Why is the Chief Executive of the U.S. the only executive who can evade taxes?

Why is the Chief Executive of the U.S. the only executive who can evade taxes?

“Taxes are supposed to hurt,” Ronald Reagan once said. It is a pain shared to a greater extent by business executives across the United States. Oddly enough, the one executive who gets a bye on evading his filing obligations is the one charged with enforcing the laws, namely the Chief Executive. Indeed, this is not an indictment of President Obama; it applies with equal force to his predecessors, including the aforementioned Mr. Reagan.

The reason for the evasion and the disparate treatment stems from the oddities of one part of the tax law, namely that dealing with state taxation.

In addition to filing federal tax returns, Americans file state income tax returns to their state of residence, as well as nonresident income tax returns in all jurisdictions from which they derive income. The derivation of income is broadly defined in the state tax codes as encompassing anyone who spends any time (even a day) within the state in furtherance of his job functions. Thus, an example in the New Jersey law provides that a New York employee of an accounting firm visiting a client in New Jersey must file in the Garden State. A CEO visiting nine states where he has plants has nine filing obligations. And so on.

Indeed, there are numerous instances of state auditors targeting unwary execs with minimal presence in a state. In cases of failure to file, penalty imposition is epidemic, even if the lapse is unwitting. Ignorance of the law is no excuse.

One of the 2016 presidential candidates embodied this fact of a multiplicity of filings. In one of the most comprehensive disclosures made, former GOP candidate Carly Fiorina divulged that she and her husband filed in 17 states in 2013.

Now consider the president. His most recent disclosures indicated federal and Illinois returns (Chicago being the Obamas’ jurisdiction of residence). Yet the president, any president spends time in a multiplicity of states: a speech to the United Nations in New York; surveying flooded areas in Louisiana; stumping for a congressional vote in California.

Yet, while the law requires multiple filings, that has not been the case for the president and his immediate predecessors. More to the point, there has been no audit activity compelling compliance, despite the stern efforts directed against non-political executives (or those with multistate activity, such as athletes and entertainers).

Of course there are safeguards against a president (or other executive) being saddled with double taxation. The state income tax laws provide for sourcing income to each state based on the ratio of working days spent in said state to total performance days, and there is a credit mechanism to allow offsets in the resident state. Rather, the headache is one of unduly burdensome compliance.

It must be acknowledged, there is no thought that the president’s lapse is willful. However, as noted above, ignorance of the law is no excuse. Nor is the president immune by virtue of being commander-in-chief. In an old case involving Franklin Roosevelt’s estate, it was made clear that the president is not a member of the military, whose members generally receive preferential tax treatment at the state level but is taxed as a civilian.

There are fixes. Congress under the Constitution’s commerce clause has the power to co-opt the area and legislate an exemption to officers of the federal government (though with the current factionalized Congress, fat chance of that happening). The states could provide exempt treatment to the Chief Executive. In fact the District of Columbia has a tax provision that exempts nonresident elected and appointed officials from tax filings. However. in the absence of said fixes, the legal requirement of multiple state tax filings for the chief executive remains.

The problem goes well beyond any elected official. Disparate enforcement of the tax laws compromises state enforcement. How can one justify penalty imposition of a corporate executive, when the Chief Executive is shown preferential treatment? Moreover, for a system built upon voluntary compliance by citizens, what effect does unequal enforcement have?

To ask the questions is to already have answered.

Kenneth T. Zemsky

Kenneth T. Zemsky

Kenneth T. Zemsky is a managing director of Andersen Tax and teaches tax law at Rutgers University. He is the author of the recently published novel, "The Nation’s Hope," which focuses on the 1965 New York City mayoralty campaign. You can follow him at KennethTZemsky.com


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