Stanford Law professor Michael McConnell thinks so.  From today’s Wall Street Journal:  “As part of the hastily enacted and seldom-read legislation establishing the Troubled Asset Relief Program (TARP), Congress authorized the Secretary of the Treasury to “require each TARP recipient to meet appropriate standards for executive compensation.” To carry out this task, last June the Treasury promulgated an emergency “Interim Final Rule,” waiving ordinary requirements for a public comment period.

As part of this emergency rule, Treasury Secretary Timothy Geithner created the office of “Special Master” for compensation, delegated his TARP authority to set compensation standards to this officer, and appointed Mr. Feinberg (a lawyer and mediator) to this position, without obtaining Senate confirmation.

Therein lies the problem. The Appointments clause of the Constitution, Article II, section 2, provides that all “Officers of the United States” must be appointed by the president “by and with the Advice and Consent of the Senate.” This means subject to confirmation, except that “the Congress may by Law vest the Appointment” of “inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

Much is being made of the “US Pay Czar,” Kenneth Feinberg’s, effort to limit executive compensation at firms that have not re-paid TARP funds.  Feinberg plans to force 175 corporate executives to cut their salaries by 90%.

A Wall Street Journal article suggests that Feinberg won’t stop at limiting salaries:

“Mr. Feinberg will also demand a series of corporate governance changes at the firms, including splitting the chairman and CEO positions, requiring boards of directors to create “risk” committees and eliminate staggered board elections, which critics charge inhibit change.”

Feinberg’s pay restrictions will be ineffective in achieving their desired goals.  Many executives who face a 90% pay cut will simply leave their firms.  But further federal intervention into corporate governance is troubling.  Corporate law has been a long been the domain of States.  So any federalization of permissible takeover defenses represents a huge shift in the power toward Washington and away from more local government. 

More importantly, staggered board elections operate as a takeover defense to prevent hostile bidders from acquiring control of the company.  The legality of the anti-takeover measures (such as the staggered board) evolved out of several high-profile Delaware Chancery Court cases in the 1980’s.  Like them or not, anti-takeover defenses yield substantial benefits to shareholders. Indeed, having a staggered board allows managers to negotiate harder and extract a higher price for the shareholder. 

Corporate governance is not likely to improve with the elimination of staggered boards.  Activist shareholders will be better equipped to challenge management - but there is no guaranty that these activist shareholders will yield more stable financial institutions.  Indeed, some acquirers may ratchet up leverage and use the company to take riskier bets in the marketplace than the old management.  As the same time, shareholders (and a nation of 401k holders) will suffer as their shares have a lower total value to potential acquirers.

The sights are off on the Second Amendment debate as both sides miss the target strictly for political reasons. The debate takes aim at personal and home defense by the law-abiding and the competing rights of criminals, ignoring the rights of the people to ensure the security of “free” States. Thus, in another politically-charged 5-4 opinion, District of Columbia v. Heller, and its later interpretation, both sides continue to overreach and ignore facts, then decry each other for doing exactly that, as I have noted in my previous blogs on these partisan opinions.

The Right consistently overplays its hand to excite political passions by claiming the Second Amendment secures law-abiding citizens’ ability to have guns to defend themselves and their homes against criminals. If this tack cannot mobilize conservatives, nothing will. The Left likewise overreaches to excite political passions by invoking circular reasoning to abrogate any right to keep and bear arms and thus allow gun bans purportedly to protect innocent bystanders, including “the children.” If this tack cannot mobilize liberals, nothing will.

Despite the urgings of the Heller majority, the Second Amendment is not rooted in personal and home defense but ensures only that “the people” have armed militias ready to protect the security of free States (particularly where police cannot or simply will not). The best modern example of this is New Orleans after Katrina, where police either evacuated or were overwhelmed and thus could not provide security for that portion of the free State of Louisiana. (Only because rampant criminals threatened security there was personal and home defense involved.) The people who remained, without police and effectively having been disarmed, were unable to invoke their militia to provide security and instead had to wait days for the US military to do so. This is exactly why militias always are necessary and exist in at least inchoate form.

