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A New Estate Tax: Eliminating the Step-Up in Basis at Death

Posted on September 1, 2015 by Sean P. McElroy

 

Sean P. McElroy is a JD candidate at Stanford University. He thanks Joseph Bankman, Stewart Dunn, Alex Kasner, Daniel Kessler, Johnathan Mondel, and Michael Rubin for reviewing earlier drafts of this report and for helpful conversations about its content. All errors are his own.

In this report, McElroy analyzes the practical ramifications of eliminating section 1014 and instead treating death as a realization event. This report was selected as a winning entry in Tax Analysts' annual student writing competition.


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Table of Contents


I. Introduction

II. The Problems With Basis Step-Up

A. The Long-Criticized Provision

B. The Perverse Incentives of Section 1014


III. Eliminating Section 1014

A. The History of Reforming the Basis Step-Up

B. Administrative Issues Today

C. A More Complex Tax Code


IV. Taxing Death: The Big Picture

A. The Estate Tax

B. The Reformed Estate Tax or a New Regime?

C. A Modest Proposal


V. Conclusion


I. Introduction


Economist Thomas Piketty wrote that "intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact."1 Piketty is certainly correct when one considers the political debate surrounding how the federal government taxes estates. The taxation of estates is one of the most direct mechanisms by which the government can redistribute wealth and shape its distribution at the macroeconomic level. But amid the heated political dialogue are fundamental questions of tax policy.

The most direct form of taxation on estates is, of course, the estate tax.2 The tax is so politically contentious that even its name is controversial: Supporters call it the "estate tax," while opponents call it the "death tax."3 Some commentators have suggested completely eliminating the estate tax,4 while others have recommended increasing the incidence of the estate tax -- either by lowering the exemption amount or raising the rate.5

In his 2015 State of the Union address, President Obama called on Congress to "close the loopholes that lead to inequality by allowing the top 1 percent to avoid paying taxes on their accumulated wealth." He has proposed eliminating "the stepped-up basis loophole" by repealing section 1014 and treating bequests and gifts (other than to charitable organizations) as realization events.6

Section 1014 states: "The basis of property in the hands of a person acquiring the property from a decedent shall [be] the fair market value of the property at the date of the decedent's death." Thus, the tax basis of an appreciated asset like a house or stock is revalued at death, and the capital gains are never taxed.

Repealing section 1014 would make death a capital gains realization event, meaning that appreciated capital property held by the decedent would be subject to immediate capital gains taxation as if it were sold for cash. Gifts to non-charitable organizations would be treated similarly.7

This would, of course, be a major change to the way in which the government taxes estates, and it would give the government a powerful tool to redistribute wealth and raise additional revenue. Although taxing estates directly might seem ideal at first glance, the reality is that the estate tax in its current form raises a surprisingly small amount of revenue while triggering a whole host of negative economic effects. Can we improve the estate tax regime?

This report addresses that meta-question by examining the practical implications of eliminating stepped-up basis and making death a realization event.8 Among the primary concerns are the complexity of the tax code and the avoidance strategies of large, well-advised estates -- factors that influence the effectiveness of any estate tax regime.


II. The Problems With Basis Step-Up


A. The Long-Criticized Provision

In 1973 Michael J. Graetz noted that "commentators have long criticized as inequitable the present practice of leaving untaxed those estates composed of unrealized appreciation while taxing appreciation when assets are sold prior to death."9 Around the same time, Stanley Surrey and Jerome Kurtz identified the failure to fully tax assets transferred at death as "the most serious defect in our federal tax structure today."10 Four decades later, we still face the same basic problem: The basis step-up at death allows large concentrations of wealth -- potentially an enormous percentage of a wealthy individual's net worth -- to escape capital gains taxation. In this light, the basis step-up stands out even among the modern code's myriad large tax exemptions.

