![OGE Logo and Address: U.S. Office of Government Ethics, 1201 New York Ave., NW, Suite 500, Washington, DC 20005-3917](https://webarchive.library.unt.edu/eot2008/20080916151730im_/http://www.usoge.gov/images/oge_ltr_hd.gif)
April 26, 1999
DO-99-019
MEMORANDUM
TO: Designated Agency Ethics Officials
FROM: Stephen D. Potts
Director
SUBJECT: FAQ: Frequently asked questions about Certificates
of Divestiture
Since the Certificate of Divestiture (CD) program was first
authorized by statute in 1989, the Office of Government Ethics
(OGE) has issued over 1,000 certificates. Our experience in
administrating the program indicates that there are recurring
issues that arise in CD cases. The attached document addresses
those issues by providing a summary, in question and answer format,
of the rules and policies that apply in most situations. We hope
this document answers most of the questions you may have; but if
you find you have additional questions, please do not hesitate to
contact this Office for guidance.
Also attached is a document entitled Smooth Sales that
summarizes some of the more basic rules about the CD program. This
document can be duplicated and folded in half to form a "pamphlet"
to give to employees, or those considering Government employment,
as an introduction to the CD program. It also will be available on
OGE's web site (www.usoge.gov). For those agencies that have color
printers, the pamphlet can be downloaded and printed in red and
black. The pamphlet is not intended to provide employees with a
complete understanding of the rules and issues relating to the CD
program. However, we think it may prove useful in serving as an
overview for persons who are concerned about the financial effects
of having to divest assets because of conflicts of interest.
Attachments
______________________________________________________________________
Table of Subject Areas Covered by the Questions and Answers
THE BASICS (PAGE 1)
1. What is a Certificate of Divestiture (CD)?
2. What is the objective of the CD program?
3. When may the Director issue a CD?
ELIGIBILITY (PAGES 1-2)
1. Who is eligible to receive a CD?
2. Should an individual count on getting a CD?
3. Can a CD be issued for property that already has
been divested?
HOW TO REQUEST A CD (PAGES 2-4)
1. Who may request a CD?
2. What information must be included in the DAEO's
request?
3. What if the divestiture is being made at the
request of a Congressional confirmation committee?
WHAT HAPPENS AFTER OGE ISSUES A CD (PAGES 4-5)
1. How will I know that a CD has been issued?
2. What should an employee do after a CD is received
and the property is sold?
3. What is the "permitted property" into which the
reinvestment must be made?
4. How does the divesting individual actually get the
tax-deferral of capital gains?
5. How will an individual know if the choice of
"permitted property" for a reinvestment is going
to be accepted by the Government?
SPECIAL MATTERS THAT AFFECT WHETHER
A CD WILL BE ISSUED (PAGES 6-9)
1. Will a CD be issued if someone other than an
eligible person holds an interest in a trust?
2. Will a CD be issued if the property to be divested
was obtained through a former employer?
3. What other considerations go into issuing CDs?
4. Will a CD be issued for interests in employee
benefit plans?
5. What if the request is not made within the
appropriate time period?
6. What if the employee owns similar or related
property?
7. How will the timing or manner in which property
was acquired affect whether a CD may be issued?
COUNSELING EMPLOYEES WHO HAVE TO DIVEST (PAGES 9-10)
1. Do all eligible persons who must divest property
ask for a CD?
2. How may employees react to being informed they may
have to divest?
3. What should I always tell those who face a
divestiture requirement?
MISCELLANEOUS (PAGES 10-11)
1. Where can an outside attorney, accountant, or
other advisor look up the technical rules for the
CD program?
2. Will people outside of the Government be able to
get copies of a CD?
______________________________________________________________________
THE BASICS
1. What is a Certificate of Divestiture (CD)?
A Certificate of Divestiture is a document issued by the
Director of the Office of Government Ethics that will
allow, for those who are eligible, the sale of property
without currently paying capital gains tax. The capital
gains tax is deferred by a provision of the tax laws.
2. What is the objective of the CD program?
The purpose of the program is to minimize the burden that
may result from incurring capital gains on the sale of
assets because of the conflict of interest laws.
3. When may the Director issue a CD?
Section 1043 of the Internal Revenue Code permits the
Director of OGE to issue a CD for specific property
required to be divested. The procedures for obtaining a
CD are described in regulations published by OGE at
5 C.F.R. part 2634, subpart J. To issue a certificate,
the Director must determine that the person asking for a
certificate is eligible under the regulations, and that
certification is reasonably necessary to comply with
18 U.S.C. § 208, or any other Federal conflict of
interest statute, regulation, rule, or Executive order,
or is pursuant to the request of a Congressional
committee as a condition of confirmation.
