{"id":1582,"date":"2009-09-30T15:55:00","date_gmt":"2009-09-30T19:55:00","guid":{"rendered":"https:\/\/www.actec.org\/?post_type=capital-letter&p=1582"},"modified":"2024-04-17T17:14:37","modified_gmt":"2024-04-17T21:14:37","slug":"more-analysis-of-estate-tax-revenue-raisers","status":"publish","type":"capital-letter","link":"https:\/\/www.actec.org\/capital-letter\/more-analysis-of-estate-tax-revenue-raisers\/","title":{"rendered":"More Analysis of Estate Tax Revenue Raisers"},"content":{"rendered":"\n

Analysis of revenue raisers by the staff of the Joint Committee on Taxation raises fascinating questions, but the big question remains what Congress will do about the estate tax itself.<\/strong><\/em>
<\/p>\n\n\n\n

Dear Readers Who Follow Washington Developments:<\/p>\n\n\n\n

Congress has returned from the August recess and worked through September.\u00a0 Whether meaningful progress has been made on health care reform depends on whom you ask.\u00a0 Progress on other congressional priorities is even less evident.\u00a0 ACTEC Fellows and other estate planners, who have \u201cknown\u201d for years that there will be congressional action regarding the estate tax before the end of 2009, are beginning to seriously wonder.

Into this uncertainty it was inevitable that confusion would drop.

Capital Letter Number 17<\/a>\u00a0described the three revenue-raising proposals related to the estate and gift tax on pages 119-23 of the Treasury Department\u2019s \u201cGeneral Explanations of the Administration\u2019s Fiscal Year 2010 Revenue Proposals\u201d (popularly called the \u201cGreenbook<\/a>\u201d), which was released on May 11, 2009.\u00a0 On September 8, 2009, the staff of the Joint Committee on Taxation released a publication entitled \u201cDescription of Revenue Provisions in President\u2019s Fiscal Year 2010 Budget Proposal, Part One: Individual Income Tax, Estate and Gift Tax Provisions\u201d (the \u201cJCT Description\u201d).\u00a0 The\u00a0JCT Description\u00a0adds insights to the Greenbook\u2019s descriptions and analysis, but at times it even seems to contradict the\u00a0Greenbook<\/a>, without explanation.

For example, the first\u00a0Greenbook<\/a>\u00a0proposal is entitled \u201cRequire Consistency in Value for Transfer and Income Tax Purposes.\u201d\u00a0 The\u00a0Greenbook<\/a>, at\u00a0page 119<\/a>, states (emphasis added) that \u201c[t]his proposal would require that the basis of the property in the hands of the recipient be no greater than the value of that property\u00a0as determined for estate or gift tax purposes<\/em>\u00a0(subject to subsequent adjustments).\u201d\u00a0 Regarding this proposal, the\u00a0JCT Description\u00a0states (emphasis added):<\/p>\n\n\n\n

The proposal requires that the basis of property received by reason of death under section 1014<\/a> generally must equal the value of that property claimed<\/em> by the decedent\u2019s estate for estate tax purposes.\u2026

Under the proposal there would be instances in which the value of an asset reported by an executor to an heir differs from the ultimate value of the asset used for estate tax purposes. For example, if the IRS challenges an estate valuation and prevails, the executor will have reported to the heir a valuation that is artificially low, and the heir may arguably be overtaxed on a subsequent sale of the asset. This same problem exists under present law to the extent the initially reported estate tax value is presumptively the heir\u2019s basis. To provide complete consistency between estate tax valuation and basis in the hands of an heir may be impractical as ultimate determination of value for estate tax purposes may depend upon litigation, and an heir may sell an asset before the determination of value for estate tax purposes.

By requiring the value of an asset reported<\/em> for transfer tax purposes to be reported and used by the heir or donee in determining basis, however, the proposal has the salutary effect of encouraging a more realistic value determination in the first instance<\/em>.  This salutary effect would be lost if there were a relief mechanism for transferees and transferors (and recoupment for the government) if the basis used by transferees differed from the fair market value ultimately determined for transfer tax purposes.  Thus, the proposal does not contain any such relief mechanism.<\/p>\n\n\n\n

The\u00a0JCT Description\u00a0portrays a regime that many would find harsh and unfair \u2013 if the estate tax value of an asset is increased on audit, the recipient\u2019s basis is not correspondingly increased, meaning that the same appreciation in value could be subject to both estate tax and income tax in apparent defiance of the principles of\u00a0section 1014<\/a>.\u00a0 But the\u00a0Greenbook<\/a>\u00a0says very bluntly that the recipient\u2019s basis will be the value \u201cas determined for estate or gift tax purposes,\u201d which ordinarily is interpreted to mean the same as \u201cfinally\u201d determined, namely after audit.[1]<\/sup><\/a>

On the other hand, the approach depicted in the\u00a0JCT Description\u00a0might explain the surprisingly high Treasury estimate that the proposal would raise tax revenue by $1.87 billion over ten years, compared to less than $50 million over ten years for a similar proposal floated by the staff of the Joint Committee on Taxation in January 2005.\u00a0 (Curiously, in June 2009 the JCT staff estimated the ten-year revenue gain from the Administration proposal at $935 million,\u00a0exactly half<\/em>\u00a0the Treasury estimate.)

