Charting the rates,
Planning for mates,
Watching the states,
Handling the waits,
And predicting the fates
Of the effective dates.
I. INTRODUCTION
This outline is a selective and evolving review of the history of the modern federal estate tax. It originated during the attempts to repeal the estate tax in President Clinton's second term and accelerated with the one-year (2010) "repeal" included in the Economic Growth and Tax Relief Reconciliation Act of 2001. A discussion of the most current developments, including the American Taxpayer Relief Act of 2012, begins on page 69. (State estate and inheritance taxes are tabulated at http://www.mcguirewoods.com/news-resources/publications/taxation/state_death_tax_chart.pdf.)
II. PAST REMINISCENCES
A. The World War I Era
1. In the Revenue Act of September 8, 1916, as the United States was on the brink of entering World War I, Congress enacted the current estate tax, imposed at rates of 1 percent to 10 percent on taxable estates over $50,000. In the Act of March 3, 1917, the rates were generally increased by half, to levels of 1½ percent to 15 percent. In explaining the Senate bill, which would have doubled rates to 2 percent-20 percent, the Finance Committee said:
S. REP. NO. 103, 65TH CONG., 1ST SESS. 14 (1917) (emphasis added).
2. In its version of the Revenue Act of 1926, when the gross rates ranged from 1 percent to 20 percent, the House of Representatives raised the state death tax credit to 80 percent of the basic tax, while the Senate version would have repealed the estate tax. In support of repeal, the Finance Committee quoted the excerpts from its 1917 report that are italicized above. S. REP. NO. 52, 69TH CONG., 1ST SESS. 8 (1926). In short, the Finance Committee of 1917 and 1926 seems to have cited the same arguments in support of doubling the tax and in support of repealing the tax! The 1926 House-Senate conference, of course, accepted the House approach.
B. The Kennedy-Johnson Studies and the Nixon Administration
On February 5, 1969, less than two weeks after the inauguration of President Nixon, Congress published a multi-volume Treasury Department work entitled "Tax Reform Studies and Proposals," reflecting work that had been overseen by Assistant Secretary of the Treasury for Tax Policy Stanley Surrey during the Kennedy and Johnson Administrations. It included a number of estate and gift tax proposals. The following list of the estate and gift tax proposals gives the date each proposal was eventually enacted in some form:
1. Taxation of appreciation at death or at the time of gifts (carryover basis enacted in 1976, repealed in 1980, and enacted again in 2001, effective only for 2010).
2. Unification of the gift and estate taxes.
a. Same rates (1976).
b. Same base – tax-inclusive (1976, for gifts within three years of death).
c. Single exemption (1976 – until 2004).
d. Abolition of the "gifts in contemplation of death" rule (1976).
3. Unlimited marital deduction, including income interests (1981).
4. Repeal of the exclusion of interests in qualified retirement plans (1984).
5. More explicit rules governing disclaimers (1976).
6. An "orphan exclusion" equal to the amount of the gift tax annual exclusion multiplied by the number of years by which the orphan is under 21 (roughly in 1976 – repealed in 1981).
7. Tightening of the deduction rules for transfers to charity (1969).
8. More rational allocation of deductions between estate tax and income tax returns (in part by the "Hubert regulations" in 1999).
9. Tax on generation-skipping transfers (1976 and 1986).
10. Liberalized extended payment of estate taxes (section 6166) (1976).
11. Discontinuance of "flower bonds" redeemable at par to pay estate tax (last issued 1971, last matured 1998).
C. The Ford Administration
"Blueprints for Basic Tax Reform" was published by the Treasury Department January 17, 1977, during the last week of the Ford Administration, in response to Secretary of the Treasury William Simon's lament that the United States should "have a tax system which looks like someone designed it on purpose." In the context of proposing a comprehensive model of income taxation that depended on a dramatically broader tax base, "Blueprints" assumed that transfers by gift or at death would be recognition events. Such capital gains, whether by gift, at death, or otherwise, would be fully taxed at ordinary income rates, with adjustments to the basis of corporate stock for retained earnings and to the basis of all assets for general price inflation. Pre-enactment gain would be excluded, following the precedent of the "carryover basis at death" rules that were enacted in 1976. "Blueprints" was not embraced by the incoming Carter Administration.
D. The Reagan Administration
1. "Tax Reform for Fairness, Simplicity, and Economic Growth" ("Treasury I") was published by Treasury on November 27, 1984, just three weeks after President Reagan's landslide reelection. It included the following (at vol. 2, pp. 373-405):
a. Imposition of gift tax, like the estate tax, on a "tax-inclusive" basis.
b. Imposition of tax only once, when beneficial enjoyment ceases, ignoring retained powers (a proposal that kindled an "easy to complete"/"hard to complete" debate).
c. Treatment of all powers of appointment as general powers of appointment if the holder could benefit from them, without regard to complicating concepts such as "ascertainable standards" and "adverse interests."
d. Valuation of fractional interests in an asset at their pro rata share of the value of the asset owned or previously transferred by the transferor or the transferor's spouse.
e. A simplified GST tax (compared to the GST tax enacted in 1976) with a $1 million exemption and a flat rate (in this proposal equal to 80 percent of the top estate tax rate).
f. Elimination of the phase-out of the credit for tax on prior transfers from a member of the same or a younger generation.
g. Expansion of section 6166 deferral of the payment of estate tax to all cases where the estate lacks sufficient cash or marketable assets, whether or not it holds an interest in a business. Liquidity would be reevaluated annually on an "if you have it send it in" basis (or at least send in 75 percent of it).
h. Conversion of the IRD deduction under section 691(c) to a basis adjustment.
i. Replacement of the separate rate schedule for calculating the maximum state death tax credit with a maximum credit equal to a flat 5 percent of the taxable estate. This would have resulted in a substantially smaller state death tax credit in most cases.
j. Repeal of section 303, which provides for exchange treatment of stock redemptions to pay certain taxes and funeral and administration expenses.
