsel to the President
Morris Harrell, Esquire
4200 RepublicBank Tower
Dallas, Texas 75201
FFF: JGR:aea 10/10/84
bcc: FFFielding/JGRoberts/SUbj/Chron
THE WHITE HOUSE
WAEHINGTOR
October 10, 1984
MEMORANDUM FOR PETER J. WALLISON
GENERAL COUNSEL
U.S. DEPARTMENT OF THE TREASURY
FROM:
FRED F. FIELDING
COUNSEL TO THE PRESIDENT
SUBJECT:
Expiration of Section 120
of the Internal Revenue Code
The attached correspondence to James A. Baker, III, together
with copies of my replies, is referred for whatever review
and additional reply, if any, you consider appropriate. The
correspondence, from the two most recent Presidents of the
American Bar Association, concerns the imminent expiration
of Section 120 of the Internal Revenue Code.
Attachments
FFF: JGR:aea 10/10/84
CC: FFFielding/JGRoberts/Subj/Chron
THE WHITE HOUSE
WASHINGTON
September 19, 1984
MEMORANDUM FOR FRED F. FIELDING
FROM:
JOHN G. ROBERTS
DR
SUBJECT:
Expiration of Section 120
of the Internal Revenue Code
Mr. Baker's office has referred to us two letters Mr. Baker
received, from American Bar Association President Wallace D.
Riley and former ABA President Morris Harrell. In their
letters Riley and Harrell express the ABA's support for
extension of Section 120 of the Internal Revenue Code,
26 U.S.C. § 120. Unless Congress acts, Section 120 will
expire pursuant to its sunset provision on December 31,
1984. 26 U.S.C. § 120 (e).
Section 120 was first enacted in 1976 and was extended in
1981. It provides for the exclusion from an employee's
gross income of amounts contributed by an employer to a
group legal services plan providing legal services to the
employee and his spouse or dependents.
Prior to enactment of Section 120, the provision of legal
services by the employer was considered the receipt of
taxable income by the employee. The ABA, both through the
instant letters and through testimony delivered before
Congress, stresses the desirability of providing group legal
services to employees as the main reason to continue the
special tax treatment of this form of employee compensation
in Section 120.
The Administration, however, opposes extension of Section
120. Treasury opposed enactment of Section 120 in 1976,
opposed extension of it in 1981, and opposes further
extension of it now. Our position was articulated on April
12, 1984, in testimony delivered by Treasury Tax Legislative
Counsel Robert G. Woodward. According to Woodward's
testimony, the desirability of group legal services is
beside the point. As Woodward testified: "Compensation
paid in the form of legal services should be taxed in the
same manner as any other type of compensation received by
employees. The existence of special exemptions for
particular types of compensation only encourages employees
to rearrange their affairs so that compensation is received
in a non-taxable form." Greg Jones of OMB advises me that
the Administration position on this question is unchanged.
- 2 -
Riley and Harrell will not be pleased with our response, but
we can do little more than send them a copy of the Treasury
testimony, thank them for their views, and assure them we
will convey those views to Treasury. Drafts doing all of
this are attached.
Attachments
THE WHITE HOUSE
WASHINGTON
September 19, 1984
MEMORANDUM FOR PETER J. WALLISON
GENERAL COUNSEL
U.S. DEPARTMENT OF THE TREASURY
FROM:
FRED F. FIELDING
COUNSEL TO THE PRESIDENT
SUBJECT:
Expiration of Section 120
of the Internal Revenue Code
The attached correspondence to James A. Baker, III, together
with copies of my replies, is referred for whatever review
and additional reply, if any, you consider appropriate. The
correspondence, from the two most recent Presidents of the
American Bar Association, concerns the imminent expiration
of Section 120 of the Internal Revenue Code.
Attachments
FFF: JGR:aea 9/19/84
CC: FFFielding/JGRoberts/Subj/Chron
THE WHITE HOUSE
WASHINGTON
September 19, 1984
Dear Mr. Harrell:
Thank you for your letter to White House Chief of Staff
James A. Baker, III, concerning the expiration of Section
120 of the Internal Revenue Code. In that letter you
expressed your support for extension of Section 120, which
plans. provides special tax treatment for group legal services
As you may be aware, the Administration, in testimony
delivered by the Department of the Treasury, has taken a
position in opposition to extension of Section 120. This
position is consistent with the opposition of Treasury to
enactment of Section 120 in 1976 and to the extension of
Section 120 in 1981. I have enclosed a copy of the pertinent
testimony for your information.
We do, however, appreciate having the benefit of your views
on this matter, and I certainly recognize your particular
interest and that of the American Bar Association. Please
be assured that I will share your views and concerns with
appropriate officials at the Department of the Treasury.
Sincerely,
Fred F. Fielding
Counsel to the President
Morris Harrell, Esquire
4200 RepublicBank Tower
Dallas, Texas 75201
FFF: JGR:aea 9/19/84
bcc: FFFielding/JGRoberts/Subj/Chron
THE WHITE HOUSE
WASHINGTON
September 19, 1984
Dear Mr. Riley:
Thank you for your letter to White House Chief of Staff
James A. Baker, III, concerning the expiration of Section
120 of the Internal Revenue Code. In that letter you
expressed your support for extension of Section 120, which
plans. provides special tax treatment for group legal services
As you may be aware, the Administration, in testimony
delivered by the Department of the Treasury, has taken a
position in opposition to extension of Section 120. This
position is consistent with the opposition of Treasury to
enactment of Section 120 in 1976 and to the extension of
Section 120 in 1981. I have enclosed a copy of the pertinent
testimony for your information.
We do, however, appreciate having the benefit of your views
on this matter, and I certainly recognize your particular
interest and that of the American Bar Association. Please
be assured that I will share your views and concerns with
appropriate officials at the Department of the Treasury.
Sincerely,
Fred F. Fielding
Counsel to the President
Wallace D. Riley, Esquire
American Bar Association
American Bar Center
Chicago, Illinois 60637
FFF: JGR:aea 9/19/84
bcc: FFFielding/JGRoberts/Subj/Chron
ID #
251322
CU
WHITE HOUSE
FI010-02
CORRESPONDENCE TRACKING WORKSHEET
0 . OUTGOING
H - INTERNAL
JBR
I . INCOMING
Date Correspondence
Name Received of Correspondent: (YY/MM/DD) / Morris / Harrell and Wallace Relex
MI Mail Report
User Codes: (A)
(B)
(C)
Subject:
Expiration of Section 120 of the deternal
Revenue Code
ROUTE TO:
ACTION
DISPOSITION
Tracking
Type
Completion
Action
Date
of
Date
Office/Agency
(Staff Name)
Code
YY/MM/DD
Response
Code
YY/MM/DD
WHolland
ORIGINATOR DDI 84/08/11
1.
/
Referral Note:
WAT 18
DDD 84,08,13
$ 84,08,23
Referral Note:
/
/
/
/
Referral Note:
/
/
/
/
Referral Note:
/
/
/
/
Referral Note:
ACTION CODES:
DISPOSITION CODES:
A - Appropriate_Action
1. Info Gopy Only/No Action Necessary
A Answered
C Completed
c - Comment/Recommendation
R - Direct Reply w/Copy
B - Non-Special Referral
S Suspended
D - Draft Response
S For Signature
F Furnish Fact Sheet
X Interim Reply
to be used as Enclosure
FOR OUTGOING CORRESPONDENCE:
Type of Response = Initials of Signer
Code
=
"A"
Completion Date = Date of Outgoing
Comments: aug 184 Marris Harrell letter to
James Baker also attached
mar 16 84 Statement ofPatrick attached Keating
Keep this worksheet attached to the original incoming letter.
Send all routing updates to Central Reference (Room 75, OEOB).
Always return completed correspondence record to Central Files.
Refer questions about the correspondence tracking system to Central Reference, ext. 2590.
