It is the thesis of this article that the deferred taxation of gain provision of the Ethics Reform Act of 1989,1 has become an extremely important tool for easing the transition of individuals from the private sector into positions as presidential nominees and appointees. The success of the deferred taxation of gain provision has ended the search for an effective remedy for the financial conflict-of-interest problems of presidential nominees and other political appointees.
A president, prior to the Second World War, could pick up the phone and ask an individual to serve in his administration and announce the nomination in less than twenty-four hours. Today, the process of selecting a presidential nominee for a high-level administration position can take weeks. Ethics officials working in the White House Counsel's Office, the Office of Government Ethics, the Department of Justice, and the nominee's designated agency ethics official must spend hours carefully reviewing the financial affairs of the prospective nominee, the nominee's spouse, and minor children to see whether they present conflict-of-interest problems. If conflictof-interest problems appear, additional time must be spent to resolve these problems prior to any announcement of a nomination.
The passage of the deferred-taxation-of-gain provision of the Ethics Reform Act has greatly simplified the process of working with presidential nominees and other political appointees to resolve financial conflict-of-interest problems.
Mandated Divestitute and Deferred Taxation of Gain
The 1992 election of Bill Clinton as President of the United States ended twelve years of Republican control of the White House. President Clinton faced the difficult task of filling hundreds of high level positions with individuals who could withstand intense public scrutiny of their personal and financial affairs? Like all presidential transitions since the early 1960s,3 the Clinton transition carefully reviewed the financial affairs of potential nominees and appointees for possible financial conflicts of interest.4 Compliance actions by presidential nominees and appointees, prior to the passage of the Ethics Reform Act of 1989, most often involved: (1) creation of either a "qualified" or "diversified" blind trust, (2) executed recusal or disqualification agreements, (3) resignation from positions in corporations or other organizations, and (4) the sale of stock or other assets.5 The Clinton transition was the first to have the opportunity to make use of the non-recognition-of-gain provision of the Ethics Reform Act of 1989.
The Ethics Reform Act of 1989 added section 1043(a) to title 26 (federal tax laws), United States Code. This section is entitled "Sale of property to comply with conflict-of-interest requirements."6 The new tax provision "permits an officer or employee of the executive branch of the federal government to rollover any gain on property sold in order to comply with any conflict of interest requirements into permitted property."'
Besides permitting the covered executive branch officer or employee to make use of the provision, the law permits the spouse or minor children to apply for and receive a certificate of divestiture from the Director of the Office of Government Ethics OGE) or the President of the United States.8 Trustees, finally, have the right to request a certificate of divestiture on behalf of a federal employee who has given the trustee responsibility for managing his or her financial holdings.9 The law does not limit the number of certificates of divestiture an employee or family member of the employee can receive or the amount of capital gain subject to the rollover provision. These features make certificates of divestiture an extremely effective remedy for financial conflicts of interest.
The Evolution of Financial Conflict Resrictions and Remedies
Since the early 1950s, federal ethics officials and presidential transition scholars have searched for ways to balance the need to prevent financial conflicts of interest with the impact of financial conflict-of-interest rules on the recruitment and retention of presidential appointees and nominees. …