Willfully ignoring this example, the Heller dissents quickly dismiss such state militias as “obsolete” and no longer in existence, disposing of any constitutional right of the people to keep and bear arms. Yet constitutional rights are not so fleeting, which is why amendments are so difficult to pass. (Indeed, if imaging technology eventually obviates physical searches, will these dissenters likewise dismiss as “obsolete” the right against unreasonable physical searches?) This hasty disposition of state militias enables the specious claim that the right to keep and bear arms relates only to military action and thus cannot be infringed only as to that purpose. Yet without state militias, the only possible military action is under the federal government, meaning the only guns it cannot take from the people are those used in serving its own military. But the Bill of Rights guarantees rights of the people against the federal government. The dissents even note that the Second Amendment was written out of fear that a federal standing army (which, of course, police never would fight against) could threaten the security of a free State.

The more sound reasoning is that the principally controlling plain language of the Second Amendment guarantees the right of the people to keep and bear arms for having state militias ready to provide security for their free States (or portions thereof) when the people’s security “proxies” can or will not. It is not hard to fathom an Al Qaeda cell storming a municipality and overwhelming local police, leaving a disarmed people helpless until other police and US military can arrive. There, the militia will be the first responders with the best chance of stopping the carnage that likely would ensue before other police or US military could respond. And with the right to keep and bear arms ensuring militias are ready for such security purposes, those arms will be available also to defend ourselves and our homes against criminals and otherwise.

Could an employer find a noose hanging in the workplace, receive a complaint from its only African American employee that a coworker has threatened him and his family, conduct an investigation without uncovering the identity of the perpetrators of either incident and still avoid Title VII liability?  The answer is YES so long as the employer takes prompt and reasonable action to prevent the coworker harassment from recurring.   See Porter v. Erie Foods Int’l Inc., 7th Cir., Case No. 08-1996 (Aug. 7, 2009).

The Porter decision demonstrates that in order to avoid Title VII liability for coworker harassment, the employer’s managers/human resources personnel should at least take the following steps:  (1) inform their own supervisors of the harassment allegations; (2) conduct a prompt and diligent investigation to find out who is responsible; (3) remind all employees of the company’s anti-discrimination policies; (4) follow up with the complainant on a regular basis in efforts to obtain additional information and attempt to shield the complainant from any future harassment (e.g., by offering him/her to work a different shift).  In reaching its decision, the Seventh Circuit Court of Appeals emphasized that “a prompt investigation is the hallmark of a reasonable corrective action,” which based on the facts of this case translated into a 24-hour rule.  

Furthermore, the Court noted that in assessing the reasonableness of the employer’s corrective action, “the focus is not on whether the perpetrators were punished by the employer, but whether the employer took reasonable steps to prevent future harm.”  Needless to say, those “reasonable steps” will vary based on the specific facts of the situation being addressed.

The Court’s decision also illustrates that in determining whether a plaintiff is constructively discharged on the basis of one of the protected categories under Title VII, the courts not only consider the egregiousness of the harasser’s conduct but also the reasonableness of the employer’s response.  In Porter, the Court indicated that the plaintiff’s allegations of repeated use of a noose combined with implied threats of physical violence were egregious but that because the employer had “a means in place for remedying complaints of workplace harassment” and conducted a diligent investigation, the employer was able to defend itself successfully against the plaintiff’s constructive discharge claim.

In Ricci v. DeStefano, the U.S. Supreme Court ruled that the City of New Haven, Connecticut (”City”) improperly discriminated on the basis of race when it set aside the results of a firefighters’ promotion test on which white and Hispanic candidates significantly outperformed their black colleagues.  The decision is scholarly and sober.  Unfortunately, however, it gives employers very little guidance as to what to do when faced with an employment test that produces racially disparate results.

 The City’s defense in Ricci was that it disregarded its test results in order to avoid violating Title VII of the Civil Rights Act of 1964 (”Title VII”).  Title VII prohibits not only intentional acts of employment discrimination based on race, color, religion, sex, and national origin, i.e., disparate treatment discrimination, but also policies or practices that are not intended to discriminate but in fact have a disproportionately adverse effect on a protected group, i.e., disparate-impact discrimination.  Thus, the City was worried about a possible disparate-impact lawsuit by the black firefighters.

