Tags: Estate Tax | Increase | Businesses | Investments

Proposed Estate Tax Increase Dramatically Impacts Businesses and Investments

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Monday, 13 Jul 2015 11:51 AM Current | Bio | Archive

How can the Treasury raise more money from taxes on family and closely held businesses and investments without changes to the tax rates?

That's easy. Keep the tax rate the same but just increase the value to which the rate is applied.

Voila, the government says that it didn't increase taxes — meaning rates — even though the taxpayers wind up paying a lot more in actual cash for tax.

The Obama administration well understands that to increase taxes it needs only to promulgate new regulations. It has taken this power to propose what is effectively a dramatic increase in estate tax impositions on all family and closely held businesses and investments

It is widely accepted that legislation by regulation is the hallmark standard operating procedure for the Obama administration.

But what about congressional oversight responsibility?

Congressional oversight is, at best, notoriously lax — if not otherwise intentionally supportive for the Treasury to act without constraint. Essentially, for tax policy Congress has abdicated its power and authority to the Treasury to act unhampered with no effective limitations.

The Treasury is using this assumed power to change the way family and closely held businesses and investments are valued for estate and gift tax purposes.

How are businesses and investments valued? Well, with a great deal of difficulty. Valuation is an especially contentious issue for tax. To say that that the value is based on determining what a willing buyer and willing seller would hypothetically agree as regards a specific business or investment is in reality merely speculation.

The professionals who make a lot of fees in dealing with this tax system imposed fantasy like to think there is a sound basis for computing what is, in reality, merely a one off theoretical transaction.

For the public securities markets valuation is highly subjective. It is obviously even more problematic when the business or investment being valued is privately held and not really offered for sale.

This valuation problem is made difficult since most times only a part of the business or investment is being examined for application of estate or gift tax.

Understanding this dilemma, the estate tax industry — the taxpayer's professionals. Treasury, and the courts — have agreed that even when a total value can be determined that whatever that number turns out to be it needs to be discounted because of several reasons.

What somebody would pay for the whole business or investment differs greatly from what somebody would pay of only a part which lacks control, or liquidity, or is subject to other restrictions impeding marketability.

Recognizing this, the estate planning industry has promoted the use of family limited partnership or limited liability company structures to reduce valuation and, the bottom line amount of estate or gift tax that a business or investment attracts.

The Treasury has litigated these valuation discounts under the authority of code section 2704 which applies in a limited way to transfers of interests in a corporation or partnership t family members. While there are cases going both ways, I think it is fair to say that the Treasury has had limited success in challenging valuation discounts.

Budget proposals by the Obama administration for fiscal years 2010 through 2014 contained proposals to restrict or eliminate valuation discounts or transfers of interests to family members.

This proposal was dropped for the proposed fiscal year budgets for 2014 through 2016.

What is being proposed now by the Treasury is that rather than go to the Congress for actual legislation and a specific grant of authority, it claims it already has regulatory authority to ignore minority and marketability discounts and it intends to promulgate regulations accordingly by September.

It seems to me, as it does to many other tax professionals, that if this Treasury proposal is to become a reality, that potential taxpayers should get on the stick and make appropriate arrangements before there is an effective date for the proposed regulatory restriction.

The Treasury's proposed valuation changes in the estate and gift tax regulations will have the effect of significantly increases the tax on family and closely held businesses and investments.

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Kleinfeld
How can the Treasury raise more money from taxes on family and closely held businesses and investments without changes to the tax rates? That's easy. Keep the tax rate the same but just increase the value to which the rate is applied.
Estate Tax, Increase, Businesses, Investments
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2015-51-13
Monday, 13 Jul 2015 11:51 AM
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