Hamill: Vague ‘DEI’ rules let federal Department of Justice punish tax-exempt groups unfairly

During a lengthy career as a tax adviser, the tax planning idea I have dealt with more than any other is how to classify someone as an investor rather than a dealer.

Except for a brief period between 1988 and 1991, the United States has taxed capital gain income more favorably than ordinary income.

Dealers report gains from the sale of real estate as ordinary income. Investors report the same income as capital gain.

The law speaks to this important issue. It presumes gains to be capital unless they fall within one of several exceptions.

The exception that matters is, “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”

We argue the meaning of these words. First, is the taxpayer in a trade or business? That has been the focus of many conflicting court decisions.

Second, is the nature of that business selling real property? A business could instead be renting real property.

Third, was the sale to a customer of that business selling real property? Perhaps the buyer in a particular case was not a “typical” customer.

Fourth, was the sale in the “ordinary” course of that trade or business. Perhaps it was part of a plan to liquidate the business through a bulk sale. Is that ordinary?

Fifth, was the property held “primarily” for sale. Perhaps sale was one thought the taxpayer had, but there may also have been others. Which is primary?

Laws can only be interpreted by looking to the meaning of the words used in the statute.

Taxpayers have enjoyed moderate success in the dealer-investor litigation arena by parsing the meaning of the words used in the statute.

This is why we have courts. Laws are seldom as clear as people think. Courts try to create a balance between the rights of the parties and to reach a “fair” outcome.

It would be bad policy if the United States adopted rules that allowed an administrative body to interpret the words of a law without judicial oversight.

The U.S. Department of Justice has directed that tax-exempt organizations be investigated for “illegal DEI” practices.”

The purpose of this investigation would seem to be the denial of tax-exempt status to organizations that use these prohibited DEI practices.

First, just to be on the same page, DEI stands for diversity, equity, and inclusion. The DOJ memo refers to “illegal” DEI practices.

Working backwards, inclusion refers to being part of a group. A policy of inclusion would presumably guarantee that all people are included, even those with disabilities.

Equity is a policy of being fair and just. Being inclusive is one part of being fair and just.

One of my daughters is a special education teacher. Her students have severe disabilities. This year, her four students are all nonverbal. They are all in wheelchairs.

Once a year, I go to her school to speak on career day. My daughter always brings one of her students to the classroom presentation.

Her special-ed student gets to participate. More importantly, I feel, the other students get to see that the student is included as part of the group.

There is nothing worse than the feeling that people do not see you. Inclusion of the special-ed students allows them to be seen. It allows others to see them.

This is only fair, equitable. The inclusion of these special ed students creates a diverse educational environment to the benefit of all.

I suspect people agree with my example. So, what’s the DEI fuss? Well, I suppose the DOJ says, it is that “illegal” DEI that must be stopped.

I do not think the DOJ memo writers even consider what I describe to be DEI. They, I suspect, have their own definition.

DEI is not well defined. Illegal DEI is even less defined. But the DOJ plans to target the tax exemptions of organizations based on this language.

The loss of the tax exemption can be challenged in court after it has been revoked. It may be too late to recover from the loss of the exemption.

I wonder what we are trying to accomplish by attacking organizations established to benefit the public, using words that we can’t even agree on the meaning.