The Sensible Taxation and Equity Promotion Act, a draft proposal from Sen. Chris Van Hollen, D-Md., would tax unrealized capital gains after death with a flat $1 million exemption. (AP Photo/Kamran Jebreili)
Supporters contend the proposal must move with Biden's proposal to require taxpayers earning at least $1 million to pay the top individual tax rate on capital gains, instead of the current top capital gains rate of 20%. They have said some wealthy taxpayers would simply hold onto their assets to avoid triggering capital gains taxes without a mandate to tax some unrealized capital gains after death.
Currently, unrealized capital gains of wealthy taxpayers are shielded from tax, unless they exceed an $11.7 million threshold, or exemption cap, to trigger the estate tax.
Critics contend the proposal to end the tradition of allowing unrealized capital gains of deceased wealthy taxpayers to be passed to heirs without being taxed, along with a step-up in basis, would force heirs to sell family-owned farms and small businesses to pay taxes. Under Biden's plan, heirs would receive inherited assets of a wealthy taxpayer after death with an adjusted basis as long as taxes have been paid on unrealized capital gains.
Some critics also have argued that Biden's overall plan to raise taxes to finance Democratic priorities would hurt the ability of businesses and investors to recover from the effects of the coronavirus pandemic. Other tax hikes in Biden's plan face opposition from business advocates, including his proposal to require partners of various types of investment funds to pay ordinary income tax rates rather than long-term capital gains rates on profits from their investment services stakes, or carried interests.
House Ways and Means Committee Chairman Richard Neal, D-Mass., and Senate Finance Committee Chairman Ron Wyden, D-Ore., have signaled general support for raising taxes on wealthy investors. But they face pressure from some members of the Democratic caucuses in both chambers to allow sweeping exemptions to ensure family-owned businesses and farms can be passed on to heirs without taxes on a deceased owner's unrealized capital gains.
"I'm keeping my powder dry and my mind open," Neal told Law360 when asked about potential exemptions from the proposal to end the step-up in basis.
The proposal could move as part of a filibuster-proof reconciliation bill to advance incentives in Biden's American Families Plan, which is expected to move after the completion of legislation for an infrastructure plan.
Wyden said that ideas for changing the treatment of capital gains after a taxpayer's death would be vetted by lawmakers and the Democratic caucus would make key decisions on the scope of proposals for tax cuts and revenue-raising offsets.
A White House summary of the American Families Plan's proposal on capital gains taxes said it would allow the charitable donation of assets after death. The summary also said the plan would provide "protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business."
But in a May 6 letter to Neal and party leaders, Rep. Jim Costa, D-Calif., and a dozen other Democrats voiced concern that exemptions being considered on Capitol Hill would not provide enough leeway for some family-run operations to continue running after the owner's death.
"Farms, ranches and some family businesses require strong protections from this tax change to ensure they are not forced to be liquidated or sold off for parts," the lawmakers said in their joint letter.
In lieu of excluding all family-owned operations, some liberals have argued for a capped exemption.
For example, Sen. Chris Van Hollen, D-Md., a former chairman of the Democratic Senatorial Campaign Committee, has promoted a draft proposal known as the Sensible Taxation and Equity Promotion Act, which would tax unrealized capital gains after death with a flat $1 million exemption. The draft bill would allow tax liabilities to be paid over 15 years and would leave in place a separate exclusion for gains from the sale of a personal residence, capped at $250,000 for individuals and $500,000 for married couples. The measure has four co-sponsors, including two Finance Committee members: Sens. Sheldon Whitehouse, D-R.I., and Elizabeth Warren, D-Mass.
Van Hollen said his plan was aimed at "an American aristocracy" and argued the capped exemption would ensure taxes are assessed on the unrealized capital gains of only the wealthiest taxpayers after death.
"This impacts a teeny fraction of Americans," Van Hollen told Law360.
But Costa said the size of Van Hollen's exemption would be dwarfed by the unrealized capital gains that have accumulated over decades for some family-run farms and businesses.
"That's not enough," Costa said, referring to the proposed $1 million exemption. He also said any exemptions should be designed to cover different business structures for family-run farms and small businesses, including limited liability companies.
Republicans have seized on the split among Democrats on the scope of exemptions as they look for ways to slow down legislation to advance Biden's overall plan to raise taxes on corporations and wealthy taxpayers to finance his two-part recovery blueprint.
Senate Republican Whip John Thune of South Dakota, a member of the Finance Committee, said Republicans would try to build a bipartisan coalition of lawmakers and outside groups to oppose Biden's plan to impose taxes on the unrealized capital gains of deceased wealthy taxpayers.
"I think we will see a pretty broad wall of opposition to it," Thune told Law360.
Rep. Tom Rice, R-S.C., a member of the Ways and Means Committee and former tax lawyer and accountant, said Biden's proposal would cause headaches for some tax professionals and survivors responsible for managing estates.
"The big problem is liquidity, when you're talking about land or anything that's not liquid. They are going to have to create cash to pay the tax," Rice told Law360.
Sen. Rick Scott, R-Fla., chairman of the National Republican Senatorial Committee, said Republicans would look to attract support from swing voters by pointing to Biden's plan ahead of the 2022 midterm elections.
"It's going to help us in races," Scott said.
In addition to opposing taxation of the unrealized capital gains of deceased wealthy taxpayers, Scott and Thune said Republicans would emphasize their desire to cut estate taxes. For example, Thune said he and other Republicans would continue to push to extend the 2017 tax overhaul's temporary expansion of the estate tax's exclusion cap to $11.7 million before the cap's scheduled reversion, starting in 2026, to the 2017 level of $5 million adjusted for inflation.
Several Democrats said it would be possible to move a proposal to tax the unrealized capital gains of deceased wealthy taxpayers without touching the estate tax framework established by the 2013 fiscal cliff deal in the American Taxpayer Relief Act
with a top rate of 40%, or the temporary expanded exclusion amount under the 2017 law. They said lawmakers might opt to focus on items in the tax package framed by Biden for his recovery plan, which omitted proposals to change the estate tax. William McBride, a vice president of the Tax Foundation, a conservative think tank, said tax planning decisions by taxpayers and their advisers could be affected by enactment of a new mandate for taxing unrealized capital gains of wealthy individuals after their death.
"There are tax planning techniques that could come into play, such as making charitable gifts. Investors also could look at investing in opportunity zones," McBride told Law360. Investments in opportunity zone businesses could allow for the deferral of capital gains taxes through 2026.
The Tax Foundation has estimated the proposal to tax unrealized capital gains of some deceased taxpayers would raise $192 billion over 10 years, if enacted as part of Biden's overall plan for raising taxes on wealthy individuals.
Sen. Chris Coons, D-Del., a Biden ally, said he expected Biden and his team would be open to tweaking the proposal in order to cement support for legislation containing parts of Biden's recovery plan.
"He's made it clear that he's not taking a rigid position and that he's open to negotiation," Coons told Law360.
--Editing by Robert Rudinger and Neil Cohen.
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