Minority Discounts: the Alchemy in Estate and Gift Taxation

[Also appears in Federal Wealth Transfer Tax Anthology, edited by Paul L. Caron, Grayson M.P. McCouch, Karen C. Burke, 269-275. Cincinnati: Anderson Publishing, 1998. An adaptation with title The Alchemy in Estate and Gift Taxation appears in Boston College Law School Magazine 4 (Spring 1996): 28-32.

Codifying \u3ci\u3eCastle Harbour\u3c/i\u3e

In this article, Burke and McCouch discuss the 2015 statutory amendment, enacted as part of the last-minute budget deal, that revised and renumbered the family partnership provision of section 704(e)(1). They question whether the change will accomplish its stated purposes of clarifying existing law and raising $1.9 billion in revenue, and they conclude that the 2014 proposals by former House Ways and Means Committee Chair Dave Camp offer a politically expedient source of selective pay-fors for future government spending without actually raising taxes

THE IMPACT OF REFORM ON WOMEN\u27S ECONOMIC SECURITY

PANEL V: SOCIAL SECURITY REFORM: THE IMPACT ON WOME

The Moving Target of Tax Reform

In 2000, Professor William Turnier proposed a package of three reforms to make the estate tax more “equitable” and “taxpayerfriendly.” All of his proposals—allowing a surviving spouse to inherit a deceased spouse’s unused exemption, replacing the state death tax credit with a deduction, and indexing the exemption for inflation—were eventually enacted. Today, the estate tax remains on the books, but changes in rates and exemptions have severely curtailed its role in the larger federal tax system. Income tax rate reductions for capital gains and dividends have further lightened the tax burden on capital income, and international pressure to reduce the corporate tax burden threatens to accelerate the increasingly unequal distribution of income and wealth. This Article argues that the trend of shifting tax burdens from capital to labor is neither desirable nor sustainable and suggests a deathtime capital gains tax and an accrual-based tax on unrealized appreciation in publicly traded stock as possible measures to make the federal tax system more equitable (though perhaps less taxpayer-friendly)

Reframing Economic Substance

Under the economic substance doctrine as codified in 26 U.S.C. § 7701(o), legislatively unintended tax benefits may be disallowed if a transaction lacks a substantial business purpose or fails to accomplish a meaningful change in the taxpayer\u27s economic position. In a recent article on framing the “transaction” in economic substance cases, David Hariton makes three interrelated points. First, he observes that even though the judicial outcome may depend largely on how the relevant transaction is framed, few courts have explicitly focused on the framing issue. Second, he proposes that courts should presumptively frame the underlying transaction broadly by focusing on the entirety of the taxpayer\u27s undertaking, rather than disaggregating particular tax-motivated steps or structures. Finally, he believes that the principal target of the economic substance doctrine should be “tax shelters” whose defining hallmark is that they are “extraneous to the taxpayer\u27s business rather than merely an aspect of it.” In considering framing explicitly, Hariton focuses on what is arguably the most difficult issue that courts are likely to face in applying the economic substances doctrine--namely, whether to disallow tax benefits by disaggregating tax-motivated steps (which, standing alone, clearly lack economic substance) from a purported larger transaction. While Hariton understandably seeks to establish an outer boundary for Coltec\u27s disaggregation approach, his proposed presumption against bifurcation would deprive the economic substance doctrine of much of its essential flexibility. In enacting section 7701, Congress expressly approved of the disaggregation approach and gave courts broad discretion in framing the relevant transaction. Although such flexibility inevitably gives rise to uncertainty, the central question under the codified version of economic substance (as under prior law) is whether the overall result of a multi-step transaction is consistent with Congressional intent. If the tax benefits are clearly contemplated--as arguably was the case in UPS--the taxpayer should win. By contrast, transactions that seek to exploit unintended technical gaps deserve to fail. Perhaps ironically, codification may encourage taxpayers to argue that such transactions do not work technically, in the hope of avoiding strict liability penalties under section 7701

The Moving Target of Tax Reform

In 2000, Professor William Turnier proposed a package of three reforms to make the estate tax more “equitable” and “taxpayerfriendly.” All of his proposals—allowing a surviving spouse to inherit a deceased spouse’s unused exemption, replacing the state death tax credit with a deduction, and indexing the exemption for inflation—were eventually enacted. Today, the estate tax remains on the books, but changes in rates and exemptions have severely curtailed its role in the larger federal tax system. Income tax rate reductions for capital gains and dividends have further lightened the tax burden on capital income, and international pressure to reduce the corporate tax burden threatens to accelerate the increasingly unequal distribution of income and wealth. This Article argues that the trend of shifting tax burdens from capital to labor is neither desirable nor sustainable and suggests a deathtime capital gains tax and an accrual-based tax on unrealized appreciation in publicly traded stock as possible measures to make the federal tax system more equitable (though perhaps less taxpayer-friendly)

The Spurious Allure of Pass-Through Parity

In 2017, Congress reduced tax rates on both corporate and noncorporate income. The drafters invoked the concept of pass-through parity to justify lower rates on noncorporate business income, resulting in a new and highly controversial deduction for pass-through owners under § 199A. The concept of pass-through parity conflates equitable treatment of different entity forms with equitable distribution of the ultimate tax burden among labor and capital. The flawed rationale for § 199A may be viewed as an attempt to preserve the pre-2017 preference for pass-through income; conceptually, the advantage of lower corporate rates is limited to the availability of a higher after-tax rate of return on reinvested corporate earnings, obviating concerns about mass conversions. Despite the stated goal of distinguishing labor income from capital income in noncorporate businesses, the purported guardrails under § 199A provide a substantial subsidy for active passthrough owners by offering a lower tax rate on commingled labor and capital returns. Notwithstanding the rhetoric of parity, the reduced corporate tax rate seems unlikely to significantly alter the choice of organizational form, at least in the near term, given the inherent instability of the 2017 legislation. More significantly, the altered rate structure enhances the ability of owners of close corporations and pass-through businesses to recharacterize labor income as capital income and to avoid employment taxes. The pass-through deduction benefits primarily high-income owner-managers and undermines the equity and efficiency of the tax system. In light of growing concern over inequality and unsustainable deficits, the case for outright repeal of § 199A is even more urgent

PROVIDING LIFETIME INCOME THROUGH SOCIAL SECURITY AND PRIVATE PENSIONS

PANEL V: SOCIAL SECURITY REFORM: THE IMPACT ON WOME