Regarding the Greenbook\u2019s proposal labeled \u201cModify Rules on Valuation Discounts<\/a>,\u201d\u00a0Capital Letter Number 17<\/a>\u00a0speculated:<\/p>\n\n\n\n

Using section 2704(b)<\/a> as a framework, the proposal would create a more durable category of \u201cdisregarded restrictions.\u201d  Disregarded restrictions would \u201cinclude\u201d restrictions on liquidation of an interest that are measured against standards prescribed in Treasury regulations, not against default state law.  Thus, no change in state law would affect the reach of the statute\u2026.

Although the Greenbook<\/a> does not say so, it is possible that that the \u201cdisregarded restrictions\u201d in view, which \u201cinclude\u201d certain limitations on liquidation (the current scope of section 2704(b)(2)(A)<\/a>), may also include other restrictions, such as restrictions on management, distributions, access to information, and transferability.  If so, this proposal might call for reconsideration of the famous disclaimer in the 1990 conference report that \u201c[t]hese rules do not affect minority discounts or other discounts available under [former] law.\u201d  H.R. Rep. No. 101-964, 101st Cong., 2d Sess. 1137 (1990).<\/p>\n\n\n\n

Of this Administration proposal the\u00a0JCT Description\u00a0states that \u201cbecause the proposal targets only marketability discounts, it would not directly address minority discounts that do not accurately reflect the economics of a transfer.\u201d\u00a0 The\u00a0JCT Description\u00a0goes on to point out that other possible approaches include the \u201clook through\u201d rules of the Clinton Administration\u2019s budget proposals and the JCT staff\u2019s own 2005 proposals, as well as the aggregation rules of the 2005 proposals and the Reagan Administration\u2019s \u201cTreasury I<\/a>.\u201d

This is a strange conundrum.\u00a0 Current law is explicitly addressed only to restrictions on liquidation. \u00a0The\u00a0JCT Description\u00a0discusses current law and the Administration proposal with reference to restrictions on liquidation, which it views as supporting either a minority discount or a marketability discount, but then seems to deny both its own analysis that restrictions on liquidity might \u201caddress minority discounts\u201d and the possibility that the Administration proposal contemplates an\u00a0expansion<\/em>\u00a0of current law that\u00a0could<\/em>\u00a0reach other minority discounts.\u00a0 Meanwhile, the\u00a0JCT Description\u00a0admits that because most of the details of the Administration proposal are left to regulations, \u201cit is difficult to determine how the proposal is intended to operate\u201d after all.

In short, the\u00a0JCT Description\u00a0portrays the Administration proposal on basis as arguably harsher than it is, but seems to view the proposal on valuation discounts as more timid than it might be.\u00a0 In the past, Treasury and congressional staffs have often collaborated in preparing documents like these.\u00a0 These two documents \u2013 the Administration\u2019s\u00a0Greenbook<\/a>\u00a0and the\u00a0JCT Description\u00a0\u2013 appear to be in competition.

With regard to the Administration proposal requiring a minimum ten-year term for GRATs, both the\u00a0Greenbook<\/a>\u00a0and the\u00a0JCT Description\u00a0focus on the effect of the proposal in increasing the\u00a0mortality<\/em>\u00a0risk of a GRAT, not necessarily its equally or even more important effect in\u00a0diminishing the upside from volatility<\/em>.\u00a0 The\u00a0JCT Description\u00a0notes that even a ten-year GRAT could be used \u201cas a gift tax avoidance tool.\u201d\u00a0 As an alternative way of achieving more accurate valuation, the JCT staff publication suggests valuation of the remainder interest for gift tax purposes at the end of the GRAT term when the remainder is distributed.\u00a0 Such a \u201chard to complete\u201d approach would have dramatic consequences beyond the use of GRATs.\u00a0 Indeed, study and critique of such a \u201chard to complete\u201d approach when it was floated by the Reagan Administration\u2019s \u201cTreasury I<\/a>\u201d in 1984 was one of the principal early tasks of ACTEC\u2019s Transfer Tax Study Committee.

While these musings are interesting to hard-core observers of the legislative process, they are not what any of us thought we would be examining with one quarter left before the estate tax is repealed.\u00a0 Capital Letters continues to bet that some variation of 2009 law (with a 45 percent rate and a $3.5 million exemption) will becomes the \u201cpermanent\u201d estate tax law.\u00a0 See\u00a0Capital Letter Number 13<\/a>.\u00a0 Whether that will happen this year, as both the Administration\u2019s proposed budget and the Congressional Budget Resolution contemplate, or some time next year following only a one-year extension of 2009 law is still not clear.\u00a0 Using a seasonal metaphor, we will have to wait to see if the key event of the last quarter is a pass, a punt, or a fumble.\u00a0 Only in Washington would \u201cpermanence\u201d be provided one year at a time!<\/p>\n\n\n\n

Ronald D. Aucutt \u00a0 \u00a9 2009 by Ronald D. Aucutt. All rights reserved<\/p>\n\n\n\n

[1]<\/sup> In contrast, while the parenthetical phrase that follows in the Greenbook<\/a> \u2013 \u201csubject to subsequent adjustments\u201d \u2013 may be a reference to audit adjustments, it probably contemplates only other adjustments prescribed by the Code, such as the increases in basis for the gift tax and GST tax attributable to appreciation under sections 1015(d)<\/a> and 2654(a)<\/a>, and adjustments to basis for subsequent improvements, depreciation, and the like.<\/p>\n","protected":false},"excerpt":{"rendered":"

Analysis of revenue raisers by the staff of the Joint Committee on Taxation raises fascinating questions, but the big question remains what Congress will do about the estate tax 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