The Obama administration's proposal to replace section 1014 with a provision that would treat a death or non-charitable gift as a taxable event appears to be a plausible and effective way to ensure that large accumulations of wealth do not avoid taxation. It would undoubtedly increase federal tax revenue substantially. According to the Congressional Budget Office, the capital gains exclusion in section 1014 is a $50 billion tax expenditure.11

Much of this $50 billion tax expenditure benefits households in the highest income bracket: 65 percent of the tax benefit goes to the top quintile of households, while an extraordinary 21 percent goes to the top 1 percent of households.12 For those who favor at least a mildly progressive tax system, the central policy problems presented by section 1014 are obvious: It is an incredibly expensive and highly regressive tax expenditure.

B. The Perverse Incentives of Section 1014

 


The problems with section 1014, however, go beyond the fact that it is a tax expenditure that almost exclusively benefits the highest earners. A simple hypothetical example illustrates the potentially perverse incentives of the basis step-up. Assume an individual has amassed an enormous net worth, mostly through the appreciation of capital assets that she inherited when relatively young. If she sells any of those assets during her lifetime, she will pay a substantial capital gains tax -- just about 20 percent of her gains over basis.13 She thus has a strong incentive to hold onto her gain property until death.

 

Section 1014 has been described as an "extraordinary rule" that leads individuals to sell their loss property before death to take advantage of a loss deduction and to retain their gain property so their heirs can take advantage of the basis step-up.14 The result is a lock-in effect, because the code provides a strong economic disincentive to sell gain assets before death, even when that sale would otherwise be in the asset holder's best interest. These purely tax-driven incentives create substantial deadweight loss by discouraging the free exchange of property.

Consider a real-world example: Donald Sterling purchased the Los Angeles Clippers NBA team in 1981 for $12.5 million and, under immense pressure,15 was forced to sell it in 2014. Sterling, who was 80 at the time, fiercely resisted the sale16 -- not just as a matter of pride, but because there was an enormous tax incentive to hold on to the team until his death.17 He potentially faced a huge CGT on the $2 billion sale of the franchise, with the federal tax bill alone being more than $350 million.18 Had the asset passed with his estate, his heirs would have received a basis step-up to market value and thus avoided the CGT.

Sterling held on to his property and threatened litigation even when it made sense for him (tax rationales notwithstanding) to sell the Clippers in 2014. This highlights the real-world effect of section 1014: Those wealthy enough to retain their assets can hold on to gain property until death and then give it to their kids, avoiding having to ever pay CGT on the sale. Sterling's resistance to the sale shows how section 1014 creates an undesired effect on the taxpayer and can lead to substantial deadweight loss when mutually beneficial transactions are avoided purely for the sake of avoiding capital gains taxation.

Another thing to consider about the basis step-up is that many middle-income earners (and even upper-middle-income families with significant assets) spend most of their wealth on their retirement (and related medical expenses). As a result, they cannot hold on to capital assets until they die and give them to their kids; they rely on what limited capital they have accumulated over a lifetime to maintain even a modest lifestyle during retirement.19 It truly is a province of upper-income individuals to possess capital assets that one can simply let appreciate over retirement to pass on to one's children.

In sum, section 1014 is a highly regressive and costly tax expenditure that creates substantial deadweight loss by providing tax incentives to hold on to capital that would otherwise be sold or invested more efficiently in the market.


III. Eliminating Section 1014


Although the current regime of stepping up the basis of a decedent's capital assets has been subject to essentially universal scorn among tax scholars for decades, previous attempts by Congress to repeal section 1014 have failed.20 The primary reason has been that revocation would unduly complicate the IRS's administration of the code, creating a nightmare not worth the increased revenue.21 But are those administrative difficulties truly so insurmountable that they justify a $50 billion tax expenditure?

Past attempts to reform section 1014 have created a carryover basis regime, a tax system in which the basis of a decedent's capital assets carries over with the estate from the decedent to the inheritor. The implementation of that regime created enormous administrative headaches for everyone involved.22 Would the administration's plan to make death and non-charitable gifts capital realization events fare any better?