ELIGIBILITY
1. Who is eligible to receive a CD?
The following persons are eligible to receive CDs:
(a) Any officer or employee of the executive branch of
the Federal Government, except a person who is a
special Government employee (as defined in
18 U.S.C. § 202);
(b) Any person who is married to, or the minor or
dependent child of, an individual referred to in
part (a) of this answer; and
(c) Any trustee holding property in trust in which an
individual referred to in part (a) or part (b) of
this answer has an interest.
2. Should an individual count on getting a CD?
Not necessarily. Whether a CD will be available is a
technical matter that requires the analysis of a number
of issues. Therefore, we urge you not to assure
employees that a CD will be issued in every case. Such
a commitment may be made only by senior officials of OGE
after review and analysis of all materials pertaining to
the specific situation. We understand, of course, that
the potential availability of a CD can be very important
when employees are required to divest. Therefore, OGE
will be happy to consult with you so that you may give
employees a preliminary analysis of the likelihood of a
certificate being issued in particular cases.
3. Can a CD be issued for property that already has been divested?
No, a CD cannot be issued for property that already has
been sold. An employee must obtain the CD before selling
the property required to be divested.
HOW TO REQUEST A CD
1. Who may request a CD?
Only the Designated Agency Ethics Official (DAEO) may
request that OGE issue a CD. Other persons, including
employees required to divest, may not make the request
directly to OGE. Instead, eligible persons should submit
their requests through the agency DAEO.
2. What information must be included in the DAEO's request?
The DAEO must submit a package of materials including the
following:
(a) A copy of a written request to the DAEO from the
eligible person who is to divest the property. The
eligible person's request must include:
(1) A commitment to complete the divestiture
on or
before a date specified in the request, in any
event no later than the end of the three-month
period from the earliest of -- (A) the date
that the property became a prohibited holding,
(B) the date of an order to divest, or (c) the
date of an ethics agreement to divest the
property; however, OGE may agree in writing to
extend the three-month period under special
circumstances; and
(2) Full and complete information concerning
the
facts and circumstances relating to the
acquisition of such property and its
contemplated divestiture;
(b) A copy of the latest financial disclosure report
filed by the employee; if the employee is not
required to file a financial disclosure report, the
request shall include a memorandum from the
employee disclosing interests in property, income,
liabilities, agreements and arrangements, and
outside positions which are required to be
disclosed on such a report;
(c) A detailed description of the specific property
for
which divestiture is contemplated;
(d) Complete statements of:
(1) The facts and circumstances relevant to
whether there is a reasonable necessity for
divestiture (including a description of the
employee's position or applicable statutory
citation setting forth the duties of the
position); and
(2) Analysis and opinion from the DAEO
applying
the CD regulations to the case of the proposed
certification. The DAEO's submission must
indicate when the three-month period within
which divestiture must occur, will lapse.
3. What if the divestiture is being made at the request of a
Congressional confirmation committee?
Instead of submitting the opinion of the DAEO that
divestiture is reasonably necessary, the package
submitted to OGE may instead include a written
acknowledgment from the Chairman of the committee that
the committee made such a request, a letter to the
committee containing a promise by the individual to make
the divestiture of specified property in accordance with
such request, or a transcript of Congressional testimony
containing such a commitment by the individual in
response to the request. However, all the other items
required to be submitted and the other rules regarding
CDs remain the same.
WHAT HAPPENS AFTER OGE ISSUES A CD
1. How will I know that a CD has been issued?
The DAEO will receive a transmittal letter and the
Certificate of Divestiture signed by the Director of OGE.
The certificate should be forwarded to the divesting
individual as soon as possible. No property should be
sold until the employee receives the certificate and
confirms that the description in the certificate of the
property to be divested exactly matches the property
being sold.
2. What should an employee do after a CD is received and the
property sold?
In order to complete the steps that will permit tax-
deferral of capital gains from the sale, the divesting
individual must make a reinvestment of the amount
realized from the sale in "permitted property" during the
60-day period beginning on the date of sale.
3. What is the "permitted property" into which the reinvestment
must be made?
"Permitted property" is limited to obligations of the
United States and diversified investment funds as defined
in the regulations at 5 C.F.R. § 2634.1003.
The regulations define a "diversified investment fund" as
any open-end mutual fund, which by its prospectus, or any
common trust fund maintained by a bank, which by the
literature it distributes to prospective and current
investors describing its objectives and practices, does
not indicate the objective or practice of devoting its
investments to particular or limited industrial,
economic, or geographic sectors.