5/81
AMERICAN BAR ASSOCIATION
OFFICE OF THE PRESIDENT
WALLACE D. RILEY
AMERICAN BAR CENTER
CHICAGO, ILLINOIS 60637
TELEPHONE: 312 / 947-4042
July 30, 1984
251322 w
Hon. James A. Baker III
Chief of Staff and
Assistant to the President
The White House
Washington, D.C. 20500
Dear Jim:
I am writing to bring to your attention a matter
which is of great concern to the American Bar
Association, and indeed the organized bar nationally.
Legislation now pending in the Congress would
extend Section 120 of the Internal Revenue Code which
encourages private-sector initiatives designed to
help millions of middle-class persons obtain legal
assistance needed to exercise their rights under our
system of laws. Section 120 was enacted in 1976 and
will expire at the end of this year if no further
action is taken.
Section 120 provides for group legal services
plans funded by employers to be treated on an
equitable basis. It allows the employer to take a
business deduction for the amounts the employer
contributes to the plan and provides that the
employee shall not be taxed on either the pro-rata
share of the employer's contributions or on the value
of any legal services he or she may receive under the
plan.
Section 120 places employer-funded group legal
services plans on roughly the same footing as group
medical plans and other statutory fringe benefits
established to insure an employee's basic well-being
and ability to participate in our economy as a
productive, self-supporting citizen. We believe the
medical analogy is very appropriate. Just as
employees may incur serious medical problems which,
if not promptly dealt with, can keep an employee off
the job, so too can serious legal difficulties cause
increased absences from and inattention to work.
Hon. James A. Baker III
July 30, 1984
Page Two
We believe that the lack of timely legal
assistance is costly to employers, employees and the
public, as illustrated in the example on Page 6 of
the attached testimony presented by an ABA witness at
a Senate hearing earlier this year. Group legal
services plans emphasize preventive legal services
aimed at helping the employee to avoid potential
law-related catastrophes. In addition to the direct
benefits to employers and employees, we believe that
these plans can reduce the burden on our courts, and
the associated public costs, by encouraging employees
to consult a lawyer at the onset of a potential legal
problem, thereby avoiding litigation.
An estimated 5.5 million Americans are presently
covered by employer-funded group legal services
plans. The growth of such plans has been fostered by
the presence of Section 120. Its absence will act as
an enormous inhibitor to the continuation of such
programs and their availability to millions of other
working families.
We understand that the Treasury Department has
nominally opposed the provision on fiscal grounds,
although the cost to the Treasury in 1983 has been
estimated at only $25 million. However, we would
hope that the Administration recognizes that the
benefits of these plans, especially to middle-income
workers and their families, far outweigh the minimal
cost and will support the extension of the current
provisions. The direct cost is small, and the
indirect savings to our economy could be
substantial. We would also hope that the
Administration will support making the provision
permanent, as provided in H.R. 5028 and S. 2080.
I hope that you will agree with our view of this
matter and assist us in our efforts. I would be
happy to provide you with any additional information
you desire.
Sincerely,
Wallade Wally D'. Riley
WDR:dcm
Enclosure
1713d
ABA
AMERICAN BAR ASSOCIATION
GOVERNMENTAL AFFAIRS GROUP
1800 M STREET, N.W.
WASHINGTON, D.C. 20036
(202) 331-2200
STATEMENT
of
PATRICK J. KEATING
on behalf of the
AMERICAN BAR ASSOCIATION
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
on the subject of
S.2080, GROUP LEGAL SERVICES TAX PROVISION
March 16, 1984
Mr. Chairman and Members of the Subcommittee:
My name is Patrick J. Keating. I am the Chairman of the Special
Committee on Prepaid Legal Services of the American Bar Association
and I am in the private practice of law in Detroit, Michigan.
I am appearing here today at the request of Wallace D. Riley,
President of the American Bar Association, who regrets that he is
not able to appear personally because of an important prior
commitment.
The ABA strongly believes that the making permanent of Section
120 of the Internal Revenue Code as provided in this bill addresses
is of critical importance to millions of people throughout the
country. Indeed only last month our Board of Governors selected
passage of S. 2080 as one of a small group of top legislative
priorities for 1984.
As the Committee knows, Section 120 determines the tax treatment
of qualified group legal services plans. It provides that employees
may exclude from their taxable income contributions made by an
employer to such a plan and the value of any legal services received
by the employee under the plan. I would like to state briefly why
the American Bar Association has supported this tax treatment of
employer paid legal plans and why we feel that the permanence of
Section 120 is critical at this juncture.
Recognizing the need to develop mechanisms to help middle-income
Americans gain access to personal legal services, the American Bar
Association has worked for over ten years to develop and perfect the
concept of prepaid legal services. In 1974, we joined with a
coalition of labor, insurance, consumer and other groups to create
an incentive for employers to provide legal services as a benefit
for employees for much the same reason as they provide medical and
other insurance benefits: to assure the personal well-being of
employees and their families so that they can continue to be
permanent and productive members of the workforce. If an employee
is sick, he or she cannot work. Being ill in the workplace can
greatly reduce productivity. By establishing tax incentives for
employers to provide or pay for medical care, the Congress has
recognized the economic benefits inherent in protecting an
employee's physical health.
Legal problems can affect the emotional and financial health of
employees. Financial problems often have legal implications.
Falling behind in mortgage or loan payments can lead to wage
garnishment and the possibility of eventual bankruptcy, both of
which may involve not only the employee but the employer and the
economy as well.
The incidence of these problems can have a significant effect on
an employee's work productivity and often lead to to absences from
work to go to court or otherwise deal with a problem personally.
The following case study was compiled from actual cases where what
initially was a minor personal problem led to serious personal and
legal trouble:
Robert Simpson (fictitious name) worked as a quality
control inspector at an electronics plant for six years. During
that period, his performance evaluations were excellent and his
- 2 -
attendance record perfect. Mr. Simpson was well-liked by his fellow
employees and was credited with making a number of suggestions which
markedly improved quality control procedures. He was active in his
local union and was being considered by management for promotion to
supervisor of his section.
In the seventh year of his employment, the quality of
components coming off the assembly line where Mr. Simpson was
stationed dropped off sharply. In addition, his attendance record
began to deteriorate and he was absent from a number of important
union meetings. Supervisors and co-workers tried unsuccessfully to
ascertain the reason for this change in Mr. Simpson's behavior. He
became short-tempered, explaining that he had a few minor personal
problems he would take care of shortly. At one point, Mr. Simpson's
job performance declined so much that both his co-workers and
management feared that he might not only lose the chance for
promotion but also his job as well.
Mr. Simpson's job performance suffered because he was
distracted by serious legal difficulties. At the conclusion of his
sixth year of employment, he moved his family to an older apartment
building in a northwest suburb of the city. Simpson entered into a
two-year lease, but did not consult an attorney as to the terms of
the lease agreement. A month after the Simpson family moved in, a
small fire broke out on the first floor of the building, and Mr.
Simpson, who lived on the third floor, became concerned over the
need for fire protection. The landlord refused to provide alarms
and extinguishers, and Mr. Simpson, not the smartest of businessmen,
- 3 -
decided to purchase $2,400 worth of fire protection equipment on an
installment note.
Had Mr. Simpson talked to a lawyer before purchasing the
equipment, he would have discovered that the landlord was obligated
by both state law and municipal ordinance to provide fire protection
equipment. He would also have been shown where the lease agreement
he entered into specifically stated that the landlord would provide
such equipment on request and that rent could be withheld if such a
request was not honored.
Three months after the purchase of the equipment, Mr.
Simpson discovered that he could not meet the installment payments.
The finance company refused to listen to any excuses and promptly
sued Mr. Simpson for $2,400 in municipal court. Mr. Simpson, unaware
of the ramifications of the suit and without funds to retain a
lawyer, failed to answer the complaint and a default judgment was
entered against him. The fire equipment was repossessed and sold at
a sheriff's sale for $400, with a deficiency balance of $2,000
showing as an unsatisfied judgment on the record of the court. Mr.
