UNITED STATES – MARCH 1: From left Rep. Brendan Boyle, D-Pa., Senator Elizabeth Warren, D-Mass. And … [+]
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Being a millionaire isn’t what it was then, so the name for the wealth tax introduced by Senator Elizabeth Warren (she’s my Senator, by the way. Don’t brag, just say) is the “Ultra Millionaire Tax Act of” 2021. As of the good old days, Senator Warren is a millionaire, even if you adjusted for inflation until the 1950s when they had that TV show The Millionaire. However, she is far from being an ultra millionaire. Let’s get to that Essentials of the bill for these and some other definitions go into.
A new chapter
The bill would add a new chapter to the Internal Revenue Code – Chapter 18 – Determination of Wealth Tax. There are five new sections 2901-2905 (Fortunately there are some loopholes in the code so there is not much to renumber). It’s Subtitle B-1 Wealth Tax right after gift and estate tax.
The tax is 2% on the net value of all taxable assets of the taxpayer between $ 50 million and $ 1 billion. It is 3% over a billion unless we provide universal health coverage, which is defined as a health insurance program that provides comprehensive protection against the cost of health care and all health-related services and prohibits private entities from providing duplicate benefits. If we have that, the billion-plus rate is 6%.
In the long run, 6% are likely to be confiscating. In the days of the gold standard there was a saying (the source of which I cannot trace) that a 7% discount rate at the Bank of England would pull gold from the moon.
Who is subject?
An “Applicable Taxpayer” means an individual or a trust that is not a trust described in Section 401 (a). and 501 (a) tax exempt “(emphasis added). The way I read that pension and profit sharing plans were exempt, but not charitable trusts. If I’m right, that’s kind of a shock.
Married persons are treated as a single taxpayer. This makes penalties for the mother of all marriages. Look at Robin and Terry, who are both valued at $ 30 million. The marriage costs her $ 200,000 a year. Then we have Blinn and Ashley getting married when we finally achieve universal health coverage. They are worth $ 900 million each. It costs her $ 32 million a year to get married.
How do you imagine that?
The tax is calculated on all assets of the taxpayer reduced by any debts. Excluded assets are things less than $ 50,000 in value, with the exception of business and capital goods and boats, aircraft collectibles, and a few other things like mobile homes. I’m serious. What person with a net worth over $ 50 million has a mobile home worth less than fifty grand?
It is assumed that the taxpayer owns everything that would be in his estate and everything he owns under the rules of the Grantor Trust. All of these deliberately defective grantor trusts are really going to appear defective now. Once in effect, gifts to family members under the age of 18 will be considered the property of the taxpayer until the recipient is 18 years old.
The IRS has 12 months to establish valuation rules that “employ retrospective and prospective formulaic valuation methods”. I think that’s supposed to make things easier. “Hey, you bought it for $ 10 million last year. Don’t try to tell me a story that it’s only worth a hundred grand.” You will also look at how to use valuation discounts.
There are some special rules that I’ll share with you.
The wild IRS
The bill provides for an audit rate of 30% for individuals and trusts that are subject to tax. Given that there is a three year law that comes close to scrutinizing any return. Of course, the real project will be to find the people who don’t submit that. If the bill passes, the IRS will receive an additional $ 100 billion for fiscal years 2022 through 2032. I read that this is eleven years which means $ 9.09 billion a year, but if it is ten years it would mean $ 10 billion.
In any case, $ 70 billion is earmarked for the enforcement of “this title” (the other thirty are earmarked for taxpayer services and business system modernization). At first I thought they were going to throw the whole $ 70 billion on property tax. But the wealth tax is a chapter of a subtitle. The title would be “Title 26” which is the Internal Revenue Code. The IRS budget for fiscal 2021 is just under $ 13 billion, of which only $ 5 billion is for enforcement. So the bill more than doubles the enforcement budget.
This is an employee program of epic proportions.