Under these rules, for example, the following types of
funds offered generally by major fund families meet the
definition of permitted property: a Common Stock Fund, a
Growth Stock Fund, an S&P Index Fund, a Global Fund
(investing in common stocks worldwide), a Blue Chip Fund,
a Corporate Bond Fund, a Municipal Bond Fund (which is
not geographically limited), and a Government Bond Fund
(which invests exclusively in obligations of the United
States). On the other hand, the following types of funds
offered generally by major fund families do not meet the
definition of "permitted property": a Pacific Fund, a
Mexico Fund, a New England Fund, a Gold Fund, a Commodity
Futures Fund, a Venture Capital Fund, and a Drug Industry
Sector Fund.
Note that a closed-end mutual fund, such as those listed
on the New York Stock Exchange, could not be "permitted
property." An additional rule is that not more than one
percent of the market value of the fund can be
attributable to the Government employee immediately after
the reinvestment.
4. How does the divesting individual actually get the tax-deferral
of capital gains?
An employee must file IRS Form 8824 with the income tax
return for the year in which the property is sold. The
IRS has jurisdiction over the rules relating to the tax
aspects of a sale and reinvestment using a Certificate of
Divestiture. Eligible persons should seek the advice of
their personal tax advisors about the tax aspects of
these transactions.
5. How will an individual know if the choice of "permitted
property" for a reinvestment is going to be accepted by the
Government?
The allowable types of "permitted property" into which
reinvestments may be made have been chosen to ensure that
most Federal employees will not have a further ethics
problem. However, the ethics program rules for a
particular agency or position may further limit the
choices that are permitted. For example, there are
restrictions on the purchase of obligations of the United
States by some officials of the Department of the
Treasury. The DAEO should give guidance in this regard.
Ultimately, however, the IRS has jurisdiction with
respect to whether reinvestments are within the
definition of "permitted property" in specific cases.
SPECIAL MATTERS THAT AFFECT WHETHER A CD WILL BE ISSUED
1. Will a CD be issued if someone other than an eligible person
holds an interest in a trust?
Possibly not. A CD may not be issued in such a case
unless the parties take actions which, in the opinion of
the Director of OGE, keep noneligible persons from
receiving the benefit of the tax-deferral. The parties
to the trust can take actions to exclude the other
people, if permitted by State trust and estate law, such
as dividing the trust into separate portfolios, making
special distributions, paying out the property held by
the trust, or anything else which in the Director's
opinion is feasible. OGE has experience with these
situations. We will try to work things out with the
parties.
In such a case, along with the other material required to
be submitted to OGE, the DAEO should submit:
(a) A copy of the trust instrument, and
(b) Full details about its current portfolio.
OGE must have adequate information to identify all
persons who hold beneficial interests in the trust
principal and income, and the relationships of those
persons to the Government employee.
2. Will a CD be issued if the property to be divested was obtained
through a former employer?
The tax law generally treats property received as
compensation for services as ordinary income, and not as
capital gains income for which a CD may be obtained. For
example, where stock options are granted by an employer,
a certificate may not be issued if the exercise of the
option, or the sale of stock received upon exercise of
the option, would result in compensation. Although the
divesting individual may want to consult a personal tax
advisor in these cases, the following types of
transactions and occurrences commonly result in the
realization of ordinary income by an employee:
(a) Shares of stock. The receipt of shares of stock
from an employer, or the sale of such shares that
previously have not been taxed;
(b) Buy-out of an employment contract. The sale or
cancellation of an employment contract with a
former employer;
(c) Nonstatutory stock options. The grant of
nonstatutory stock options that have a readily
determinable fair market value, or the elimination
from such options of a substantial risk of
forfeiture. However, if the options did not have a
readily determinable fair market value when
granted, ordinary income is realized upon the
receipt of the underlying stock when the option is
exercised;
(d) Employee stock purchase plan options. The sale of
stock received through the exercise of an employee
stock purchase plan option within two years after
the option was granted or within one year after the
stock is received;
(e) Incentive stock options. The sale of stock
received through the exercise of an incentive stock
option within two years after the option was
granted or within one year after the stock is
received, or the sale of the stock at any time
unless the individual worked for the employer for
the entire period from the date that the option was
granted until at least three months before it was
exercised.
If, in spite of these general principles, the divesting
individual still believes that there will be capital
gains income from the sale of property received from an
employer, the reasons should be explained in detail in
the submissions through the agency to OGE. Often
employers give their employees complete written
explanations of how property given to them will be taxed.
Copies of such material also should be submitted to OGE.
3. What other considerations go into issuing CDs?
In addition to the other rules, the Director of OGE will
not issue a CD to an eligible person if, in his opinion,
to do so would give an unfair or unintended benefit.
Some common examples of these situations are described in
the answers to the following four questions.