Simpson was then summoned to court on a judgment-debtor hearing and
his wages were immediately garnisheed.
Over the next six months, as Mr. Simpson attempted to pay
off the judgment against him, his other monthly obligations fell
into arrears. He lost his gasoline credit card, the rent was always
late and his other creditors began harassing him for payment of his
obligations. Several law suits were filed, all resulting in default
- 4 -
judgments. Mr. Simpson attempted to secure a loan to relieve nis
financial burden, but loan companies refused to consider his
application because of the court judgments.
Mr. Simpson became short tempered and abusive with his wife
and children -- a changed man with his family. Because of the
change in him and the pressure of continual harassment by creditors,
Mrs. Simpson informed her husband that she had had enough and filed
for divorce. Simpson was served with the complaint at work, much to
his embarrassment, along with motions for expense money, temporary
alimony and support and custody of the children. Ironically, since
the rent was once again late, the landlord filed for eviction.
During the next six months, numerous hearings on the pending divorce
were held and Mr. Simpson had little time for anything but the legal
battles that surrounded him.
Could an attorney have prevented many of Mr. Simpson's problems?
Probably. Certainly, an attorney's review of the original lease
agreement might have prevented the credit purchase of the fire
prevention equipment in the first place which seems to have led to
many of his other difficulties. Even assuming that the purchase had
been made anyway, many of the judgment-debtor problems could have
been immediately relieved through the attorney's active participation
with creditors. The divorce might well have been avoided if the
credit problems had been alleviated initially. Even if the divorce
was unavoidable, the availability of an attorney prior to the
initiation of the suit by Mrs. Simpson could have prevented a
lengthy contested proceeding.
- 5 -
su, though certainly many
situations can turn out to be less disastrous. Let's take a "minor"
matter which actually occurred in a midwest office.
An employee was billed by a hospital for approximately $130
which he thought he didn't owe and which he had no money to pay in
any event. Repeated requests for payment were ignored until the
employee received a summons from county court located 35 miles away
from the office. The employee mentioned the need to take time out
from work to go to court to his supervisor, who advised that the
employee talk to a lawyer first. A lawyer was consulted and
eventually accompanied the employee to court twice, requiring the
employee to be absent from work for one-half day each time, and a
settlement with payment arrangements was worked out with the lawyer
for the hospital.
The cost to the employee associated with this problem was
calculated at $358.84, including $225 in attorney fees, $59.84 in
lost wages, $28 in transportation to court and $46 in court fees.
In addition, the employer lost the services of the employee for two
mornings, the federal government lost approximately $11.80 in tax
revenue on the employee's lost earnings and the hospital had to pay
its attorney to handle the case in court.
The point of this story is that the attorney indicated afterward
that had she been called as soon as the employee started receiving
past-due notices from the hospital, she could have negotiated a
payment schedule with the hospital by phone, avoiding the law suit,
- 6 -
court appearances, costs, time off from work and the worry which had
plagued the employee during the three months while this situation
was developing.
How could an employer-paid legal benefit plan have helped in
this second, more typical case? First, the employee, realizing that
arrangements for consulting and paying for a lawyer were part of his
compensation, the question of whether the employee had the funds to
hire an attorney would not come up. Secondly, by having this barrier
removed, the employee would have had the incentive to consult a
lawyer early as soon as the problem presented itself, rather than
waiting until. the last minute and having a law suit filed against
him. Third, the employer would not have lost the services of the
employee both for the time taken to go to court and in the preceding
months during which the employee's attention was distracted from his
work because of worry and phone calls to and from the hospital.
Will employees actually take advantage of a legal services
benefit to their own and the employer's advantage? The statistics
we have gathered since Section 120 was enacted in 1976 indicates
that they will. A comprehensive survey of the legal needs of the
public published in 1977 by the American Bar foundation and carried
out by the National Opinion Research Center indicated that more than
35% of the population encounter problems each year that could be
resolved by a lawyer, yet only 10% actually seek legal assistance.
In contrast, our information indicates that an average of 20% of the
employees covered by a group legal plan consult a lawyer at least
once annually.
- 7 -
These employee-users are in a majority of cases receiving
preventive legal assistance that often make it possible to avoid
litigation or serious, protracted remedial services. Some of the
newest prepaid legal plans feature legal advice and consultation by
phone as a benefit. The administrators of these plan have told us
that between 60% and 80% of the problems presented by plan members
can be resolved over the phone in one or two calls or with telephone
negotiation with adverse parties.
It is clear to us that after 10 years of experimentation with
prepaid legal service plans, the promise that they hold for
establishing a private-sector mechanism for delivering needed
personal legal services to employees has been fulfilled. Direct tax
revenue loss is considered minimal, as indicated in the March, 1983
estimates prepared by the staff of the Joint Committee on Taxation.
Further, we suggest that tax dollars can even be saved by reductions
in the use of our courts to resolve minor disputes as a result of
preventive legal services being made available to employees through
qualified group legal service plans. And the benefit to our economy
of minimizing the impact of employee personal and legal problems on
productivity in the workplace should not be taken lightly.
In 1976, Congress acted wisely in incorporating a termination
provision in Section 120 which would force us to evaluate the
efficacy of this tax policy in stimulating the development of plans
which provide access to needed personal legal services. Further,
controls built into Subsection (c) (1) of Section 120 assure that
qualified group legal service plan will not discriminate in favor of
- 8 -
highly-paid employees and wealthy owners of businesses, thereby
insuring that middle-income Americans are the major beneficiaries of
these plans. We are convinced that the plans have proved themselves,
and we know that employers throughout the country are planning to
incorporate legal service benefits into their compensation programs
as soon as the taxation questions raised by the pending expiration
of Section 120 have been resolved.
We urge that S.2080 be passed into law at the earliest date
possible so that the millions employees who now take advantage of
employer-furnished legal services can continue to do so and so that
employers who have recognized the value of this benefit in
maintaining good employee relations and productivity can move
forward to implement a qualified group legal service plan.
- 9 -
AMERICAN BAR ASSOCIATION
IMMEDIATE PAST PRESIDENT
MORRIS HARRELL
AMERICAN BAR CENTER
PLEASE REPLY TO:
CHICAGO, ILLINOIS 60637
4200 REPUBLICBANK TOWER
TELEPHONE: 312 / 947-4042
DALLAS, TEXAS 75201
TELEPHONE: 214 / 742-1021
August 1, 1984
Hon. James A. Baker III
Chief of Staff and
Assistant to the President
The White House
Washington, D.C. 20500
Dear Jim:
You no doubt have received a letter from my
successor as ABA President, Wallace D. Riley
regarding the American Bar Associations's concern
over the expiration of Section 120 of the Internal
Revenue Code.
I just want to let you know that I firmly support
the concept of group legal services because I know
the benefits which can be derived from timely legal
assistance. We know that working families, just like
large corporations and the wealthy, need access to
our justice system. My tenure as President of the
ABA made me well aware of the legal needs of the
public and the concomitant need to develop ways to
make legal services affordable for middle-income
people.
The organized bar has been working for over
fifteen years to this end. Millions of Americans,
and I believe our society as a whole, are now the
beneficiaries of our labors. With the incentive
provided to employers to establish group legal plans
under Section 120, insurance companies and others
have responded with coverage for personal legal
expenses of employees. Moreover, the costs
associated with these plans have not risen
substantially over the last ten years, partially
because most group legal plans require covered
employees to share in the cost of at least some of
the services they receive.
Hon. James A. Baker III
August 1, 1984
Page Two
I am convinced that the benefits, both economic
and otherwise, of making preventive legal assistance
available to the majority of our citizens far
outweigh the quite minimal estimated loss of direct
government revenues associated with the tax treatment
afforded by Section 120. I hope you share my view
and will help in encouraging Administration support
for the legislation in Congress which would make this
Code section permanent.
