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June 7, 2021

Biden Administration proposes to increase individual income tax rates, expand application of employment tax and radically change the taxation of capital income

In the FY 2022 budget (Budget) and Treasury Green Book, released May 28, the Biden Administration provided details on tax increases and other proposals outlined earlier in its Made in America Tax Plan (alongside the American Jobs Plan infrastructure proposal) and the American Families Plan "human infrastructure" proposal. The Green Book mostly sticks with provisions under the Jobs and Families plans and does not offer many new proposals in other areas. It also omits several proposals from Biden's campaign tax plans.

It is hard to determine which of the proposals that President Biden set forth in his first address to Congress (see Tax Alert 2021-0906) made it into the Green Book. But, the general goal, for individuals at least, is to treat income from capital the same as income from labor.

According to press reports, some Democrats in Congress have been waiting for Treasury to release details on the tax proposals and estimates of their revenue impact to help them decide whether they can support the proposed tax changes. The Budget's release comes as the Administration seeks bipartisan support for infrastructure plans, and Republicans have made clear they won't support tax increases. The outlook for the Families Plan is even murkier and may depend on how infrastructure comes together.

General commentary

This Tax Alert categorizes the individual tax proposals into two parts: (1) general reforms of the individual tax system and (2) reform of how income from capital is taxed. Presumably the individual tax reforms will also apply to estates and trusts, though no details were provided in the Green Book. But first, some general observations:

  1. The Budget is simply a request to Congress, which must approve federal spending.
  2. The overall package appears to be a patchwork of ideas that have not yet been synthetized into a cohesive plan. For example, the rules inconsistently flip between taxable income and adjusted gross income (AGI) as thresholds for tax increases.
  3. White House budget estimates are not necessarily the same as those used for "scoring" a tax provision on Capitol Hill. Some estimates are higher; others are lower. It depends on assumptions of taxpayer behavior, downstream economic impacts, etc.
  4. The Budget does not include the following:
    1. Changes to estate/gift tax rates, although some changes indirectly affect grantor-retained annuity trusts (GRATs), gifts to generation-skipping trusts (GSTs) and holding of appreciated property at death and appear to eliminate valuation discounts
    2. Changes to lifetime estate/gift exemptions
    3. Changes to Social Security taxes, proposed during the campaign
    4. Limitations on the IRC Section 199A deduction, proposed during the campaign
    5. Changes to deduction limitations under the Tax Cuts and Jobs Act (TJCA) (i.e., taxable income increases):
      1. The state and local tax (SALT) cap remains at $10,000
      2. The limit on mortgage interest deductions remains at $750,000/$1m
      3. Casualty and theft losses are still limited
      4. Alimony remains non-deductible

Part 1

Reform of individual income tax

Increasing marginal tax rates

The proposal would increase the top marginal individual income tax rate to 39.6%. This rate would apply to taxable income exceeding the 2017 top bracket threshold, adjusted for inflation.

The proposal would be effective for tax years beginning after December 31, 2021.

COMMENT: This change would effectively accelerate what would happen in 2026 under the TCJA — without the beneficial items also coming back (e.g., deduction for state and local taxes, etc.). The table below compares the highest individual tax brackets between current law in 2021 and what is proposed for 2022:


2021 @ 37%

2022 @ 39.6%

Married filing jointly






Head of household



Married filing separately



Trusts and estates



According to press reports, some Democrats in Congress say they won't vote for a bill" without some change to the overall $10,000 SALT cap. Any increase in the cap, regardless of size, would help blunt the impact of these changes.

Expanding application of net investment income and Self-Employed Contributions Act (SECA) taxes

The proposal would:

  1. Ensure that all pass-through business income of high-income taxpayers is subject to either the net investment income tax (NIIT) or SECA tax
  2. Redirect NIIT funds to the Hospital Insurance Trust Fund
  3. Make the application of SECA to partnership and LLC income more consistent for high-income taxpayers
  4. Apply SECA to the ordinary business income of high-income nonpassive S corporation owners

First, the proposal would ensure that all trade or business income of high-income taxpayers is subject to the 3.8-percent Medicare tax, either through the NIIT or SECA tax. For taxpayers with AGI over $400,000, the definition of net investment income (NII) would be amended to include gross income and gain from any trades or businesses that are not otherwise subject to employment taxes.