However, once it set aside the test results, the City was sued by the candidates whose test scores would have likely entitled them to a promotion.  The Plaintiffs, seventeen white firefighters and one Hispanic firefighter, alleged that by discarding the test results, the City violated Title VII’s prohibition against disparate treatment based on race as well as the Equal Protection Clause of the United States Constitution.  The U.S. Supreme Court agreed and reversed the Second U.S. Circuit Court of Appeals’ decision in favor of the City.  In addition to highlighting the tension between Title VII’s disparate treatment and disparate impact provisions, the U.S. Supreme Court’s 5-4 ruling has received a significant amount of media attention because the current Supreme Court nominee, Judge Sonia Sotomayor, cast a deciding vote in the Court of Appeals’ decision. 

Justice Kennedy wrote the opinion of the Court and attempted to resolve the apparent conflict between the disparate treatment and disparate impact provisions of Title VII by allowing employers to make race-based decisions in instances in which “there is a strong basis in evidence of disparate-impact liability.”  Applying this standard to the facts before it, the Court concluded that there was “no evidence-let alone the required strong basis in evidence-that the tests were flawed because they were not job-related or because other, equally valid and less discriminatory tests were available to the City.” 

Although it was undisputed that had the black firefighters sued they would have been successful in making out a prima-facie case of disparate-impact discrimination against the City, the Court did not consider this to be enough to absolve the City of any disparate treatment liability.  In short, the Court ruled that “[f]ear of litigation alone cannot justify an employer’s reliance on race to the detriment of individuals who passed the examinations and qualified for promotions.” 

While the fear of litigation alone should not justify a race-based decision,  employers must be allowed to make decisions on the basis of race or any other protected classification under Title VII when faced with a prima-facie case of disparate-impact discrimination.  The Equal Employment Opportunity Commission has set a rule which provides that a selection rate that is less than 80% of the rate for the group with the highest selection rate will generally be regarded by the federal enforcement agencies as evidence of a disparate impact.  See 29 C.F.R. § 1607.4(D) (2009).  This means that if 50% of white candidates receive a passing score on a test, but only 30% of Hispanics pass, the relevant ratio would be 30/50, or 60%, which would violate the 80% rule. 

If an employer notices that a particular test violates 29 C.F.R. § 1607.4(D) it should be allowed to discard the test results without fear of disparate treatment liability.  Without such a bright-line rule, the Court’s decision has left employers and their attorneys with minimal guidance as to what “a strong basis in evidence” standard really means.

One of the few perks that a taxpayer can bestow upon his or her beneficiaries is the so called “step up” in basis under Section 1014 of the Internal Revenue Code. This Section generally permits the tax basis of property owned by the decedent to take a tax basis equal to fair market value as of the date of death of the decedent.  This Code provision is usually very helpful for taxpayers, particularly those who may have held appreciated securities or real estate for many years.  Depending upon the size of a person’s estates (taxable or not) the ability to step up the tax basis of assets may be outweighed by the ability to transfer the assets out of the taxable estate and avoid the usually greater marginal estate tax rate.

The recent carnage in the markets however, has left taxpayers with the unpalatable prospect of a step down in basis.  Section 1014 merely specifies that the basis of property acquired from the decedent is valued at fair market value as of date of death, independent of whether the fair market value is greater or less than basis.

For example, say Mr. G. owns 1,000 shares of AIG, which he purchased for $100 per share way back in October, 2000.  If Mr. G sells the AIG shares for $1, he incurs a long term capital loss of $99,000 ($100,000 - $99,000).  If he dies owning the shares, the tax basis of the shares plummets to $1,000.

What is a planner to do?  The first alternative is for the client to sell the property prior to death, thereby recognizing the loss.  The second alternative, if the client is married, would be to transfer the property to the healthier spouse so that he or she would have the opportunity to time the sale of the asset before his or her later death.  Section 1041(b)(2) of the Code provides that a spouse takes the donor’s basis in the transferred property.  The result is not the same however, if the donee is not the donor’s spouse.  In that case, it is a heads I win, tails you lose for the IRS.  If the fair market value of the property is less than the donor’s basis, then for purposes of recognizing any loss, the donee takes as his or her basis the fair market value of the property rather than the donor’s basis.

Example 2:  Assume Mr. G gives the AIG stock to his son, Junior.  Junior later sells the shares for $1.  He does not recognize any gain or loss because his basis is now $1.  He will later recognize gain or loss to the extent that the sales price of the shares is more or less than $1.

The above examples illustrate that the devastating meltdown in financial and real estate assets is turning some transitional estate planning on its head.