I want to thank you in advance for your
consideration of this important issue.
Sincerely,
Morris
Morris Harrell
(1713d/4-5)
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
ROUTE SLIP
Take necessary action
TO
John Roberts
Approval or signature
Comment
Prepare reply
Discuss with me
For your information
See remarks below
but
FROM
DATE
Greg Jones 9/18/84
REMARKS
This is the Treasury testimony on
group legal plans that we discussed on
the telephone.
OMB FORM 4
Rev Jul 82
OF
TREASURY NEWS
DEPARTMENT THE TREASURY
THE
1789
Department of the Treasury
Washington, D.C.
Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 A.M.
April 12, 1984
STATEMENT OF
ROBERT G. WOODWARD
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
OF THE
HOUSE COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Subcommittee:
I am pleased to present the views of the Treasury Department
on the following bills:
H.R. 676, which would extend to certain educational
institutions the exception from the debt-financed property rules
that is currently applicable to qualified pension trusts;
H.R. 2697, which would increase the mileage allowance for
charitable deduction purposes to that allowed for the business
expense deduction;
H.R. 4114, which would allow a deferral of an employee's
income and employer's deduction from the date of exercise of a
nonqualified employee stock option until the date of disposition
of the stock received on exercise of the option;
H.R. 4357, which would eliminate capital gain treatment for
gains on certain sales of stock by key shareholders and would
deny deductions to corporations for payments under so-called
"golden parachute" contracts; and
R-2636
- 2 -
H.R. 5028, which would allow a permanent exclusion for
benefits under group legal services plans.
I will discuss each bill in turn.
H.R. 676
Exemption from the Unrelated Business Income Tax
for Debt-Financed Real Property Investments of Schools
Background
Although exempt organizations generally are exempt from
business activities that are unrelated to its exempt
a tax is imposed on income earned by an exempt organization from tax,
for Exceptions to this tax on unrelated business income are purpose. provided
certain traditional types of investment income (rents,
debt. improvement of the property producing the income is financed or
royalties, dividends, and interest) unless the acquisition
Subject to limited exceptions, a share of any income from by
debt-financed property, proportional to the ratio of debt on the
property to the adjusted basis of the property, is treated as
income from an unrelated trade or business.
enacted in 1950 in response to abusive sale-leaseback
The original rules relating to debt-financed property were
of transactions between tax-exempt organizations and taxable owners
active businesses. These transactions typically involved a
tax-exempt organization's purchase of an active business,
of a of the assets of the business to the seller. The effect
financed lease primarily by a contingent, nonrecourse note, followed by
these transactions was to convert the ordinary income of the
business into capital gains for the seller while allowing the
tax-exempt organization eventually to acquire property with
to little or no investment of its own funds. The primary objection
they permitted an organization's tax exemption to benefit the
sale-leaseback arrangements involving borrowed funds was that
taxable seller, either by conversion of ordinary income into
capital gain income or by payment of a higher price for the
property than a taxable purchaser would pay.
Unfortunately, the 1950 legislation to tax income from
certain leases was insufficient to prevent abuse because
developed. In response to these new transactions, the unrelated
forms of transactions involving leveraged investments quickly new
to business income tax rules were strengthened in 1969 by subjecting
tax the income received from all kinds of debt-financed
property. This broad revision was designed to deal with all
organizations. types of abuses involving leveraged investments by tax-exempt
- 3 -
An exception to the debt-financed property rules was added to
the Internal Revenue Code by the Miscellaneous Revenue Act of
1980 (P.L. 96-605) for debt-financed real property investments of
pension trusts that satisfy certain conditions. Section 110 (b)
of that Act specifically stated that this exception was not to be
considered precedent for extending the exception to other exempt
organizations. The stated reason for providing this special
exception was that exemption for investment income of qualified
retirement trusts is an essential tax incentive which is provided
to tax-qualified plans in order to enable them to accumulate
funds to satisfy their exempt purpose -- the payment of employee
benefits. The reason for limiting the exception to investments
by pension trusts was that the assets of such trusts will
ultimately be used to pay taxable benefits to individual
recipients, whereas the investment assets of other exempt
organizations are not likely to be used for the purpose of
providing benefits that will be taxable at individual rates.
H.R. 676
H.R. 676 would provide an exception to the debt-financed
rules for investments in real estate by schools and certain
affiliated support organizations. However, the exception would
not apply to a real estate investment if --
(1) the acquisition price is not a fixed amount;
(2) the amount of any indebtedness, any amount payable
with respect to any indebtedness, or the time for making
any payment with respect to any indebtedness is
dependent uponithe revenue, income, or profits derived
from the real property;
(3) the real property is at any time after the acquisition
leased to the seller or to certain persons related to
the seller;
(4) the seller or any person related to the seller provides
nonrecourse financing in connection with the acquisition
of the real property and such debt is subordinate to any
other indebtedness on the property or bears a rate of
interest which is significantly less than the rate
available from an unrelated person.
The bill would apply to taxable years beginning after
December 31, 1982.
- 4 -
Discussion
The debt-financed property rules are intended to prevent the
use of an exempt organization's tax exemption for the benefit of
taxable persons. In the absence of the debt-financed property
rules, it would be much easier to provide benefits to taxable
persons through conversion of ordinary income to capital gain
income, through the payment of a higher price for property than a
taxable investor would pay, or through the transfer to a taxable
person of the tax benefits associated with an investment made by
a tax-exempt organization. We do not believe the provisions of
H.R. 676 would prevent these uses of a tax-exempt organization's
exemption for the benefit of a taxable person.
One possibility for abuse exists because the bill would
permit nonrecourse financing by the seller if the financing
provided is not subordinate to other debt on the property and the
rate of interest is not significantly less than the market rate.
These restrictions would not prevent the conversion of ordinary
income to capital gain income in the hands of the seller or the
payment of an inflated price for the property based on the exempt
organization's ability to receive rental income from the property
tax-free.
The bill also would create significant incentives for the
development of methods for transferring to taxable persons the
substantial tax benefits arising from leveraged real estate
investments by tax-exempt organizations. H.R. 676 contains no
provisions to prevent partnership allocations that would transfer
the tax benefits on a partnership's real estate investment from
tax-exempt partners to taxable partners. Through such
partnership allocations, taxable persons could obtain significant
tax deferral benefits and could convert ordinary income to
capital gain income in a wide variety of transactions. Indeed,
the possibilities for using partnership allocations to transfer
tax benefits from tax-exempt partners to taxable partners are SO
varied that it is doubtful that rules could be drafted to prevent
all abuses of this sort. Additionally, the bill would give
tax-exempt educational institutions an incentive to solicit and
accept gifts of real estate tax shelters that have passed the
"cross over" point at which the taxable income exceeds the cash
flow produced. Charitable contributions of such investments
would provide further tax advantages to the taxable investors.
The proponents of H.R. 676 argue that the investment needs of
schools are no different from the investment needs of pension
trusts, and therefore the exception to the debt-financed proper'
rules for pension trusts should be extended to schools. In
enacting the special exception for pension trusts, Congress
- 5 -
indicated that pension trusts were distinguishable from other
tax-exempt organizations because the purpose of the exemption for
pension trusts was to permit the accumulation of investment
income and because the assets of pension trusts are ultimately
taxed to pension recipients. In view of these distinguishing
characteristics, Congress considered it appropriate to provide a
special rule for pension trusts alone. In fact, the law as
enacted contains a specific statement that the exception for
pension trusts is not to be considered as precedent for any
further exceptions to the debt-financed rules.
While the distinctions drawn between pension trusts and other
tax-exempt organizations may be tenuous, we do not think that the
existence of a special exception for pension trusts justifies a
similar exception for schools. We see the same problems with the
pension trust exception as we have discussed concerning H.R. 676.