COMMENT: This idea creates an NIIT doughnut hole, of sorts, as shown in the chart below:

AGI limits

Tax system

AGI < $250,000

Not subject to NIIT

AGI = $250,001 — $399,999

Subject to current NIIT rules

AGI > $400,000

Subject to "new" NIIT

Second, all of the revenue from the NIIT (that raised under current law and that which would be raised by the proposed expansion) would be directed to the Hospital Insurance Trust Fund, just as revenue from the 3.8-percent tax under FICA and SECA is.

COMMENT: This would actually benefit cross-border taxpayers, especially US citizens or residents living outside the US, where the NIIT would presumably be covered by totalization agreements if it is determined to be a social insurance-type tax. Presumably, this change would also come with language similar to that in the self-employment tax regime found in IRC Section 1401(c).

Third, limited partners and LLC members who provide services and materially participate in their partnerships and LLCs would be subject to SECA tax on their distributive shares of partnership or LLC income to the extent this income exceeds certain threshold amounts. Exemptions from SECA tax provided under current law for certain types of partnership income (e.g., rents, dividends, capital gains, and certain retired partner income) would continue to apply to these types of income.

COMMENT: Given that IRC Section 1411(c)(6) exempts income subject to SECA from the NIIT base, it is unclear why this change is actually needed considering that the NIIT base would apparently apply to those with income exceeding $400,000. Of course, this proposal would appear to apply to all income, regardless of amount, and regardless of income level.

This is another attempt to change IRC Section 1402(a)(13) (the limited partner exception) — something that has been tried more than a dozen times since 1986 with no success — and to statutorily overrule the long-standing position under Revenue Ruling 59-221 that S corporation shareholders are not subject to self-employment tax.

There is some question whether Congress can use the budget reconciliation process to alter the Social Security tax base in IRC Section 1402, due to 2 USC Sections 641(g) and 644(b)(1)(F).

Limiting IRC Section 1031 exchanges

The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1m for married individuals filing a joint return) each year for like-kind exchanges of real property. Any gains from like-kind exchanges exceeding $500,000 (or $1m in the case of married individuals filing a joint return) during a tax year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange. The proposal would be effective for exchanges completed in tax years beginning after December 31, 2021.

COMMENT: First, the provision would apply to exchanges "completed" in tax years beginning after December 31, 2021. Under this reading, open like-kind exchanges at year-end would lose the benefit of tax deferral. Presumably, they would be caught in the new $500,000 per taxpayer rule in 2022.

Second, this provision appears in the Green Book section addressing taxation of high-income individual taxpayers. Does that location mean this provision does not apply to corporations? What about partnerships and S corporations — does it apply at the pass-through level or at the ultimate-owner level? There are pros and cons to both options.

In federal taxation, the terms "taxpayer" and "person" can be read to include corporations, S corporations and partnerships, which would mean that each entity only gets $500,000 — regardless of the number of owners. Thus, a family partnership with two parents and three children as partners would get a $500,000 exclusion. If they distributed the real property in-kind, however, each of them would have the potential for the $500,000 cap for a total of $2.5m, assuming the "held for" requirement under IRC Section 1031 were satisfied.

Making limitation on excess business loss permanent

The proposal would bring the tax treatment of losses from nonpassive pass-through business activities closer in line with the tax treatment of losses from corporations and passive pass-through business activities. By constraining individuals' abilities to offset income sources such as wages with nonpassive pass-through business losses, IRC Section 461(l) creates a more uniform tax regime for business losses across different forms of business organization and types of business activity.

COMMENT: The Budget estimates this provision could raise $42.86b. If the provision is simply a one-year deferral, however (because the NOL created by IRC Section 461(l) will be allowed the following year, but any new losses in the following year will be disallowed, thus creating only a temporary deferral), how does it raise this much revenue?

If this provision is made permanent, an exception would need to be made to allow non-application in the year of death. For a corporation's final year, a deemed sale of assets in taxable liquidation occurs that will use the NOL -upon the death of an individual, however, there is no such construct (unless death becomes a taxable event under the other part of the Green Book proposal, discussed in Part 2 later).

Taxing carried (profits) interest as ordinary income

The proposal would generally tax as ordinary income a partner's share of income on an "investment services partnership interest" (ISPI) in an investment partnership, regardless of the character of the income at the partnership level, if the partner's taxable income (from all sources) exceeds $400k. Accordingly, such income would not be eligible for the reduced rates that apply to long-term capital gains (LTCG). In addition, the proposal would require partners in such investment partnerships to pay self-employment taxes on such income. The proposal would repeal IRC Section 1061 for taxpayers with taxable income (from all sources) over $400,000 and would be effective for tax years beginning after December 31, 2021.