There are undoubtedly considerable administrative complexities to repealing or replacing section 1014, because doing so would require that the IRS acquire more information about estates than it currently does (most notably, the basis of all assets within the estate). Those complexities provide a convenient excuse for those who have a fierce political opposition to raising any tax.23 Under any regime in which assets are taxed at death, the IRS will inevitably need to determine the FMV of assets in an estate. It is thus presumptively easier -- from a purely administrative perspective -- to simply calculate the basis from that FMV rather than ask executors to prove, or to calculate on their own, the basis of assets that might be decades-old (and thus might not electronically available or easily accessible).

A. The History of Reforming the Basis Step-Up

 


As noted, prior reform efforts took the form of a carryover basis regime. Hence, although an estate could avoid paying taxes on assets, the heirs' eventual sale of those assets would trigger CGT at the going rate for all gains over the original basis.24

 

For example, the Tax Reform Act of 1976 (P.L. 94-455) attempted to eliminate the basis step-up by providing that specified types of property "would have the same basis in the inheritor as in the hands of a decedent." That regime proved "surprisingly complicated and . . . extremely unpopular."25 It also failed to raise the promised revenue, because it created an even greater incentive to lock in capital property after death to avoid a capital realization event.26

The complexities of the attempted 1976 reform underscore what is usually considered the central benefit of the current regime: administrative convenience. The appraised date-of-death FMV for all estate property becomes the stepped-up basis for all capital assets (and, if the estate is large enough, that amount is used to calculate the estate tax).27 The asset's old basis need not be reported or calculated in the taxation of the estate. Resetting basis to the date-of-death FMV simplifies matters for both the estate and the IRS, which is one justification for keeping section 1014. It eliminates lengthy tax histories that could eventually spawn disputes or complex litigation over how the basis of a decades-old asset was calculated or determined.

B. Administrative Issues Today

 


Treating a bequest or a gift as a capital realization event would still require that the IRS (1) determine the original basis of all items in an estate; (2) calculate the FMV of the capital assets at the date of death; and (3) tax the difference at the capital gains rate. Thus, the new regime proposed by the administration would require the IRS to make the same value determinations it makes today -- with the additional requirement that the IRS discover or calculate the original basis of assets held by the decedent.

 

Hence, this new proposal would present considerable administrative problems. For some capital assets, such as publicly traded stocks,28 calculating the original basis would be easy because the cost basis of marketable securities is electronically recorded. Even if there is no recording of the basis, the taxpayer (or the IRS on audit) can fairly easily determine the FMV of a security by looking at the historical record.

But difficulties arise for capital assets that lack a clearly defined basis, such as decades-old property or partnership interests in small family businesses. The fear is that calculation of the original basis could become a highly contentious finding of fact and could open the door to tax disputes, thus creating an administrative nightmare for the already-overburdened IRS. That was a concern in 1976, when Congress tried to implement a carryover basis regime, and it merits consideration today.

However, the basis of commonly held capital assets (such as stock and most houses bought within the past few decades) has been electronically recorded or can be easily calculated. Although there are some assets for which the calculation of basis will remain difficult, the widespread electronic recording of the cost basis for real property will make this task, on the whole, increasingly easier.29

For the proposed regime to work, Treasury must be given the flexibility to implement taxpayer-friendly methods of calculating basis for the few hard-to-calculate properties, and there should be a "free" step-up in basis for property under a specified value (such as a grandmother's modest wedding ring).30 This could provide a simpler way to calculate the original basis of very old assets in a gift or in an estate and minimize the central administrative problems that arose in the earlier reform attempts.31 It would, however, raise distributive problems (which are not raised by the estate tax) in that middle-income families could be required to sell assets upon death, as discussed in Section IV.

