Replacing the Estate Tax with a Reimagined Accessions Tax

This Article proposes replacing the federal estate and gift tax system with an accessions tax. An accessions tax is a tax, at progressive rates, on the aggregate lifetime gratuitous receipts of an individual in excess of a specified exemption. The main thesis of this Article is that an accessions tax is not simply a reverse image of the current estate tax system, but is significantly different both in purpose and effect. An accessions tax should be an easier pill to swallow than the estate tax, because it is a tax on the unearned income (accessions to wealth) of individuals. The accessions tax is not a periodic wealth tax, and would not need to be supplemented by a generation-skipping tax. In operation, the accessions tax can avoid many of the loopholes in the estate tax, because the accession can occur after the transferor\u27s death. Accessions would be taxed only when realized in cash or assets that are not hard to value. Thus, only trust distributions (as opposed to the acquisition of trust interests) would be taxed. Accordingly, actuarial tables would be irrelevant, and general powers of appointment would be ignored. Taxation of qualified hard-to-value property (such as interests in a closely-held business) would be deferred to conversion to cash (or other event whereby qualification lapses). Accessions by charities and by the spouse of the transferor would be excluded, as would transactions (such as one person purchasing the consumption of another) that do not involve true wealth transfers. Elaborate qualification rules for the spousal and charitable exclusions would not be necessary

Further Thoughts on Realizing Gains and Losses at Death

Professor Lawrence Zelenak has put forth a detailed proposal\u27 for repealing present Section 1014 of the Internal Revenue Code, which gives a decedent\u27s successor a basis equal to the estate tax value of property at death. This rule, commonly known as the stepped-up basis (at death) rule, has been roundly criticized as producing an unwarranted (inequitable, nonneutral) income tax loophole, because the step up in basis without realization of gain removes the gain from the tax system entirely. Its repeal, therefore, offers a potential source of significant revenue. Moreover, Section 1014 aggravates the lock-in effect ; that is, it inhibits rational deployment of investment funds by inducing taxpayers to retain gain property until death. Repeal of Section 1014 alone, however, does not solve the problem, because it must then be decided whether the decedent\u27s basis should carry over to her successors, as presently occurs under Section 1015 with respect to inter vivos gifts, or whether a gratuitous transfer should be treated as a realization event, with the amount realized deemed to be the fair market value of the property at death. Professor Zelenak favors the deemed-realization approach. I concur in this view, wholly apart from the fact that the carryover basis approach was tried and repealed. This Article attempts to avoid unnecessary redundancy with Professor Zelenak\u27s article. Unlike Professor Zelenak, who concentrates on the practical reasons for favoring repeal of Section 1014 and preferring the deemed-realization approach over the carryover basis approach, I emphasize the theory and policy reasons justifying these outcomes. In the section of this Article that addresses the technical details of the proposal, I point out areas of disagreement with Professor Zelenak, plus Professor Zelenak\u27s areas of omission or light coverage. Ultimately, my preferred version of the taxing gains at death proposal would have fewer gaps than Professor Zelenak\u27s proposal but would be more generous to taxpayers in certain instances