Let the fight begin! There has been a groundswell of protest against the Internal Revenue Service’s proposed Treasury regulations under Internal Revenue Code 2704, which were released in early August. These rules, if enacted, could end the use of discounts and other estate planning strategies long accepted by both political parties to move family businesses from senior generation family members to their children and heirs. Read our recent tax alert for more details.
The matter has garnered the attention of Congressional Republicans. On September 21, 2016, Representative Warren Davidson (R-OH) introduced a bill, the Protect Family Farms and Businesses Act, to prevent the proposed rule from becoming final. The Bill has 19 additional co-sponsors. A similar bill written by Representative James Sensenbrenner (R-WI), was introduced the week before.
In his official release, Davidson said, “The Constitution is very clear: ‘The Congress shall have the power to lay and collect taxes.’ The Obama Administration’s proposed tax increase violates what was clearly spelled out by Congress. This increase on the part of the executive branch violates the separation of powers within the federal government by unilaterally changing well-established tax law and practice and rejecting the clear will of Congress.”
Davidson notes that his bill is intended “to halt the stealth death tax increase.” A failure to turn back the proposed Treasury regulations could result in their becoming effective by year-end. He also noted that his district has “a lot of manufacturing businesses and farms that will be impacted.”
The Family Business Coalition, a coalition of trade associations supporting repeal of the estate tax, supports the bill and has launched a lobbying campaign of its own to build Congressional opposition to the proposed estate-tax regulations. “I think the goal of the legislation is to put as much pressure as possible on the Treasury Department to withdraw the regulation or to delay enactment until the next Treasury secretary can review the regulation,” said Palmer Schoening, chairman of the Family Business Coalition.
“As a procedural matter, it would be difficult to move it forward,” said Marc Gerson, a partner at Miller & Chevalier and a former Republican tax counsel on the House Ways and Means Committee. “It’s a question of whether they go beyond messaging. Do they start garnering attention and support from tax writers?”
Davidson, who replaced former House Speaker John Boehner in a special election earlier this year, is not a member of the Ways and Means Committee, but several of the original co-sponsors of the bill do sit on the panel.
Unfortunately the Capitol Hill schedule leaves little time for action on Davidson’s bill. Congress is meeting this month but then will take a break until a lame duck session after the November election. At that point, the bill’s survival may depend on who wins the Presidential election. Usually, a new administration will take some amount of time to consider recently-introduced rules.
The Treasury is currently taking comments on the proposal and has scheduled a hearing for December 1, 2016. A final rule could be released by the end of the year. Bob Grossman will speak at the hearing on behalf of the National Association of Certified Valuators and Analysts, a national business valuation organization headquartered in Salt Lake City, Utah.
In another setback for sizable estates, Presidential candidate Hillary Clinton introduced an even-greater increase to estate tax rates than she had previously proposed. The Democratic nominee called for raising the top rate to an astounding 65% on estates of $500 million or more. ($1 billion for married couples), and establishing a 50% rate for estates of more than $10 million per individual and a 55% rate for those starting at $50 million per individual.
Previously, Clinton proposed a top rate of 45%. The current top rate is 40%, and estate taxes begin to kick in for estates over $5.45 million per person ($10.9 million per married couple.) Republican Presidential nominee Donald Trump has proposed eliminating the estate tax.
Given the current political situation, it appears that Clinton has decided to lift the curtain on what taxpayers may expect, if she is elected. In combination with a finalization of the proposed Treasury regulations, taxpayers with relatively-small estates (those individuals with total estates of approximately $16 million) could face tax rates of near 60%. Assuming the estate was built on the taxable efforts of the decedent, the size of the estate at $16 million is already likely net of income taxes at 40%.
There is still time to take advantage of current laws in making intergenerational gifts in 2016.