After returning the refund claim
If I was still practicing and this was over, I would prepare a few wealth tax returns. After they have been filed and mailed, but likely before the check has cashed, I would file a full tax refund claim as it is unconstitutional. It would probably just be a protection claim as we could rely on people with deeper pockets to sue after their claims are denied. There will be lawsuits in every county if not every county and in the Court of Claims.
In my opinion, it would be misconduct not to assert a protective claim for reimbursement. The IRS will make huge investments in enforcement up front. What would be the odds of constitutionality to justify this investment, given the potential prospect of having to return almost all taxes levied – with interest?
Really a terrible idea
I would say the odds should be 90% or better. The odds are maybe better than 50% with governments, but I don’t think they increased in the 90s. I’ve written about what some experts here and here are saying about the constitutionality of a wealth. The question is whether the wealth tax is viewed as a “direct tax” that would require a population breakdown among states, which is widely viewed as an insurmountable obstacle. You will find that the Ultra Millionaire Act doesn’t even include a split as a backup.
We can find out what the problem is from a letter on Senator Warren’s website. (It’s a download) The letter advocates constitutionality. Here is the key paragraph.
Given Knowlton’s role in drafting the debate about the passing of the Sixteenth Amendment, no thoughtful “originalist” can conclude that Pollock’s dictation, which heralds a broad reading of the “direct” tax clause, is the constitutional choice of the American people on the Pollock’s rejection survived in 1913.
They argue that although contemporaries concluded that a constitutional amendment is needed to allow income tax on income from all sources, the 1895 decision that put down income tax can be ignored. Basically, the scholars, delighted with the constitutionality of the property tax, say, “Well, Pollock was just wrong. Let’s not worry about that, even though it provoked a constitutional change.”
It’s just too big a risk, and there are much easier ways to eradicate inequality. For example, how about marketing publicly traded securities and limiting donations to charity to the grassroots? That would bring in a few dollars from Bill Gates, Warren Buffett, and Jeff Bezos. This 30% audit rate brings a lot of income tax with it. Why don’t we see how we deal with it? Here are some other comments.
Tax attorney Louis Vlahos of Farrel Fritz PC noted that the tax is levied on the last day of the year, which he believes is reminiscent of the old FL intangible tax. He takes note of the deleveraging and speculates about planning options. There was a trusted method to bypass the intangible tax that killed them, but that probably won’t be available here. Attorney Vlahos suggests that clients avoid funding grantor trusts and consider making themselves a discretionary beneficiary of a trust with the consent of an “adverse” party. He also notes that the evaluation will be a factual and subjective fact and there will be room for give and take.
Robin E. Caruso
Robin E. Caruso from Prague’s Metis CPAs LLC had some interesting thoughts that I shortened a bit:
The annual tax of 3% on assets over $ 1 billion and 2% on assets between $ 50 million and $ 1 billion, proposed by Senators Elizabeth Warren, Bernie Sanders, and other Democrats, will pose many obstacles and unexpected effects. including how such assets can be effectively managed in taxes, the cost of compliance by taxpayers and IRS, and other possible effects on our economic performance. The IRS is already burdened with dealing with all the recent changes in tax law changes.
The proposals put $ 100 billion in funding for the IRS to screen at least 30% of the super-rich annually, and we need to consider the impact and time and cost burden on these taxpayers. Are we really concerned about the burden on those over a billion dollars? It would depend on who you ask. Efforts to enforce compliance with this plan can create many new jobs. The complexity and cost of evaluating all assets and enforcing the rules alone seems almost insurmountable, but at some point we must effectively address the wealth imbalance in our country. I assume that this wealth tax will encourage those affected and sponsors to find new strategies for tax avoidance.
I believe that it will ultimately take a combination of many tax laws to truly address concerns about our nation’s fiscal inequality and deficit.
From an experienced tax lawyer
I heard from a fairly prominent tax attorney who is now retiring. It was short.
The first thought is to spend your money below the threshold before it takes effect. Second, one proposal to you voters in Massachusetts is not to re-elect Elizabeth Warren. (I tend to be very practical since I retired.)
I can not agree with that. I have a real soft spot for Senator Warren.