COMMENT: At first blush, the proposal appears to create two parallel systems. For sake of simplicity, we will refer to the Biden proposal as the "New IRC Section 1061."

Taxable Income limits

Tax system


Taxable income < $400,000

Subject to IRC Section 1061


Taxable income > $400,000

Subject to New IRC Section 1061


If this is indeed what was intended, partnerships will have the comply with two systems, because they will not know if the ultimate individual taxpayer has taxable income above or below the $400,000 threshold.

This gets at the heart of the proposal and is consistent with the overall approach for the Green Book proposals to treat income from labor and capital equally, as discussed in Part 2. Additionally, this provision becomes less and less relevant as LTCG/qualified dividend income (QDI) rates get closer to ordinary income under the newly proposed parity between labor income and capital income.

An ISPI is a profits interest in an investment partnership that is held by a person who provides services to the partnership. A partnership is an investment partnership in which (1) substantially all of the assets are investment-type assets (e.g., certain securities, real estate, interests in partnerships, commodities, cash or cash equivalents, or derivative contracts with respect to those assets), and (2) more than half of the contributed capital is from partners in whose hands the interests do not constitute trade or business property. Income attributable to the invested capital would not be recharacterized to the extent that (1) the partner who holds an ISPI contributes "invested capital" (generally money or other property) to the partnership and (2) the partner's invested capital is a qualified capital interest. (A qualified capital interest generally requires: (a) the partnership allocations to the invested capital to be made in the same manner as allocations to other capital interests held by partners who do not hold an ISPI and (b) the allocations to these non-ISPI holders are significant.) Similarly, the portion of any gain recognized on the sale of an ISPI that is attributable to the invested capital would be treated as capital gain.

COMMENT: This change also gets at the heart of the Administration's proposal and is consistent with the overall approach of the Green Book to treat income from labor and capital equally. Compared to current law, the proposals laid out in the Green Book would (1) be of unlimited time duration, whereas Code IRC Section 1061 applies for less than three years; (2) recharacterize carried interest as ordinary income, instead of short-term capital gain, which could affect other tax benefits; and (3) subject the income to SECA.

Part 2

Reform of the taxation of capital income

Taxing capital income for high-income earners at ordinary rates

Long-term capital gains and qualified dividends of taxpayers with AGI of more than $1m would be taxed at ordinary income tax rates, with 37% generally being the highest rate (40.8% including the NIIT), but only to the extent that the taxpayer's income exceeds $1m ($500,000 for married filing separately), indexed for inflation after 2022.

COMMENT: Considering that the Administration proposes to increase the top ordinary individual income tax rate to 39.6% (43.4% including the NIIT), the increase on capital gains and dividend income actually could be higher. Capital gains recognized during the year would be included in determining the $1m threshold. A footnote in the proposal uses the following example to highlight this point:

A taxpayer with $900,000 in labor income and $200,000 in preferential capital income would have $100,000 of capital income taxed at the current preferential tax rate and $100,000 taxed at ordinary income tax rates.

Having LTCG and qualified dividends taxed at varying rates for taxpayers depending on their income thresholds will make tax distributions from partnerships and S corporations more complex and difficult, especially for family-held entities that may only make tax-affecting distributions.

This proposal would be effective for gains required to be recognized after the "date of announcement."

COMMENT: The meaning of "date of announcement" is unclear. Does it mean, for example, the date President Biden formally announced this proposal as part of his speech to a joint session of Congress on April 28, the date the Green Book was released (May 28), or the date the proposal is formally introduced in Congress as part of bill? Also, the effective date provision does not mention whether it applies to QDI — possibly indicating that the provision may be retroactive to the first day of the year in which the provision is "announced."

Treating transfers of appreciated property by gift or on death as realization events

The proposal would be effective for gains on property transferred by gift, on property owned at death by decedents dying after December 31, 2021, and on certain property owned by trusts, partnerships, and other noncorporate entities on January 1, 2022.

COMMENT: The effective date provision will give taxpayers much to think about for the rest of the year, but also gives them time to act before the proposal applies.

Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. For a donor, the amount of the gain realized would be the excess of the asset's fair market value on the date of the gift over the donor's basis in the asset. For a decedent, the amount of gain would be the excess of the asset's fair market value on the date of death over the decedent's basis in the asset. That gain would be taxable income to the decedent on the federal gift or estate tax return or on a separate capital gains return (to be determined). Capital losses and carryforwards from transfers at death could offset capital gains income and up to $3,000 of ordinary income on the decedent's final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent's estate (if any).

