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November 25, 2013
News Analysis: The Tax Pros and Cons of Being a Communist
Joseph J. Thorndike

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When the Cold War ended in the late 20th century, it left behind a few footprints in the tax system. Specifically, the Internal Revenue Code still features some stray provisions designed to make life difficult for Communists.

In a recent article for Politico, Brian Faler identified one of these "tax oddities": the FICA tax exemption for employees of Communist organizations.1 It's not the only Cold War holdout in the code; the law continues to disallow deductions for charitable contributions to those same groups. But the FICA exemption does have a colorful legislative history, featuring the benefit checks of an aging Marxist ideologue jailed during the Red Scare of the 1950s.

Code section 3121(b)(17) provides that Social Security taxes must not be withheld from wages earned for "service in the employ of any organization which is performed (A) in any year during any part of which such organization is registered, or there is in effect a final order of the Subversive Activities Control Board requiring such organization to register, under the Internal Security Act of 1950, as amended, as a Communist-action organization, a Communist-front organization, or a Communist-infiltrated organization, and (B) after June 30, 1956."

Enacted as part of the Social Security Amendments of 1956, that provision was designed to deny Communists the benefits of a society they claimed to reject. It was the legislative expression of popular outrage about one particular Communist, Alexander Bittelman, who was receiving Social Security checks while serving time in a federal prison for advocating the overthrow of the U.S. government.

"Red Inmate Gets $88.10 Monthly Security From Hand He Tried to Bite," proclaimed The Washington Daily News on October 27, 1955.2 "The $88.10-a-month payment is made to the 65 year-old Mr. Bittelman under the Government's old-age insurance program. He can cash the check and spend the money, and furthermore, it isn't subject to income tax."

Bittelman was sending $76 of each check to his wife, who had no other source of income.3 But her plight did little to soften the outrage of Bittelman's jailers, and the warden at his prison notified authorities of the apparent injustice.

Bittelman was not the most famous of American Communists, but he was a founder of the American Communist Party. He immigrated to the United States from the Soviet Union in 1912, and during the first half of the 20th century was a leading figure in the party's development, considered one of its leading intellectuals by many.

Federal authorities pursued Bittelman vigorously, especially after the end of World War II. In 1948 Time reported on the arrest of the "bespectacled and intellectual" Communist, who was nabbed while vacationing in Miami.4 In 1953 he was actually convicted of advocating the overthrow of the U.S. government, a crime under the Alien Registration Act of 1940 (as well as other statutes). He was jailed pending deportation to the Soviet Union.

After his conviction, Bittelman continued to receive his Social Security benefits, because federal law provided no means of stopping them. To do that, Sen. John Williams introduced legislation to terminate the benefits of anyone convicted of treason, sabotage, espionage, sedition, subversive activities, or similar crimes specified in the Internal Security Act of 1950.

Williams offered his amendment in the Senate Finance Committee, which was drafting new Social Security legislation. But as the panel mulled the provision, the Eisenhower administration's Bureau of the Budget (the forerunner of the Office of Management and Budget) weighed in with concerns. In a letter to Finance Committee Chair Harry F. Byrd, bureau Director Rowland Hughes acknowledged that giving benefits to traitors seemed perverse. "These are heinous crimes, of course, and the perpetrators deserve little consideration," he wrote. "It follows that any gratuitous Government benefit or award quite properly might be withheld from such persons."5

But unfortunately, Social Security checks were not a government gratuity. "It has always been stressed by the Congress that old age and survivors insurance is not a Federal bounty, but rather a separate self-financed system of insurance, the costs of which are shared equally by employer and employee," Hughes pointed out. "That benefits are assured as a matter of statutory right; that the Federal government is merely a trustee of the system and not a contributor."

The Williams amendment seemed to violate those bedrock principles of the Social Security system. Hughes warned that "if enacted, it might be taken as a precedent for departures in other directions from the independent character of OASDI [Old Age, Survivors, and Disability Insurance], with consequences that could go considerably beyond the limited purpose of the amendment."