C. A More Complex Tax Code

 


The administrative complexity posed by eliminating the basis step-up is considerable, but given the increasing ease with which the IRS can track the basis of capital assets, it would not be substantially more burdensome than any other alternative proposal for taxing estates. If Treasury is given flexibility in calculating the basis of older assets, the law would likely be administrable.

 

Making a bequest a realization event would certainly accomplish the policy goals of increasing tax revenue and increasing the equality of taxation, but it would still result in a more complex tax code and more complicated tax administration. The question is whether those costs make this option less desirable than the current regime.


IV. Taxing Death: The Big Picture


A policy goal of the Obama administration is to prevent the accumulation of large quantities of untaxed wealth.32 Taxation is one method by which the government can prevent that accumulation.33 With this policy goal in mind, it is important to consider not just the effect of repealing section 1014 but also the broader role of the federal estate tax.

Assuming that eliminating the basis step-up would be administrable and generate revenue according to the estimates above, is it the ideal way to tax estates equitably and fairly? Would it be better than simply keeping the current estate tax? I argue that repealing section 1014 and treating bequests of capital property as realization events would be an improvement over the ever-unpopular estate tax regime.

A. The Estate Tax

 


The treatment of death as a realization event would impose CGT on estates at the same time as the estate tax (for large estates to which the estate tax applies). Thus, one must first consider the current estate tax before evaluating the effect of an additional tax.

 

The estate tax is, in the words of the IRS, "a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death."34 The estate tax is designed to apply only to the wealthiest Americans, hence there is a large exemption amount -- $5.43 million for those who die in 2015 -- although in some cases the tax applies to small businesses holding substantial assets (most commonly, small farms).

To say that the estate tax has its critics is a gross understatement. The Heritage Foundation has argued that elimination of the estate tax would boost the economic growth of the United States by "more than $46 billion over the next ten years and generate an average of 18,000 private-sector jobs annually."35 The foundation's report posits two key reasons the estate tax harms Americans (and not just wealthy Americans): (1) it reduces capital available to workers, which hurts productivity; and (2) it does not affect income inequality, and only 2 percent of income inequality can be explained through inherited wealth.36 It is unclear, however, how the report defines inherited wealth or distinguishes between income inequality and the concentration of intergenerational wealth. Although one could argue that this is a politically motivated report, it nonetheless highlights some important criticisms of the estate tax.

Among the estate tax's critics are those who support the abstract notion of taxing estates but find the current estate tax inefficient in achieving its policy goals. Edward D. Kleinbard, for example, has offered a critique and proposed reform of the estate tax.37 He notes that "the estate tax is extremely important to ensuring over the long term an open society not dominated by vast concentrations of dynastic family wealth."38 As part of his comprehensive reform plan, Kleinbard proposes to lower the estate tax exemption to roughly $3.5 million per estate and impose a 45 percent top tax rate.

Kleinbard notes that any reforms of the estate tax should focus on preventing avoidance, since those measures are generally far more important in limiting dynastic wealth than decreasing the exclusion amount. This seems correct, but it might still be impossible to prevent avoidance of the estate tax given the abilities of tax practitioners (and the nature of money in politics to ensure that loopholes continue to exist), however necessary those reform efforts might be to the efficacy of our tax system.

The estate tax thus has many critics from many different political perspectives. Although this report takes no position regarding the correct level of government taxation, it seems safe to say that the current regime is not ideal from any perspective. The next question is whether a new regime -- one that treats death as a realization event with no basis step-up -- could do better.

B. The Reformed Estate Tax or a New Regime?

 


Considered solely from a revenue perspective, the administration's proposal -- eliminating the stepping-up of basis while keeping the current estate tax -- would raise significantly more revenue than the current estate tax regime. While the CBO estimates that section 1014 costs the Treasury almost $50 billion,39 proposed exemptions would substantially reduce this amount. The 2016 Obama Budget compiled in a single line both the elimination of 1014 and a moderate increase in the capital gains rate, and estimated that together these reforms would generate $208 billion in tax revenue over the next ten years.40 Considering that the estate tax brings in roughly $11 billion dollars annually, the treatment of bequests as realization events would likely generate about the same revenue as the entire estate tax today.

