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| Best Practices: Taxes |
Mind the Gaps
Gayle B. Ronan
07/01/2005
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The House and Senate Joint Committee on Taxation (JCT) has been combing
through the tax code, certain that a few hundred billion dollars must have
fallen through the revenue cracks somewhere. Now they are readying to collect
from America’s often unsuspecting taxpayers.
 The committee says it has found
nearly $400 billion of tax dodges, the elimination of which could help ease the
deficit, according to its 435-page report, Options to Improve Tax Compliance and
Reform Expenditures, issued in January. The report contains 69 proposals for
plugging revenue leaks through noncompliance, tax shelters and loopholes.
What one committee calls loopholes, some taxpayers might call astute
financial planning. Like most individuals with wealth transfer concerns, Rusty
Baltis, a retired real estate developer in Mission Hills, Kan., has financial
advisors who have scrutinized the committee’s proposals, particularly four that
could significantly impair some commonly used estate and gift tax planning
techniques. “It’s not like I’m losing any sleep over this,” Baltis says. “But
maybe my children should be.”
| A significant amount of revenue is slipping through the cracks: The JCT estimates that $3.6 billion has been lost over the last 10 years. |
Legislation to repeal the estate tax passed the
House in April, and rancorous debate is expected to fill the Senate this summer.
But estate tax repeal, even if signed into law, may last only as long as the
current tax-averse administration. Meanwhile, JCT members Charles Grassley
(R-Iowa) and Max Baucus (D-Mont.), the chairman and ranking member of the Senate
Finance Committee, respectively, seem intent on leaving a legacy of restrictive
tax statutes that may well outlast the current administration’s estate tax
policy.
Value Subtracted
Two of the JCT’s targets involve perceived abuses in
valuation of estate assets. Grassley suggested at a recent committee meeting
that the heads of appraisers be mounted, figuratively speaking, for contributing
to the valuation problems that he blames for inflating the tax gap.
TOP VIEW
The Joint Committee on Taxation has targeted several estate and gift tax
planning techniques as noncompliance threats, tax shelters and loopholes. Spearheaded by Sen. Charles Grassley, the JCT argues that these dodgy strategies
account for a significant portion of the current revenue gap. Two of the proposals addressing these loopholes have a reasonable chance of passing; two do not. |
The first
of these proposals prohibits an heir who sells an inherited item from claiming a
higher valuation for the item than that used on the estate’s final tax return.
Dennis Belcher, a partner in the Richmond, Va., office of McGuireWoods, a law
firm specializing in wealth and asset transfer, explains that this problem
arises with tangible assets such as artwork and collectibles when an heir’s
auction house assigns a value to an item that is significantly higher than that
assigned by the estate appraiser. When the heir sells the item, he will pay
capital gains tax on the difference between the sale price and the higher
auction house valuation, rather than the lower estate appraiser’s figure.
Because this proposal to require heirs to base valuations on the estate’s final
return seems equitable—and the problem arises relatively infrequently—it is very
likely to pass.
The second proposal involves limiting the availability of
minority and marketability discounts for federal transfer tax purposes. These
are most commonly used to transfer shares in a family limited partnership. The
JCT’s position is that the discount, which reflects the illiquid nature of the
shares, is being used to suppress the market value of securities and bonds for tax purposes. It is here that
the JCT believes a significant amount of revenue is slipping through the cracks:
It estimates that $3.6 billion has been lost over the last 10 years.
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