Since we do not consider the pension trust provision to be a
desirable exception to the debt-financed property rules, we
oppose expansion of that provision.
Furthermore, the arguments for expansion of the pension trust
exception to schools apply equally to other public charities, and
perhaps to all tax-exempt organizations. In addition, a broad
exception for debt-financed investments in real estate could be
used as precedent for adding exceptions for debt-financed
investments in other types of property. For example, the pension
trust exception has been used as a model for proposed legislation
(S. 1549) to provide an exemption for debt-financed investments
in working interests in oil and gas wells.
We also note that expansion of the pension trust exception to
educational institutions would result in a revenue loss of
approximately $200 million in fiscal years 1985 through 1987.
The Treasury Department believes that the debt-financed
property rules are sound and should not be narrowed by piecemeal
exceptions such as the one proposed in this bill for real estate
investments by schools. Enactment of the bill would create new
opportunities for abuses involving nonrecourse seller financing
and the transfer to taxable persons of tax benefits attributable
to investments by tax-exempt organizations. Accordingly, we must
oppose H.R. 676.
The Senate Finance Committee recently approved a provision
that would extend to certain educational institutions the
exception to the debt-financed property rules currently provided
for pension trusts. Under the Finance Committee provision,
however, the exception would not be available to either pension
trusts or. schools if financing was provided by the seller or a
party related to the seller, or if the debt-financed property was
- 6 -
acquired or held by a partnership in which taxable entities or
organizations which are not eligible for the exception are
partners. The Finance Committee provision thus significantly
reduces the opportunities for abuse. If the Congress decides to
expand the exception to the debt-financed property rules, we
would strongly support the inclusion of the restrictions
contained in the Senate provision.
Finally, we would like to bring to the Committee's attention
the possibility that pension trusts may avoid the currently
applicable restrictions on debt-financed property through
investments in qualified segregated asset accounts of insurance
companies. We would like to work with the Committee to ensure
that the rules cannot be avoided through the use of segregated
asset accounts or any other collective investment vehicle.
H.R. 2697
Increase in Standard Mileage Rate for Purposes of Computing
Charitable Contribution Deductions
Background
Under current rules the rate taxpayers are permitted to use
for computing the business expense deduction for use of an
automobile is 20.5 cents per mile for the first 15,000 miles.
( Above 15,000 miles, and for fully depreciated cars, the rate is
11 cents.) Taxpayers who use an automobile in connection with
performing services for charitable organizations presently may
use a standard mileage rate of 9 cents per mile in computing
their charitable contribution deductions. (Nine cents also is
the mileage rate used for/determining medical and moving expense
deductions). The reason for the difference in the two mileage
rates is that the standard mileage rate permitted for purposes of
the charitable contribution deduction reflects an allowance only
for gas and oil -- the only expenses actually paid in performing
the charitable service. On the other hand, the standard mileage
rate for business use of an automobile reflects an additional
allowance for depreciation, insurance, general repairs and
maintenance, and registration fees.
H.R. 2697
H.R. 2697 would amend section 170 of the Internal Revenue
Code to provide that the amount of the charitable contribution
deduction allowable for expenses incurred in the operation of an
automobile in performing services for a charitable organization
shall be determined at the same mileage rate used to compute
business expense deductions.
- 7 -
Discussion
Allowance of the lower mileage rate for purposes of the
charitable contribution deduction reflects the longstanding
administrative position that the only expenses for which
charitable deductions should be allowed are those actually paid
by the taxpayer in performing the charitable service. We believe
there are sound reasons for this administrative position, upon
which the different mileage rates are based. Accordingly, the
Treasury Department opposes H.R. 2697.
Section 170 of the Code allows a deduction for contributions
or gifts to, or for the use of, a qualifying charity only if
"payment is made within the taxable year." Because the Code
requires "payment," the charitable deduction of a taxpayer who
operates his vehicle in performing services for charity is
limited to the taxpayer's out-of-pocket costs. Since gasoline
and oil are the only items that the taxpayer buys to use solely
for the charity, the cost of gas and oil is the only automobile
expense that is properly deductible. This interpretation of the
law is carried out through the 9 cent mileage allowance.
The "payment" requirement contained in section 170, as it
applies to the use of automobiles, is appropriate because it is
difficult to quantify indirect costs that are properly
attributable to charitable use of automobiles. Charitable use of
automobiles typically accounts for a very small fraction of total
use. Because of this, the owner of the vehicle would incur most
costs attributable to owning his automobile whether or not he
used the car for charitable activities. An owner incurs the vast
majority of costs, such as depreciation in value, general
maintenance, and insurance, merely as a result of the increasing
age and the personal use of his car. Thus, such an owner should
not be considered as "paying" to or for the benefit of charity
costs that are largely fixed. While it may make sense to
allocate these costs on a strictly pro rata basis for business
vehicles, where a large portion of use often is business use,
such a pro. rata allocation does not reflect economic reality in
the charitable use setting.
Another reason for maintaining the "payment" requirement as
it applies to automobile use is to avoid setting an undesirable
precedent for determining deductions for charitable use of other
property. If charitable deductions were allowed for indirect
costs of operating an automobile, then similar deductions
logically should be allowed for charitable use of other property,
such as wear and tear on a home made available for occasional use
by a charity. If this were done, the IRS would be faced with
significant compliance problems.
- 8 -
It should be noted that the current charitable mileage
allowance causes no significant unfairness to taxpayers.
According to studies performed for the IRS, 9 cents per mile is a
generous estimate of the costs of gasoline and oil. In addition,
if a taxpayer's actual expenses for gasoline and oil in
performing services for charity exceed 9 cents per mile, he may
deduct allowance. the amount of his actual expenses in lieu of the mileage
Finally, increasing the charitable mileage allowance as
proposED in H.R. 2697 would reduce Federal revenues by an
estimated $445 million is fiscal years 1984 through 1987. These
revenue losses would increase each year. In view of current
Federal deficits, we strongly oppose this reduction in Federal
revenues.
H.R. 4114
Tax Treatment of Nonqualified Employee Stock Options
Background
Under present law, the tax treatment of employee stock
options generally is governed by section 83 in the case of
nonqualified options, or by section 421 in the case of options
granted pursuant to employee stock purchase plans meeting the
requirements of section 423, or incentive stock options meeting
the requirements of section 422A. Section 83 provides that the
value of a stock option constitutes ordinary income to the
employee when granted only if the option itself has a readily
ascertainable fair market value at that time. Employees
receiving options without a readily ascertainable value are taxed
when the option is exercised (or six months later, if the stock
is subject to certain securities law restrictions) on the
difference between the value of the stock at exercise and the
option price. The timing of the employer's deduction coincides
with the employee's recognition of income.
In the case of options granted under employee stock purchase
plans, there are no tax consequences upon either grant or
exercise of the option. Instead, provided that the option is
priced at at least 100 percent of the stock's fair market value
at the date of grant, and the employee meets special holding
period requirements, the employee is taxed when the stock is sold
at capital gain rates upon any fluctuations in the stock's fair
market value following the date of option grant. If the option
was priced at between 85 percent and 100 percent of the stock's
fair market value at date of grant, the employee is taxed upon
sale of the stock at ordinary income rates on the amount of ar
such discount (or, if less, on the difference between the fai
- 9 -
market value of the stock at the date of disposition and the
amount paid for the stock under the option), and at capital gain
rates on any gain in the stock's value over the fair market value
of the stock on the date of option grant. No business expense
deduction is allowed to the employer with respect to the grant or
exercise of an employee stock purchase plan option, although the
employer can claim a business expense deduction at the time the
employee disposes of the stock in the amount of any ordinary
income recognized at that time by the employee. In order for
these options to qualify for this special treatment, an employee
stock purchase plan by its terms must not grant options to any
employees who own (or possess options to purchase) more than 5
percent of the corporation, but must grant options on a
nondiscriminatory basis to all other employees (with the
exception of part-time employees, recent hires, officers,
supervisors, and highly compensated employees). In addition, the
option price must equal or exceed 85 percent of the stock's fair
market value at time of grant. Finally, no employee may purchase
more than $25,000 in optioned stock in any year.