 

One policy consideration is the problem of taxpayers forced to sell an asset to pay the CGT. Although we might not have felt sorry for Sterling's family members if they had had to sell the Clippers to pay taxes on the $2 billion sale, we might have sympathy for a middle-income family forced to sell a family heirloom (or even an upper-middle-income family forced to sell an inherited car or house because the taxes are too high).

The estate tax exemption, now $5.43 million, avoids that problem. If the tax policy goal is to prevent large quantities of untaxed, accumulated wealth, it might make sense in a realization-at-death regime to exempt some amount of capital gain from taxation at death. However, even a relatively small exemption would substantially narrow the base and reduce the revenue that this tax would be able to generate.41

That exemption might also have the same lock-in effect as the step-up in basis. The difference would be that instead of extremely wealthy individuals having a strong incentive to hold on to gain property until they die, middle-income individuals with modest estates would have strong incentives to not sell gain property in order to take advantage of this exemption.42 The estate tax appears to eliminate this problem, but its ability to actually tax the largest estates is limited by effective tax avoidance strategies used by those estates.43

One final consideration is that eliminating the basis step-up and maintaining the current levels of estate tax would be an extremely visible form of double taxation on large estates. Politically, this double taxation would be far more visible because it would occur at the exact same time -- large estates would pay the CGT on their realized capital assets, and then those assets would be subject to the estate tax. While some would note that the estate tax is by design a form of double taxation, the administration's proposal would apply the estate tax to wealth that has already been taxed (at least once) at the capital gains rate.

C. A Modest Proposal

 


The visibility of the double taxation makes it unlikely that a tax code containing both the current estate tax and the treatment of death as a realization event would be politically feasible. The political desire to fairly tax all income once and prevent tax avoidance by the wealthiest leads to a potential solution: Substantially curtail the present estate tax by raising the exemption to cover only extremely large estates, and in exchange eliminate the basis step-up and treat death as a realization event. That regime would be fairer, generate more revenue, and prevent the problems of double taxation that dominate the political discourse surrounding the estate tax.44 Also, the IRS resources that are currently used to calculate the estate tax could be used to calculate the CGT that would be imposed on estates under this new regime, thus lowering the cost of administering a tax code that lacked section 1014.

 

Of course, one of the goals of a broader estate tax is to offset the basis step-up by taxing the largest estates, because the estate tax's incidence is almost exclusively on wealthy individuals' estates.45 Stephen Moore of the Heritage Foundation has argued that the basis step-up at death exists to "offset the effects of the estate tax" and has thus criticized the administration's proposal as a form of double taxation.46 Eliminating the basis step-up would obviate the need to broaden the estate tax, because there would be assurance that all estates had been taxed once and that the incidence of the tax was the same as for any other capital gains. One could also limit the application of this tax on small businesses -- for example, by allowing the tax to be spread over 15 years for them. As discussed earlier, it is unclear whether this proposal would generate more revenue than the estate tax. However, if it did, it would be worthwhile for the administration, given their policy goals, to pass this reform even if such passage meant eliminating the estate tax.

One potential policy problem with this proposal, at least in the current political environment, is that it appears that the capital gains rate could be highly variable. Republican candidates -- for example, Mitt Romney in 2012 -- have made it no secret that if elected president they intend to urge Congress to lower the capital gains rate. On the other hand, many Democrats wish to raise the capital gains rate. Thus, this proposal would not end the policy discussions about the proper rate at which to tax capital gains -- but that is a good thing. The goal of this proposal is to ensure that taxation is fair and minimally complex and that political debate can center on the proper rate at which to tax assets rather than the complications and intricacies of the so-called death tax.