COMMENT: Given the subtitle of this provision and other textual references, "transfer" seems to mean a transfer by gift or bequest/legacy/devise. However, it is unclear whether other types of transactions, such as sales of assets, could be included in the definition of a "transfer." The provision would cause an income tax realization event at the time of the transfer equal to the fair market value of the asset on the date of transfer, less the basis the taxpayer had in the asset on the date of transfer. The taxpayer will be deemed to have sold the transferred asset, resulting in phantom income with no corresponding proceeds from the deemed sale to pay the income tax.

The provision contains contradictory language indicating which form should be used to report the deemed sale and the tax paid. It first indicates that the deemed sale will be reported on the gift or estate tax return for the year in which the transfer occurs (or on a separate capital gains return) but also states, at least with regard to transfers occurring at death, that capital losses and carryforwards may offset capital gains and up to $3,000 of ordinary income on the decedent's final income tax return. Although the provision indicates that losses caused by a transfer at death will be allowed in determining the taxpayer's final income tax liability, there is no indication whether this rule would apply to transfer by gift. Under current related-party loss rules, the loss would seem to be disallowed in determining the taxpayer's income tax liability.

The provision does not mention how the income tax at issue would be harmonized with any gift, estate or generation-skipping transfer tax that might apply to the transfer to mitigate potential double taxation. Current estate tax rules would allow the income tax imposed by the proposal to reduce the value of the taxpayer's gross estate, but only if the tax were reported on and paid with the taxpayer's final income tax return. There is no similar provision for gift and generation-skipping transfer taxes, although the payment of the income tax on the transfer also ultimately reduces the taxpayer's gross estate at death.

Gain on unrealized appreciation also would be recognized by a trust, partnership, or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years, with the testing period beginning on January 1, 1940. According to the Green Book, the first possible recognition event for any taxpayer under this provision would be on December 31, 2030 .

COMMENT: This provision would apply the deemed-sale rule every 90 years to assets that are placed in a trust, partnership or other noncorporate entity, to the extent these assets have not otherwise been subject to an income recognition event within 90 years, with the first deemed-sale event under this provision to occur on December 31, 2030, according to the Green Book . The provision is aimed at ensuring taxpayers cannot prevent the deemed-sale rule from ever applying to the assets transferred to these entities. While this provision may be relatively easy to apply to transfers in trust, it would be very complicated to apply to partnerships and noncorporate entities — especially those carrying on a trade or business. Presumably, S corporations are corporate entities and, therefore, not subject to this provision. For trusts, this provision is similar to a Canadian tax provision that subjects a trust's assets to a deemed-sale rule every 21 years.

A "transfer" would be defined under the gift and estate tax provisions and would be valued using the methodologies used for gift or estate tax purposes. For purposes imposing this tax on appreciated assets, the following would apply. First, a transferred partial interest would be taxed based on its proportional share of the fair market value of the entire property. Second, transfers of property into, and distributions in-kind from, a trust, partnership or other noncorporate entity (other than a grantor trust deemed to be wholly owned and revocable by the donor) would be recognition events. The deemed owner of such a revocable grantor trust would recognize gain on the unrealized appreciation in any asset the trust distributes to any person other than the deemed owner or US spouse of the deemed owner, unless the distribution is made to discharge an obligation of the deemed owner. All the unrealized appreciation on the revocable grantor trust's assets would be realized at the deemed owner's death or at any other time that the trust becomes irrevocable.

COMMENT: The gift tax regulations contain rules for applying the gift tax to a transfer, whether the transfer "is in trust or otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible." (Treas. Reg. Section 25.2511-1(a).) The transfer is subject to gift tax at the time the "donor has so parted with dominion and control as to leave him no power to change its disposition whether for his own benefit or for the benefit of another." (Treas. Reg. Section 25.2511-2(b).) Thus, incomplete gifts should not be subject to the deemed-sale rule. The estate tax regulations deem a transfer of the estate to have occurred on the date of the taxpayer's death.

The gift tax rules generally only apply when property is transferred for less than "an adequate and full consideration in money or money's worth," indicating that the rules do not apply to transfers for fair and adequate consideration. If the gift tax rules must apply to the transfer, it would appear that gift tax should not apply to transfers for fair and adequate consideration. Further clarification is needed. It is also unclear whether certain types of "deemed transfers" that exist under the gift and estate tax rules (e.g., transfers subject to Chapter 14 of the Code) would be treated as "transfers" for these purposes.