4. Will a CD be issued for interests in employee benefit plans?
Interests in pension, profit-sharing, stock bonus and
other employee benefit plans do not qualify for CD
treatment. Capital gains resulting from asset sales
within such plans are not subject to current taxation.
5. What if the CD request is not made within the appropriate time
period?
A CD will not be issued for any contemplated divestiture
when the request is received by OGE more than three
months after the earliest of -- (a) the date (with an
additional ten-day grace period) that the property became
a prohibited holding, (b) the date of an order to divest,
or (c) the date of an ethics agreement to divest the
property. For example, if the regulations of your agency
prohibit employees from owning securities issued by
companies operating in specific industries and a
particular employee started employment with the agency on
June 15, OGE would reject a request for a CD for that
employee that was submitted to it after September 25.
Extensions of time may be granted in accordance with
5 C.F.R. § 1002(e)(4).
6. What if the employee owns similar or related property?
In many cases, an employee must sell all property similar
or related to the property to be divested. Otherwise,
OGE may not issue a CD because an unfair or unintended
benefit would result. This issue may arise in many
different ways. For example, a Government employee
might have financial interests in a particular company
both through direct ownership of shares and through the
attribution of shares held in trust for a dependent
child. The employee would not be issued a CD for the
proposed sale of the directly held shares unless he also
committed to sell the shares held in the trust.
Likewise, an employee might have financial interests in
two companies that are both affected by the same
particular Governmental matter (such as a regulation)
which is to be the subject of the employee's next
assignment. The employee would have to divest her
interests in both companies in order to receive
certificates in this situation. It should be noted that
in some cases, similar or related property might be
exempted under the de minimis rules of 5 C.F.R.
§ 2640.202 or be subject to separate treatment under
other applicable rules. In such cases, there would not
be an unfair or unintended benefit if the exempt or
separately treated property were not divested. Please
consult with OGE as to whether a CD may be issued under
the facts and circumstances of particular cases which
raise these issues.
7. How will the timing or manner in which property was acquired
affect whether a CD may be issued?
There would be an unfair or unintended benefit, and a CD
will not be granted, if the property was acquired at a
time when the holding of the property was prohibited by
any law or regulation. For example, if the property was
received as a gift from someone at a time when ownership
of such property was prohibited by a regulation, a CD
would not be granted. Similarly, a CD will not be
granted under circumstances which otherwise would create
the appearance of a conflict with the conscientious
performance of Governmental responsibilities. Note that
OGE has granted CDs for divestiture of prohibited
property received through inheritance when all other
requirements have been met.
COUNSELING EMPLOYEES WHO HAVE TO DIVEST
1. Do all eligible persons who must divest property ask for a CD?
In some divestiture cases, CDs simply are not sought.
Our experience indicates that many of these situations
involve small holdings, and the individuals conclude that
they wish to avoid the burdens of participating in the
process of requesting a CD and the additional personal
tax filing that is required (IRS Form 8824), as well as
to avoid the restrictions on reinvestments. In other
cases, individuals do not seek a CD because they make
frequent changes in their holdings and would not,
therefore, benefit from a mechanism that will defer the
capital gains tax only until they sell the property in
which they have reinvested. Often, the issue is not
faced because the property to be divested will be sold at
a loss making the tax-deferral procedure inapplicable.
Additionally, the capital gains issue is sometimes
avoided through the gift of property to adult children or
grandchildren, rather than a sale of the property.
2. How may employees react to being informed they may have to
divest?
Very few of those employed in the executive branch are
ever faced with the requirement of divestiture. However,
for those who are required to divest property, it may be
a stressful experience that can have a significant impact
on personal finances and financial planning. Frequently,
divestiture issues will also involve other family members
whose interests are attributable to a present or
prospective executive branch employee, and the issues may
at times affect the estate plans implemented by
additional family members such as parents and
grandparents of the employee or his spouse. For many of
those who must divest property for conflicts of interest
reasons, the availability of a CD will mitigate the
concerns they have about divestiture.
3. What should I always tell those who face a divestiture
requirement?
The employees or prospective employees should always be
told that
(a) A CD may be available;
(b) CDs cannot be issued after the divestiture has
already occurred; and
(c) There is a distinction between the requirement to
divest and the availability of a CD in a particular
case.
MISCELLANEOUS
1. Where can an outside attorney, accountant, or other advisor
look up the technical rules for the CD program?
The program is administered under section 1043 of the
Internal Revenue Code of 1986, as implemented through
regulations that start at § 2634.1001 of Title 5 of the
Code of Federal Regulations.
2. Will people outside of the Government be able to get copies of
a CD?
Yes. The public can get copies of CDs under the same
rules that permit access to public financial disclosure
reports. See 5 C.F.R. §§ 2634.1004 and 2634.603.