V. Conclusion


Repealing section 1014 would fundamentally transform how we tax death and non-charitable gifts. However, this would be a major shift in tax policy, and the factors outlined above must be carefully considered before implementation.47

The complications associated with eliminating the basis step-up cannot be ignored. The additional revenue raised would come at the cost of increased complexity to the tax code. But the amount of tax revenue at stake suggests that the potential administrative burdens are worth it. Other trade-offs are increased fairness and the end of some tax-driven investment behaviors. And, as outlined above, modern technology, coupled with a clear statutory (and regulatory) regime for determining the basis of hard-to-calculate assets, would minimize the administrative burdens.

If our goals are having a fair tax code for similarly situated taxpayers and preventing the accumulation of large estates of untaxed wealth, the treatment of bequests and gifts as realization events is a practical solution. That treatment would also address the considerable lock-in problems that arise when large estates have a strong incentive to hold on to assets until death for purely tax-driven reasons. Tying estate taxation to the capital gains rate allows Congress to make policy determinations about the proper level of taxation in the future without necessitating an overhaul of the system or generating costly political debates about the estate tax. Thus, if Treasury is given the flexibility to create taxpayer-friendly ways to calculate the basis of decades-old assets, this is a workable and well-considered way to equitably tax capital assets held at death -- one far preferable to the current estate tax regime.


FOOTNOTES


1 Piketty, Capital in the Twenty-First Century 2 (2014).

2See section 2001 (imposing a tax "on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States").

3 This report refers to this tax as the "estate tax" because that is the favored term in academic literature.

4See, e.g., John L. Ligon et al., "The Economic and Fiscal Effects of Eliminating the Federal Death Tax," Heritage Foundation (Sept. 23, 2014), available at http://www.heritage.org/research/reports/2014/09/the-economic-and-fiscal-effects-of-eliminating-the-federal-death-tax (arguing that eliminating the federal estate tax would "create economic opportunities for American Families").

5See, e.g., Matthew O'Brien, "The Estate Tax Is a Huge Giveaway in the Fiscal-Cliff Talks," The Atlantic (Dec. 31, 2012), available at http://www.theatlantic.com/business/archive/2012/12/the-estate-tax-is-a-huge-giveaway-in-the-fiscal-cliff-talks/266723. Even comedians have weighed in on this matter. See, e.g., "Real Time With Bill Maher," HBO (Mar. 13, 2015) (suggesting, in the comedian's tongue-in-cheek monologue, a 100 percent tax on inheritances).

6See White House, "Fact Sheet: A Simpler, Fairer Tax Code That Responsibly Invests in Middle Class Families" (Jan. 17, 2015) (Obama tax proposal).

7Id. This avoids the rather obvious loophole of having near-death individuals gifting gain property to their heirs to avoid paying capital gains tax. Also, this exemption could further encourage tax-free charitable investment.

8 This report does not consider what a modern carryover regime would look like, although the failures of those regimes are discussed in Section II. Much of this report's analysis would apply to a carryover basis regime.

9 Graetz, "Taxation of Unrealized Gains at Death -- An Evaluation of Current Proposals," 59 Va. L. Rev. 830, 833 (1973).

10 Surrey and Kurtz, "Reform of Death and Gift Taxes: The 1969 Treasury Proposals, the Criticisms, and a Rebuttal," 70 Colum. L. Rev. 1365, 1365 (1970).

11 CBO, "The Distribution of Major Tax Expenditures in the Individual Income Tax System," at 16 (May 2013). See also Obama tax proposal, supra note 6 (claiming "hundreds of billions of dollars escape capital gains taxation each year because of the 'stepped-up' basis loophole"). For a general critique of tax expenditures as a means of masking government spending, see Edward D. Kleinbard, We Are Better Than This: How Government Should Spend Our Money 241-263 (2014).