Regarding transfers of partial interests, for purposes of determining the gain on the deemed sale, the basis would presumably be bifurcated based on a proportional share of the entire basis, much like basis is bifurcated under the bargain sale rules for transfers to charity that are part-gift/part-sale. This rule would be easy to apply to vertical transfers (e.g., a transfer of a 1/5 interest in property); further clarification would be needed if applying to horizontal transfers (e.g., a transfer of an income or remainder interest in property). Further, this provision would seem to target discounts that may generally apply to transfers that are not a taxpayer's entire interest in property — particularly lack-of-control discounts. Further clarification of the definition of a "partial interest" would be needed to determine if this rule would eliminate any discounts associated with a transfer, as separate ownership interests can be created in property or an entity (e.g., voting and nonvoting, general and limited interests).

Regarding transfers of property to a trust, partnership or other noncorporate entity, it is unclear whether this rule would override current nonrecognition rules for transfers that benefit no one other than the owner (e.g., the non-recognition rule under IRC Section 721 for transfers to partnerships). If the definition of a transfer for purposes of this provision refers to its meaning for gift and estate tax purposes, then the answer may be "no." The provision's exception for grantor trusts seems to confirm this answer, but further clarification is needed. The answer is not as clear regarding distributions from these entities, as distributions are not generally gifts or bequests.

If the gift or estate tax rules must apply to the transfer for the deemed-sale rules under this proposal to apply, it would seem that this provision should not affect a sale to an intentionally defective grantor trust (IDGT), at least on the transfer (i.e., sale) to the trust because no gift is involved with the transfer. Any distribution from the IDGT, however, may be deemed subject to the deemed-sale rule, presuming that the IDGT's basis in the asset would carry over from the seller under the current basis rules. Arguably, payments on the note to the seller should not be considered a distribution under current trust rules.

For GRATs, the transfer arguably results in no transfer by gift if the remainder interest in the GRAT is zero, and the deemed-sale rule would not apply. Upon the distribution of property in-kind to the grantor, it is unclear whether the deemed sale would apply to the annuity payments because the payment is not a distribution and or a gift. Query whether the deemed-sale rule would apply when the estate inclusion period expires if, for instance, the assets then were distributed to beneficiaries or further in trust?

Certain exclusions would apply. Transfers by a decedent to a US spouse or to charity would carry over the basis of the decedent. Capital gain would not be recognized until the surviving spouse disposes of the asset or dies, and appreciated property transferred to charity would not generate a taxable capital gain. The transfer of appreciated assets to a split-interest trust would generate a taxable capital gain, with an exclusion allowed for the charity's share of the gain based on the charity's share of the value transferred as determined for gift or estate tax purposes.

COMMENT: The provision appears to provide no exclusion for gift transfers to spouses and charities. This is probably an oversight. There is a current income tax provision that would exclude gain for transfers between spouses (e.g., sales between spouses), but it simply states that the transfer is treated as a gift, which would seem to pull it back into the deemed-sale rule.

Regarding transfers to split-interest trusts, the deemed-sale rule would not apply to the portion of the trust that goes to charity. This would eliminate the deferral of income tax benefit of transfers to charitable remainder trusts. Regarding charitable lead non-grantor trusts, the deemed sale would presumably eliminate the benefit unless, as is the case for GRATs, the non-charitable interest is zeroed-out.

The proposal would exclude from recognition any gain on tangible personal property, such as household furnishings and personal effects (excluding collectibles). The $250,000-per-person exclusion under current law for capital gain on a principal residence would apply to all residences and would be portable to the decedent's surviving spouse, making the exclusion effectively $500,000 per couple. Finally, the exclusion under current law for capital gain on certain small business stock would also apply.

COMMENT: This provision applies the current exclusion-of-gain rule for the sale of personal residences to the deemed-sale rule and makes it portable. If a personal residence were sold in a taxable event within the holding period required for the exclusion rule to apply after a deemed sale has occurred, it is unclear whether the exclusion would apply to the actual sale because the exclusion was used for the deemed sale (i.e., does the tolling provision of the exclusion apply to a deemed sale because there has been no actual sale?).