In the case of incentive stock options (ISOS), there are no
tax consequences when the option is granted or when the option is
exercised (except for possible alternative minimum tax
consequences to the employee). If the employee holds the stock
for a special time period after exercise of the option, the
employee is taxed at capital gain rates when the stock is sold.
No business expense deduction is allowed to the employer with
respect to the grant or exercise of an ISO. In order to qualify
for this special treatment, an ISO must satisfy a number of
different requirements outlined in section 422A. For example,
the option price must equal or exceed the stock's fair market
value at the time of grant. No more than $100,000 in ISOs may be
granted to any employee in any year. ISOS must be
nontransferable, except by reason of death of the employee.
Finally, no ISO can be exercised while an earlier ISO is
outstanding.
H.R. 4114
H.R. 4114 would provide new rules for the tax treatment of
nonqualified stock options. Like current law, the difference
between the value of the stock at the exercise date and the
option price would constitute ordinary income to the employee,
and a corresponding business expense deduction to the employer.
However, unlike the current rules relating to nonqualified
options, the employee would be able (subject to the employer's
agreement) to defer recognition of ordinary income on the option
spread from the date of option exercise until the date of
disposition of the stock. The amount included in ordinary income
would not be affected by any appreciation or depreciation in the
- 10 -
value of the option stock after the date of exercise. Instead,
the amount included in ordinary income would be added to the
basis of the stock for purposes of determining capital gain or
loss from the disposition. The corporation's deduction would
also be deferred until the date of disposition of the option
stock.
We understand that the sponsors of H.R. 4114 have agreed to
certain amendments to the bill as introduced, which are designed
to limit the abuse of these tax-deferred nonqualified options by
highly compensated employees. These amendments would impose on
this new class of options certain limitations similar to those
affecting ISOs, including a $100,000 per year cap on the amount
of options granted to any employee and a requirement that the
options be exercised in the order granted.
Discussion
The Treasury Department strongly opposes H.R. 4114. This
bill would create an unnecessary exception from the rules of
section 83, by allowing an employee to defer tax indefinitely on
compensation paid in the form of stock transferred pursuant to
the exercise of an option which had no readily ascertainable fair
market value when granted. Section 83 currently allows an
employee who receives property in exchange for services to defer
recognition of income only until the lapse of any restrictions
upon the sale of such property. No employee should be allowed to
defer income recognition beyond the date on which he could sell
the property that is transferred to him. By providing yet
another means for highly compensated individuals to enjoy special
tax benefits, enactment of this bill would further undermine the
public's perception of the fairness of the income tax system.
In creating this tax deferral opportunity for employees who
exercise nonqualified stock options, H.R. 4114 admittedly
requires the employer corporation to agree to the corresponding
deferral of its deduction. However, in many cases the employer's
approval would not. be difficult to obtain, especially in the case
of key employees who likely would participate in the employer's
decision. Furthermore, such a joint election by the corporation
and its employee is likely to be filed only in situations where
there is a net tax savings as between the corporation and the
employee.
The additional limitations suggested by the sponsors of the
bill will not, in our opinion, eliminate abuse of this provision
by officers, shareholders, and highly compensated employees. If
these option programs are indeed intended (as the sponsors of
H.R. 4114 have asserted) for use by a broad-based cross section
of employees, then nondiscrimination rules must be added to th
- 11 -
bill, similar to the rules applicable to other statutory fringe
benefits. For example, no more than 25 percent of these options
should be provided to the class of employees who are owners of 5
percent or more of the stock, company officers, or employees
whose annual compensation exceeds two times the defined
contribution limitation for pension plans (currently $60,000).
The same percentage limitations should apply to employees
benefitting from elections by the employer to defer tax on option
exercise. In addition, to ensure further against abuse of these
provisions by highly compensated employees, the $100,000 annual
limit on option grants to any employee should be reduced by any
ISOs granted to the employee in that year, and any amount
deferred by reason of the election should be treated as an item
of tax preference for purposes of the individual alternative
minimum tax.
We also recommend that, like ISOs, these options should be
granted at a price not less than the fair market value of the
underlying stock at the date of grant, and that they be
exercisable during the employee's lifetime only by the employee.
Moreover, in order to avoid loss of revenues to the social
security system, we recommend that the bill be clarified to
insure that the option spread will be subject to both employer
and employee FICA taxes at the time of option exercise. (If
social security taxes were deferred as well as income taxes, and
if the stock received on exercise were sold after an employee's
termination of services, it is likely that both the employee and
employer could argue that no FICA taxes were owed after the
employee's retirement.) Finally, we recommend that the rules of
H.R. 4114 governing the deferral election by the employer and
employee be clarified to require that the election be filed
within a short period of time after exercise of the option. As
proposed in the bill, option stock covered by such an election
should either be retained by the corporation for the benefit of
the employee, or stamped with a restrictive legend or
stop-transfer instruction indicating that the corporation must be
notified of any transfer.
The above-described limitations would help ensure that this
new type of stock option would be made available to a
nondiscriminatory cross-section of employees. Nevertheless, even
if the bill were modified to include these limitations, we would
continue our opposition to this legislation.
- 12 -
H.R. 4357
Preferential Payments to
Certain Shareholders and
Golden Parachute Arrangements
Background
Recently there has been a significant amount of publicity
about corporate stock acquisitions in which a higher purchase
price per share is offered to large shareholders of the target
corporation than is offered to smaller shareholders. In
addition, there has been a great deal of publicity concerning
so-called "golden parachute" arrangements between corporations
anticipating the possibility of a hostile takeover attempt and
their key personnel. Typically these arrangements provide for
the payment of cash or property (frequently in excess of historic
compensation) to key executives in the event of a change (or
threatened change) in ownership or control of the employer
corporation.
H.R. 4357
H.R. 4357 would amend the Internal Revenue Code in two
respects to penalize the arrangements described above. First, in
the case of stock purchased for more than its fair market value
from any shareholder owning one percent or more of the voting
power of the corporation, the shareholder would include in gross
income as ordinary income any gain realized on the transaction,
and the company would be disallowed any deduction for any amount
attributable to the transaction. Second, a corporation would be
denied any deduction for payments under any management protection
agreement that discriminates in favor of officers, shareholders,
or highly compensated employees. An employee who enters into
such an agreement would include in gross income in the year of
termination of services the present value of all amounts
(including property) to be paid under the agreement.
Discussion
The Treasury Department cannot support H.R. 4357. We
question in general the necessity of addressing either type of
arrangement, troubling as they may be, through changes in the
income tax law. These arrangements can be addressed much more
sensibly and effectively by the Securities and Exchange
Commission and through state law limitations on corporate waste
and unequal treatment of shareholders.
- 13 -
H.R. 5028
Extension of Tax-Free
Group Legal Services Plans
Background
Effective for taxable years beginning after 1976 and before
1985, section 120 of the Internal Revenue Code provides an
exclusion from an employee's gross income for amounts contributed
by an employer to a qualified group legal services plan for
employees or their spouses or dependents. The exclusion also
applies to the value of any personal legal services rendered (or
reimbursements for such services paid) under the plan to an
employee, or to the employee's spouse or dependents. Section
501 (c) (20) provides tax-exempt status for any trust or
organization that functions exclusively to accept funds for, or
otherwise forms part of, .a group legal services plan.