12 CBO, supra note 11, at 16. These quintiles are determined according to annual income -- not wealth -- as is standard.

13 This is assuming, of course, that she pays the long-term capital gains rate on all her assets, which, under current law, would be about 20 percent for income in the highest tax bracket. See IRS, "Topic 409 Capital Gains or Losses," available at http://www.irs.gov/taxtopics/tc409.html.

14 Joseph Bankman et al., Federal Income Taxation 108 (2012).

15 David Leon Moore, "Donald Sterling Racism Allegations Ignite NBA Outrage," USA Today, Apr. 28, 2014, available at http://www.usatoday.com/story/sports/nba/clippers/2014/04/27/donald-sterling-racism-allegations-outrage-los-angeles/8333029/.

16 Sterling went as far as to file a federal antitrust lawsuit to prevent the sale, although this lawsuit was ultimately revoked. See Ken Bilson, "With Sale Pending, N.B.A. Cancels Its Vote on Sterling," The New York Times, May 31, 2014, available at http://www.nytimes.com/2014/05/31/sports/basketball/nba-clippers-sterling.html; and Nathan Fenno, "Donald Sterling Loses Court Battle to Prevent Sale of Clippers," L.A. Times, July 28, 2014, available at http://www.latimes.com/sports/sportsnow/la-sp-sn-sterling-donald-shelly-clippers-judge-ruling-20140728-story.html.

17See Jordan Weissman, "Why the NBA's Punishment Could Cost Donald Sterling More Than $100 Million," Slate, Apr. 19, 2014, available at http://www.slate.com/blogs/moneybox/2014/04/29/donald_sterling_selling_clippers_he_could_lose_100_million.html.

18 Depending on the legal ownership of the team, Sterling would potentially be subject to substantial California state taxes, as well as other federal taxes, such as the Affordable Care Act's net investment income tax. This is also assuming that his basis in the asset was very low; however, for various reasons, his actual basis was likely higher than the $12.5 million he paid for the team. See Weissman, supra note 17; and Robert W. Wood, "Donald Sterling's Last Laugh: Tax-Free $2 Billion Clippers Sale," Forbes, June 4, 2014, available at http://www.forbes.com/sites/robertwood/2014/06/04/donald-sterlings-last-laugh-tax-free-2-billion-clippers-sale/. I am also assuming that there are no other loopholes Sterling could exploit to avoid paying CGT on this sale. In Sterling's case, that's probably false. See Wood, supra.

19See, e.g., AARP, "Money Matters: Spending Down Your Assets in Retirement" (2009), available at http://assets.aarp.org_/articles/money/financial_pdfs/spend_down_retirement_2009.pdf (advice on how a retiree should spend down assets over the course of retirement so they last until death).

20 Tax scholars who have discussed eliminating section 1014 have long noted that although replacing the provision would lead to more revenue and equity, it would also inevitably lead to more complexity in the code. See, e.g., Graetz, supra note 9, at 832.

21See, e.g., id.

22 Bankman et al., supra note 14, at 109; see also Comment, "The Tax Reform Act of 1976, Section 1023: Tax Reform Gone Awry?" 37 Md. L. Rev. 380, 401 (1977).

23 This modern political reality (that a substantial portion of Congress will simply refuse and block any new taxes) did not exist when these reforms were originally being considered. The reforms nevertheless drew substantial political backlash. See, e.g., Bankman et al., supra note 14, at 109.

24 It seems that the carryover basis regime would encourage those with large, accumulated assets to wait to sell until the capital gains rate was lower (e.g., under a different administration). This might be the case under any regime with a changing capital gains rate, but a carryover regime would allow this to occur across generations. It would also allow people to spread the taxation of their capital gains over multiple years.

25 Bankman et al., supra note 14, at 109.

26See Comment, supra note 22, at 400-401. See also supra note 24.

27See section 1014; and Form 706 Instructions, available at http://www.irs.gov/instructions/i706/ch01.html.