In addition to these exclusions, the proposal would allow a $1m-per-person exclusion from recognition of other unrealized capital gains on property transferred by gift or held at death. The per-person exclusion would be indexed for inflation after 2022 and would be portable to the decedent's surviving spouse under the same rules that apply to portability for estate and gift tax purposes (making the exclusion effectively $2m per married couple). The recipient's basis in inherited property would be the property's fair market value at the decedent's death. The same basis rule would apply to the donee of gifted property to the extent the unrealized gain on that property at the time of the gift was not shielded from being a recognition event by the donor's $1m exclusion. However, the donee's basis in property received by gift during the donor's life would be the donor's basis in that property at the time of the gift to the extent that the unrealized gain on that property counted against the donor's $1m exclusion from recognition.

COMMENT: This provision gives taxpayers some relief from applying the deemed-sale rule to gifts and bequests but is not nearly as generous as the current gift and estate tax exemption of $11.7m per taxpayer. Further, the provision contains no provision for de minimis transfers of property, like the one that currently applies for gift tax purposes ($15,000). The exclusion would be diluted for a transfer by gift, as transfers that are covered by the exclusion receive carryover basis. The provision also does not indicate how the exclusion would apply to a transfer by gift. Does the taxpayer get to choose to which transfers the exclusion applies? This would become important when the taxpayer is deciding what property to gift and when to gift it.

Payment of tax on the appreciation of certain family-owned-and-operated businesses would not be due until the interest in the business is sold, or the business ceases to be family-owned-and-operated. Further, the proposal would allow a 15-year fixed-rate payment plan for the tax on appreciated nonliquid assets transferred at death, except for businesses for which the deferral election is made. The IRS would be authorized to require security any time there is a reasonable need for security to continue this deferral. That security may be provided from any person, and in any form, deemed acceptable by the IRS.

COMMENT: The deferral of tax on family-owned-and-operated businesses until the sale of the property or until it is no longer family-owned is a carve-out, perhaps intended to counter arguments that the tax would detrimentally affect family businesses (e.g., family farms), similar to the arguments made over the last 20 years in favor of eliminating the gift, estate and generation-skipping tax regimes. The definition of "family-owned-and-operated" will be key in applying this provision. Presumably this would apply to transfers by gift as well as transfers by bequest. The provision regarding the 15-year payment seems to indicate that the deferral is elective.

The 15-year payment plan appears similar to a provision in the estate tax rules that allows estate tax to be deferred for up to 5 years, followed by installment payments for up to 10 years, for family business assets that are included in a taxpayer's gross estate, although further details will be needed to determine its actual operation. Like the previously mentioned deferral, this installment-payment provision appears to be elective, although it does not seem to be available for a family-owned-and-operated business if the deferral election is made. The security requirement would make the sale of those assets during the 15-year period more complicated, as the sale would need to be coordinated with the IRS.

Additionally, the proposal would include legislative changes designed to facilitate its implementation, including:

  • Allowing a deduction for the full cost of appraisals of appreciated assets
  • Imposing liens
  • Waiving the penalty for underpayment of estimated tax to the extent the underpayment is attributable to unrealized gains at death
  • Granting a right of recovery of the tax on unrealized gains
  • Providing rules for determining who has the right to select the return filed
  • Achieving consistency in valuation for transfer and income tax purposes
  • Coordinating changes to reflect that the recipient would have a basis in the property equal to the value on which the capital gains tax is computed
  • Granting broad regulatory authority to provide implementing rules

COMMENT: This is the "catch-all" provision stating that additional provisions will be needed to accommodate the application of this proposal. Allowing the deduction for appraisals associated with determining the amount of tax under the proposal, as well as waiving underpayment penalties for the underpayment of estimated tax in the year of death caused by the deemed-sale rule, are taxpayer-favorable.

To facilitate the transition to taxing gains upon gifting and death and periodically under this proposal, the Treasury Secretary would be authorized to issue any regulations necessary or appropriate to implement the proposal, including (1) rules and safe harbors for determining the basis of assets when complete records are unavailable, (2) reporting requirements for all transfers of appreciated property including value and basis information, and (3) rules applicable when reporting could be permitted on the decedent's final income tax return.

Moving forward

June and July 2021 will be key months in the evolution of these plans. With a divided Senate and a slim majority in the House, it is highly unlikely all of these provisions will pass. The key will be watching for comments from Capitol Hill Democrats on what is politically possible and what is not. In any event, it is likely that federal taxes will be higher in 2022 — the question is, which taxes exactly and by how much?


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