In order to qualify for this exclusion, a group legal
services plan must meet a number of requirements. First, the
legal services must be provided for the exclusive benefit of
employees or their spouses or dependents. Second, the plan must
provide only "personal" legal services and cannot provide legal
services relating either to a participant's trade or business or
to the management, conservation or preservation of property held
for the production of income. Third, the employer must fund the
plan through prepayment of, or advance provision for, all or a
part of the legal benefits provided under the plan. These
prepaid employer contributions must be paid either (a) to
insurance companies or to organizations or persons that provide
personal legal services or indemnification against the cost of
such services; (b) to tax-exempt group legal service
organizations; (c) to other tax-exempt organizations that pay or
credit the employer contributions to a tax-exempt group legal
services organization; (d) to providers of personal legal
services under the plan; or (e) to a combination of the
above-listed permissable arrangements.
The fourth qualification requirement is that the plan must
not discriminate in either contributions, benefits, or
eligibility for enrollment, in favor of officers, shareholders,
self-employed individuals, or highly compensated employees. In
addition, no more than 25 percent of the plan contributions can
be provided to owners of more than 5 percent of the business (or
to their spouses or dependents). The final qualification
requirement is that the plan must apply to the Internal Revenue
Service for recognition of its satisfaction of all the
above-listed rules.
- 14 -
Code section 120 was enacted in 1976 in order to create a
means for employers to provide tax-free personal legal services
to their employees. The exclusion as originally enacted was
available only for taxable years ending before January 1, 1982,
but was extended through the end of 1984 by the Economic Recovery
Tax Act of 1981.
Prior to the enactment of section 120, any employer-provided
legal services were included in an employee's gross income.
Employees could then deduct only the cost of those legal services
rendered in connection with a trade or business or investment
property, or in connection with the determination, collection or
refund of any tax. By enacting section 120, Congress has created
a tax exclusion for otherwise nondeductible personal legal
services provided to employees through employer-funded plans.
This exclusion is in two respects more attractive to
employees than the deduction available for business-related legal
services. First, the exclusion applies to any employee receiving
legal services under the plan, whereas a comparable business
expense deduction generally would be available only to employees
who are able to itemize their deductions. Second, employer-
provided group legal services benefits are free from social
security taxes as well as from income taxes. No comparable
services. exclusion exists for wages used to pay business-related legal
Treasury opposed both the enactment of section 120 in 1976
and its extension in 1981, on grounds that equity requires that
compensation received in the form of personal legal services
(whether paid in kind or in cash) should be taxed the same as any
other type of compensation received by employees. Providing an
exclusion from income for employer-provided personal legal
services is contrary to the well established tax policy of
denying tax deductions for personal expenditures.
H.R. 5028
H.R. 5028 would eliminate the December 31, 1984 sunset of
section 120 and extend the provision permanently. The bill also
would continue the tax-exempt status of group legal services
organizations.
Discussion
The Treasury Department opposes H.R. 5028 for the same
reasons we opposed the enactment of section 120 in 1976.
Compensation paid in the form of legal services should be taxed
in the same manner as any other type of compensation received
employees. The existence of special exemptions for particula'
- 15 -
types of compensation only encourages employees to rearrange
their affairs so that compensation is received in a non-taxable
form. The restructuring of an employee's compensation package to
substitute nontaxable legal services for taxable compensation is
made easier whenever group legal services are offered as an
alternative to cash or other benefits under a cafeteria plan.
The exclusion for group legal benefits permits certain employees
to pay no tax on their personal legal costs, simply because their
employers operate qualified section 120 plans. This produces an
inequitable tax advantage for participants in group legal
services plans over all other individuals (who cannot deduct
their personal legal expenses). Moreover, even among
participants in any given section 120 plan, the tax exclusion
provides the greatest tax benefits to participants with the
largest incomes.
We also are concerned that both the rules granting tax-exempt
status to group legal services organizations and governing
employer deductions for contributions to such organizations
provide unwarranted tax advantages. The tax exemption accorded
to the income of group legal services organizations reduces both
the income and social security tax bases and thus requires higher
tax rates to be imposed on other forms of income. Furthermore,
the current rules governing an employer's deduction for
contributions to a group legal services organization provide an
employer with excessive discretion in determining the level of
deductible contributions that may be made for any year. The
result is that an employer -- particularly a closely held
company -- may. be able to use such an organization as a
tax-favored savings account for its own and its key employees'
benefit.
For these reasons, we oppose the extension of the exclusion
from gross income for payments to or under qualified group legal
services plans and the tax exemption for group legal services
organizations.
That concludes my prepared remarks. I would be happy to
answer any questions you may have.
THE WHITE HOUSE
WASHINGTON
October 10, 1984
MEMORANDUM FOR KATHERINE SHEPHERD
PRESIDENTIAL CORRESPONDENCE OFFICE
FROM:
FRED F. FIELDING Orig. signed by FFF
COUNSEL TO THE PRESIDENT
SUBJECT:
New Items From the Boehm Studios
By memorandum dated September 20, 1984, you requested
guidance on a reply to a letter to the President from Mrs.
Helen F. Boehm. I have prepared a reply to Mrs. Boehm, for
my signature. If you agree, I will send it.
Attachment
FFF: JGR:aea 10/10/84
CC: FFFielding/JGRoberts/Subj/Chron
THE WHITE HOUSE
WASHINGTON
October 10, 1984
Dear Mrs. Boehm:
Thank you for your letter of September 17, 1984 to the
President. That letter and the accompanying materials raise
certain legal questions, and accordingly the letter has been
referred to this office for consideration and direct reply.
We are concerned that featuring the quotation from the
President on the brochures for "The Great American Heritage
Collection" could contravene established White House policy
on commercial endorsements. The White House adheres to a
policy of not approving any use of the President's name,
likeness, signature, or photograph in any manner that
suggests or could be construed as an endorsement of a
commercial product or enterprise. I am certain that you
will readily appreciate the need for this policy. In this
instance, there is the danger that the use of the quotation
of the President to introduce your new collection could be
misinterpreted by some as an endorsement of the collection
by the President. Accordingly, I must ask that you not use
the quotation or the President's name on the brochures. I
hope that you will understand why we must make this request,
and also that it in no sense constitutes an adverse reflection
on the exciting new collection featured in the brochure.
You also expressed your hope in your letter that the collection
could be used in some way to raise funds for the party.
There are of course various rules and regulations governing
political fundraising, so any particular proposal you have
in mind would have to be carefully reviewed prior to implemen-
tation to ensure compliance with all applicable laws. If
you have any questions, please do not hesitate to contact
this office, or counsel for the party, as may be appropriate.
Thank you for sharing your plans for this new collection
with us.
Sincerely, Orig. signed by FFF
Fred F. Fielding
Counsel to the President
Mrs. Helen F. Boehm
25 Fairfacts Street
Trenton, NJ 08638
FFF:JGR:aea 10/10/84
CC: FFFielding/JGRoberts/Subj/Chron
THE WHITE HOUSE
WASHINGTON
October 10, 1984
MEMORANDUM FOR FRED F. FIELDING
FROM:
JOHN G. ROBERTS MR
SUBJECT:
New Items From the Boehm Studios
Katherine Shepherd of Presidential Correspondence has
referred to you a letter to the President from Mrs. Helen F.
Boehm, of the Boehm porcelain company. Shepherd states that
Mrs. Boehm is a friend of the Reagans. In her letter Mrs.
Boehm advises that a quotation from a Labor Day address of
the President -- "to make America great again and let the
Eagle soar" -- has inspired a new line of Boehm china,
featuring patriotic eagles. She enclosed with her letter a
mock-up brochure promoting the new line, prominently fea-
turing the President's quotation and identifying the source.
Mrs. Boehm wrote that she hopes "The Great American Heritage
Collection" "can be utilized to aid the party in raising
some important dollars for the Republican Inaugural
Committee."
The brochure as presently designed may convey the false
impression that the President has endorsed "The Great
American Heritage Collection." This would not only contra-
vene established White House policy concerning endorsement
of commercial products, but also, given this particular
pattern, call into serious question the President's taste in
dinner service. Of course, only the former point need be
made in the reply to Mrs. Boehm. The attached draft reply
also raises a cautionary note about use of the collection to
raise funds for the party. Since Mrs. Boehm is reportedly a
personal friend of the Reagans, I have prepared a memorandum
to Shepherd in order that the proposed reply may be reviewed
by her office before being sent.