28 This is the asset offered as an example in the White House's release. See Obama tax proposal, supra note 6.

29See Lawrence Zelenak, "Taxing Gains at Death," 46 Vand. L. Rev. 361, 388-392 (1993). How difficult it actually is to require the calculation of all assets' original basis has been hotly debated. In 1993 one scholar noted that despite wildly varying testimony on the difficulty of calculating the basis of assets, this calculation "would not make a death gains tax impracticable." Id. at 392. Modern technology and the increasing ease of electronic data will make finding the basis of assets increasingly easy for both the IRS and taxpayers.

30 Of course, any exception could lower the revenue from a tax and -- as is always a concern with tax policy -- open the door for abuse or misuse. However, even if this exemption cost the fisc $1 billion in annual revenue, the analysis in this report would still apply.

31 For examples of this flexibility (applied to a similar proposal in the early 1990s), see Zelenak, supra note 29, at 392-394. It also seems that such a regime would need to have an exemption for some small assets that lack a clear valuation.

32See Obama tax proposal, supra note 6.

33 Piketty, among others, has implied that taxation of estates is perhaps the best way to prevent the accumulation of wealth. See, e.g., Piketty, supra note 1, at 373-375.

34 IRS, "Estate Tax," available at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax.

35 Ligon et al., supra note 4.

36Id. (citing Alan Binder, former chair of the Federal Reserve Board).

37 Kleinbard, supra note 11, at 379-381 (discussing what Kleinbard describes as a "Better Base Plan").

38Id. at 379.

39 CBO, supra note 11, at 16. The amount of revenue it would generate is highly variable because it is tied to the CGT rate, but I would argue that is but an additional reason to favor this proposal -- its rate can be varied by the tax policy goals of future Congresses.

40 Office of Management and Budget, "Fiscal Year 2016 Budget of the U.S. Government," at 120 (2015), available at https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/budget.pdf.

41 The amount of income that would be captured by such an exemption is substantial. For example, the Obama budget offers a figure of approximately $207 billion raised by reforming the capital gains tax, treating death as a realizable event and eliminating section 1014. However, this figure includes in these numbers a capital gains rate increase of 4.1 percent. Thus, with this exemption, a $50 billion tax expenditure turns into perhaps a fifth of that in actual tax revenue. Supra note 40.

42 Presumably, large estates would not be as concerned because they would receive the same benefit anyway (assuming they have a large variety of gain property) -- but if a taxpayer had only $300,000 in assets, even if it made sense to sell major gain assets (such as a house or stock), the tax incentives of holding on to this property might lead to inefficient behaviors such as taking out loans that the estate would pay at death rather than selling the asset when it makes the most sense economically.

43See, e.g., Zachary Mider, "How Wal-Mart's Waltons Maintain Their Billionaire Fortune: Taxes," Bloomberg Business (Sept. 11, 2013), available at http://www.bloomberg.com/news/articles/2-13-09-12/how-wal-mart-s-waltons-maintain-their-billionaire-fortune-taxes (discussing what a family spokesperson described as the variety of "broadly available and commonly used" legal loopholes for estate tax avoidance).

44See Stephen Moore, "Obama Estate Tax Plan: Die Once, Get Taxed Twice," Heritage Foundation (Feb. 3, 2015), available at http://www.heritage.org/research/commentary/2015/2/obama-estate-tax-plan-die-once-get-taxed-twice (criticizing the Obama tax proposal, supra note 6, as leading to double taxation).

45 Some of the incidence of this tax is on small businesses, most notably farms. This is a concern, but one that could be minimized and alleviated through creative drafting and carefully designed carveouts for specific types of assets. See Obama tax proposal, supra note 6.

46 Moore, supra note 44.

47 As one commenter has noted, there is no constitutional barrier to taxing gifts -- this is purely a matter of legislative policy. See, e.g., Jeffrey L. Kwall, "When Should Asset Appreciation Be Taxed?: The Case for a Disposition Standard of Realization," 86 Ind. L.J. 77, 109-111 (2011).


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