The Department of Health, Education, and Welfare chimed in with additional warnings. Social Security was funded entirely by employee and employer contributions -- "there is no contribution from general tax revenues," observed department Secretary Marion B. Folsom. But if someone convicted of sedition were to have their benefits withdrawn, he might fall into poverty and end up applying for public assistance, and the cost of that assistance would be borne by the taxpayer.6

Folsom acknowledged that federal law already limited benefits in a few circumstances, including some cases of deportation and incidents of subversive activity by government employees. But those exceptions were narrowly drawn and did not apply to Bittelman. The Williams amendment, by contrast, constituted a "broad departure" from existing practice and principles and should therefore be rejected, Folsom concluded.

Byrd took those concerns to heart, and the Finance Committee passed over the Williams amendment in drafting the Social Security Amendments of 1956. But when Williams offered his amendment again, this time on the Senate floor, Byrd agreed to take it to conference with the House.

Ultimately, Congress found several ways to stop the flow of benefits to Communists. The final bill swept aside concerns about whether Social Security was an earned right, granting judges the right to terminate benefits for those convicted of subversion and similar crimes.7

But the bill specified that employees of Communist organizations were simply ineligible for Social Security in the first place. Those employees would get no credit for wages earned in the service of any organization registered under the Internal Security Act of 1950 as a "Communist-action organization, a Communist-front organization, or a Communist-infiltrated organization." Nor would they pay FICA withholding taxes on those wages.

That latter provision found its way into the code, where it joined a long list of other FICA exemptions. And it has remained in the code ever since, surviving past attempts to prune deadwood.

The provision seems to have been rendered meaningless by repeal of the Communist Control Act of 1954. But its continued existence leads to some irresistible musing about how it might still operate. For instance, Libin Zhang -- a tax lawyer at Roberts & Holland LLP who deserves credit for unearthing this anachronism in a 2013 blog post8 -- has wondered if it might prove popular among a new generation of Communists:


    What was a penalty in the 1950s might be a blessing today. Younger employees nowadays might prefer to forgo paying the Social Security Tax and give up on the fragile likelihood of receiving Social Security checks in their retirement. The employers would also save some money on their Social Security contributions.

Unfortunately, it's not clear how those eager nonparticipants would claim their right to a FICA exemption, because the Subversive Activities Control Board disappeared during the Nixon administration. Perhaps it might work for people employed by organizations that were once registered as Communist organizations.9 Alternatively, Zhang suggests, "an employer could voluntarily send in a registration form and see how it goes."

FOOTNOTES

1 Faler, "Tax Oddities Live On Amid Budget Impasse," Politico, Nov. 6, 2013.

2 The text of that article was entered into the Congressional Record by Sen. John Williams. For the article, accompanying floor comments, and the text of other related documents, see Appendix A of the House Ways and Means Social Security Subcommittee, "Social Security Benefits for Prisoners," U.S. Government Printing Office, 1980, at 13-17.

3 William L. O'Neill, American High: The Years of Confidence, 1945-1960, New York: Free Press, 1989, at 162-163.

4 "Communists: Gentleman, Very Timid," Time, Jan. 26, 1948, available at http://content.time.com/time/magazine/article/0,9171,779601,00.html.

5 House Ways and Means Committee, "Social Security Benefits for Prisoners," at 16.

6 Id. at 16-17.

7 Charles I. Schottland, "Social Security Amendments of 1956: A Summary and Legislative History," Social Security Bulletin, Sept. 1956, at 3.

8 Zhang, "Tax Break for Employees of Communist Fronts," The Best Tax Loopholes of the Internal Revenue Code, Jan. 30, 2013, available at http://taxloops.blogspot.com/2013/01/tax-break-for-employees-of-Communist.html.

9 Detlev F. Vagts, "Repealing the Cold War," American Journal of International Law, July 1994, at 510.


END OF FOOTNOTES