Attachment
ID# 248062
THE WHITE HOUSE
CORRESPONDENCE TRACKING WORKSHEET
INCOMING
DATE RECEIVED: SEPTEMBER 20, 1984
NAME OF CORRESPONDENT: MRS. HELEN F. BOEHM
SUBJECT INFORMS OF CREATION OF NEW ITEMS FROM THE
BOEHM STUDIOS AND FORWARDS MOCK-UP OF
BROCHURE
ACTION
DISPOSITION
ROUTE TO:
ACT
DATE
TYPE C COMPLETED
OFFICE/AGENCY
(STAFF NAME)
CODE YY/MM/DD RESP D YY/MM/DD
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KATHERINE C. SHEPHERD
ORG 84/09/20
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KEEP THIS WORKSHEET ATTACHED TO THE ORIGINAL INCOMING
LETTER AT ALL TIMES AND SEND COMPLETED RECORD TO RECORDS
MANAGEMENT.
244062
BOEHM
BOEHM
International Creators of Porcelain Art
September 17, 1984
President Ronald Reagan
THE WHITE HOUSE
1600 Pennsylvania Avenue
Washington, D.C. 20006
Dear Mr. President:
Your quote
...
"to make America great again and let the Eagle soar,"
made on Labor Day in California has generated some ideas in our
minds as to a way to help the Republican Party attain its goals.
Enclosed is a mock-up of a brochure -- "The Great American Heritage
Collection" -- by the Boehm Studios that has been put together
to reflect the upsurge of patriotism you are fostering. We are
proud of the collection and hope it can be utilized to aid the
Committee. party in raising some important dollars for the Republican Inaugural
I will be writing to the proper people on your staff regarding the
logistics of working together but wanted you to see the brochure
immediately.
Keep up the good work as we here at the Boehm Studios rely a great
deal on your leadership in keeping America proud, great, safe, and
prosperous.
yours,
Helen Respectfully F. Boehm Border and sincerely
HFB/dk
encs. 2
U.S.A.-Trenton: Edward Marshall Boehm, Inc., 25 Fairfacts St., Trenton, N.J. 08638, Telephone: (609) 392-2207, Telex: 510-681-8407
New York: Boehm Showroom, 41 Madison Ave., Fourth Floor. 4-B, New York, NY 10010, Telephone: (212) 679-2861
England-Boehm of Malvern England Ltd., Tanhouse Lane, Malvern WR14 1LG, England, Telephone: (0886) 32111, Telex: 338759 Boehm G.
THE WHITE HOUSE
WASHINGTON
Date:
9/20/84
To:
Fred Fielding
Although I know that Mrs. Helen Boehm is a friend
of the Reagans, I thought that the attached
should be brought to your attention. Please
note the proposed brochure on the Golden Eagle
in which the President is quoted. (I also note
that the piece will be cast by an English firm
of silversmiths.) I want to make sure that any
response to Mrs. Boehm from the President will
not constitute an endorsement of the Edward Marshall
Boehm Studios in general or that particular
sculpture.
Thank you for your help.
KATHERINE SHEPHERD
Presidential Correspondence
Office
Room 98, x7610
THE WHITE HOUSE
WASHINGTON
October 12, 1984
MEMORANDUM FOR FRED F. FIELDING
FROM:
JOHN G. ROBERTS FJR
SUBJECT:
Request for Permission to Declare
October 13-21 Child Abuse Awareness Week
Brother John Foster, Director and Founder of the Kids for
Christ Foundation of Portsmouth, Ohio, has written Merrie
Spaeth to ask for permission from the President to declare
next week, October 13-21, Child Abuse Awareness Week in
Portsmouth. The week was chosen because there will be a
seminar on the subject in Portsmouth at that time. Foster
is requesting Presidential permission because some misguided
bureaucrat in the city manager's office told him it was
required.
Portsmouth, of course, can have any week it wants without
Presidential permission. Congress and the President have in
fact acted in this area: Congress passed Public Law 98-230,
which the President signed on March 12, designating April
1984 as "National Child Abuse Prevention Month." The
appropriate proclamation was issued on April 3. The attached
letter advises Foster that no Presidential permission is
required for the activities he has planned, and also advises
him of the action taken in April at the Federal level.
Attachment
THE WHITE HOUSE
WASHINGTON
October 12, 1984
Dear Brother Foster:
This responds to your letter of October 4, 1984, to Merrie
Spaeth of the White House staff. In that letter you reviewed
have planned for October 13-21 in Portsmouth. You stated
some of the activities to promote child abuse awareness you
that you had been advised that you needed permission from
the President before designating that period Child Abuse
Awareness Week in Portsmouth.
No such permission from the President is required for a
local program of the type described in your letter. It is
true that the President, from time to time, issues proclama-
tions calling upon all Americans to observe a particular
day, week, or month, but those proclamations are nation-wide
and are typically issued in response to a joint resolution
passed by Congress. For example, and of particular interest
in the present context, the President signed a proclamation
on April 3 of this year designating April 1984 as "National
Child Abuse Prevention Month." The proclamation was authorized
and requested by Congress pursuant to Public Law 98-230,
which the President signed into law on March 12, 1984.
have enclosed for your information a copy of this proclamation. I
This proclamation, and the wide range of other steps the
Administration has taken in this area, demonstrate our
commitment to do everything we can about this tragic problem.
program. Thank you for your inquiry, and best of luck with your
Sincerely,
Orig. signed by FFF
Fred F. Fielding
Counsel to the President
Brother John D. Foster
Director & Founder
Kids for Christ Foundation
P.O. Box 1049
Portsmouth, Ohio 45662
FFF: JGR:aea 10/12/84
CC: FFFielding/JGRoberts/Subj/CHron
bcc: Merrie Spaeth
Media Relations
ID # 200380 CU
WHITE HOUSE
Hf
JV
CORRESPONDENCE TRACKING WORKSHEET
0 . OUTGOING
H . INTERNAL
I - INCOMING
Date Correspondence
Received (YY/MM/DD)
/
/
John D. Foster
JGR
Name of Correspondent:
MI Mail Report
User Codes: (A)
(B)
(C)
Subject:
Requests funession to declare October 13th
through week October 21st Child abuse awareness
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CUltolland
ORIGINATOR
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FOR OUTGOING CORRESPONDENCE:
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5/81
KIDS FOR CHRIST FOUNDATION
P.O. Box 1049
yoi-
Portsmouth, Ohio 45662
265380
E
Bro. John D. Foster
Director & Founder
Office:
Residence:
1-614-858-6976
October 4, 1984
Mrs. Marry Spaeth
Director Of Media Relations
Room 164 O.E.O.D.
Washington, DC 20500
Dear Mrs. Spaeth,
We are sending you this letter to ask for permission to declare
October 13th through October 21st Child Abuse Awareness Week in
our city, Portsmouth, Ohio and/or County of Scioto.
The Honorable Bob McEwen is sending us a U.S. Flag, which is being
flowen over the White House in memory of children who have died over
the years because of Abuse, to be flown at half mast in our city
during the week of the 13th.
Our Honorable Juv. Judge James Kirsch thought this would be a good
week for us to do this because of the Seminar going on in our area
during the week of the 13th.
We have singing groups ready, Eagle Scouts to post the colors and
we are trying to get a dinner togather to honor the Republican
Candidates.
We have everything set up and permission from our City Managers
Office and they called us today and said we must have permission
from our President before we could do it. Please call us as soon
as possible to let us know what to do. We have a lot of work in
this event and we would appreciate anything you can do to help us.
Please forgive us for not asking sooner. We didn't know. May God
bless you.
will Director & Founder
Sincerely,
Bro John D. Foster
"There Is No Excuse For Child Abuse"