2. "The President's Tax Proposals to the Congress for Fairness, Growth, and Simplicity" was published by the White House on May 29, 1985. It was popularly called "Treasury II" or "White House I" or sometimes "Regan II" in reference to the fact that Donald T. Regan was the Secretary of the Treasury who signed the transmittal letter for "Treasury I" and had become the White House chief of staff by May 1985. Based generally on Treasury I, it was the rough model for the Tax Reform Act of 1986. It contained no transfer tax proposals.
a. Ultimately, the Tax Reform Act of 1986 (Public Law 99-514) did enact a supposedly simpler GST tax (but at a rate equal to 100 percent, not 80 percent, of the top estate tax rate).
b. In the Omnibus Budget Reconciliation Act of 1987 ("OBRA") (Public Law 100-203), the House of Representatives added a repeal of the state death tax credit, a rule valuing interests in family-owned entities at their pro rata share of the total value of all interests in the entity of the same class, and rules regarding "disproportionate" transfers of appreciation in estate freeze transactions. H.R. REP. NO. 100-391, 100TH CONG., 1ST SESS. 1041-44. The House-Senate conference retained only the estate freeze rules, as section 2036(c) (which in turn was repealed in 1990 and replaced with the supposedly more workable rules of chapter 14).
c. The other transfer tax suggestions of Treasury I have not been enacted.
E. The Clinton Administration
1. The Clinton Administration's budget proposals for fiscal 1999 included a proposal to "eliminate non-business valuation discounts," described as follows:
General Explanations of the Administration's Revenue Proposals (Feb. 1998) at 129, http://www.treasury.gov/resource-center/tax-policy/Documents/grnbk98.pdf.
a. The Clinton Administration's budget proposals for fiscal 2000 and fiscal 2001 repeated this proposal, except that "readily marketable assets" was changed to "non-business assets" and "the propriety of these discounts under present law" was changed to "whether these discounts are allowable under current law."
b. This proposal was reduced to legislative language in section 276 of H.R. 3874, 106th Cong., 2d Sess., introduced on March 9, 2000, by the Ranking Democrat on the House Ways and Means Committee, Rep. Charles Rangel of New York. This bill would have added a new section 2031(d) to the Code, the general rule of which read as follows:
(d) VALUATION RULES FOR CERTAIN TRANSFERS OF NONBUSINESS ASSETS—For purposes of this chapter and chapter 12—
(1) IN GENERAL—In the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092), the value of such interest shall be determined by taking into account
(A) the value of such interest's proportionate share of the nonbusiness assets of such entity (and no valuation discount shall be allowed with respect to such nonbusiness assets ), plus
(B) the value of such entity determined without regard to the value taken into account under subparagraph (A).
c. A slightly different articulation of this rule appeared in section 303 of H.R. 1264, 107th Cong., 1st Sess., which Rep. Rangel introduced on March 26, 2001, partly as an alternative to the Republican proposals that became the 2001 Tax Act:
(d) VALUATION RULES FOR CERTAIN TRANSFERS OF NONBUSINESS ASSETS—For purposes of this chapter and chapter 12—
(1) IN GENERAL—In the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092)—
(A) the value of any nonbusiness assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets ), and
(B) the nonbusiness assets shall not be taken into account in determining the value of the interest in the entity.
Rep. Rangel's 2001 bill would also have added a new section 2031(e) to the Code, to read as follows:
(e) LIMITATION ON MINORITY DISCOUNTS—For purposes of this chapter and chapter 12, in the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092), no discount shall be allowed by reason of the fact that the transferee does not have control of such entity if the transferee and members of the family (as defined in section 2032A(e)(2)) of the transferee have control of such entity.
Identical statutory language for new sections 2031(d) and (e) appeared in H.R. 5008, 107th Cong., 2d Sess. §3 (introduced June 24, 2002, by Rep. Earl Pomeroy (D-ND)), H.R. 1577, 109th Cong., 1st Sess. §4 (introduced April 12, 2005, by Rep. Pomeroy), and H.R. 4242, 110th Cong., 1st Sess. §4 (introduced November 15, 2007, by Rep. Pomeroy).
d. Clinton Administration proposals inevitably experienced a bit of a revival after Democrats took control of the Congress and White House. Democratic staff members publicly referred to them as a possible model for legislative drafting. This is perhaps reflected in H.R. 436, the 2009 version of Rep. Pomeroy's bill, discussed in Part VII.A on page 25.
e. The same Clinton Administration's proposed budgets also recommended the repeal of the personal residence exception from section 2702.
2. The "Death Tax Elimination Act of 2000" (H.R. 8) was passed in 2000 by large majorities in Congress, including 59 Senators, but it was vetoed by President Clinton. H.R. 8 would have –
a. reduced the top rate from 55 percent to 40.5 percent in nine annual steps from 2001 through 2009,
b. converted the "unified credit" to an exemption, thereby allowing the exemption to be applied to the top marginal rate rather than to the lower rates as the credit is,
c. eliminated the 5 percent surtax that resulted in the 60 percent "bubble" for taxable estates larger than $10 million,
d. repealed the estate tax, gift tax, and generation-skipping transfer tax (GST tax), beginning in 2010, and
e. replaced the estate, gift, and GST taxes with a carryover basis regime, beginning in 2010.
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