The House of Representatives approved the Build Back Better Act (H.R. 5376) reconciliation bill by a 220-213 vote on November 19, 2021. Among the bill's numerous tax provisions are some that affect individual taxpayers, trusts and estates.

Key proposed changes of interest for individual taxpayers would:

• Expand the net investment income tax (NIIT) to cover net income derived in the ordinary course of a trade or business for taxpayers with greater than $400k (single filer) or $500k (joint filer) in taxable income
• Impose a 5% surtax on the modified adjusted gross income (AGI) over $10m for individuals or over $200k for non-grantor trusts
• Charge an additional 3% surtax on modified AGI over $25m for individuals or over $500k for non-grantor trusts
• Modify Roth IRA provisions
• Limit excess business losses for noncorporate taxpayers
• Reduce the IRC Section 1202 exclusion for the sale of qualified small business stock (QSBS)
• Increase the deduction for state and local income and real property taxes

House-passed H.R. 5376 also includes provisions that would apply to closely held businesses owned by individuals and operated in pass-through form. Though of interest to individuals, these provisions are not addressed in this Alert.

Applicable provisions included in House-passed H.R. 5376

Individual income tax provisions

Overall, the individual income tax provisions are expected to raise approximately $786b over the next 10 years.

1. NIIT changes

Summary: Amending IRC Section 1411, this provision (Section 138203) would expand the NIIT to cover net investment income (NII) derived in the ordinary course of a trade or business for (1) individuals with taxable income exceeding $400k (single filer) or $500k (joint filer), and (2) trusts and estates. The provision clarifies that this tax does not apply to wages on which Federal Insurance Contributions Act (FICA) tax is already imposed. These changes would apply to tax years that begin after December 31, 2021.

Implications: The Administration's Greenbook proposal included a provision similar to this one, along with changes to the self-employment tax regime. Congress likely appreciated that changes to the self-employment tax regime cannot be accomplished through the budget reconciliation process, so its only avenue was to modify the NIIT system by making it a three-tier tax system for individuals, as illustrated in the following chart:

This "new" NIIT would cause NII to increase by including a business's nonpassive operating income that is not subject to self-employment tax. It would also include gains from the sales of business assets used in nonpassive businesses, as well as all gains from the sales of S corporations and partnerships. As self-employment taxes have never applied to gain on the sale of business assets (other than inventories or property held by dealers), the new NIIT would apply to gains of all businesses, regardless of whether they are paying self-employment taxes on other income. Considering that the NIIT's proposed application appears to be a substitute for the imposition of self-employment taxes, its expansion to those already paying self-employment taxes could be considered overly broad.

The legislation appears to deny trusts and estates the benefit of the middle tier of NIIT, because trusts and estates with income above the threshold (approximately $13k) would be subject only to the new NIIT regime. Congress might not realize that problems could arise if a trust is subject to the new NIIT regime and the beneficiary is subject to the current NIIT. Therefore, the downstream consequences for beneficiaries would need to be corrected, either via statute or IRS guidance (although the legislation does not authorize the IRS to draft related regulations, which could be problematic if the legislation is enacted as-is). Further, the IRS would also have to address charitable remainder trusts (CRTs) that accumulate NII over years before distribution. With an increase to the NII base, the IRS would have to determine how CRTs should track income earned before and after the effective date of the change.

The legislation would also modify IRC Section 1411(c)(6), which currently excludes self-employment income from NII. However, if the amendment causes certain nonpassive business income to be included in NII, changes would be needed to address the long-standing rule that individuals earning salary income are engaged in nonpassive business activity. As a result, IRC Section 1411(c)(6) is proposed to be amended to exclude wages subject to FICA (as defined in IRC Section 3101(b)) and railroad withholding (as defined in IRC Section 3201(a)).

Because wages earned outside of the US might be considered nonpassive business income but are not caught in the hospital insurance definitions of IRC Section 3101(b), the legislation would add a special rule to eliminate wages earned outside of the US. However, a glitch remains in the language because individuals who are working in the US and covered by a social security totalization agreement have their wages excluded from tax under IRC Section 3101(b); therefore, the language could be read to cause those employees to be liable for NIIT on their wages.

Although the "new" system was meant to increase NII, it would also cause previously excluded nonpassive losses to now be included, which would reduce NII. Therefore, some individuals, estates and trusts would see their NIIT liability decrease as a result of this provision. In addition, current IRC Section 1411(c)(6) and Treas. Reg. Section 1.1411-9 regard individuals who have income subject to both NIIT and self-employment tax actually as subject only to self-employment tax. As a result, for those who claim their nonpassive business losses reduce the NIIT, the IRS might attempt to argue that those losses are included in the self-employment tax base, and therefore cannot reduce NII. If the taxpayer has self-employment income less than NII, any deduction for NII could be disallowed, and self-employment income could not be reduced below zero. In essence, the loss could be useless in both systems. This would likely apply to operating losses for limited liability corporations (LLCs) and, potentially, to limited partnerships under the Renkemeyer, Campbell & Weaver v Comm'r (136 TC 137 (2011)) line of cases, but not to S corporation shareholders by reason of Revenue Ruling 59-221, 1959-1 C.B. 225, and Ding v. Comm'r (200 F.3d 587, 9th Cir. 1999). Lawmakers in Congress could be mistaken if they believe the "new" NII system will put an end to litigation over IRC Section 1402(a)(13), which excludes certain items of gain and loss from net self-employment earnings. The more appropriate way to address the disconnection between the NIIT regime and the Self-Employed Contributions Act (SECA) tax regime would be to address IRC Section 1402(a)(13), but that cannot happen under the procedural rules governing what can be included in a reconciliation bill.

For taxpayers facing increased NIIT liability, the more logical choice might be to intentionally subject the income to employment taxes to take advantage of IRC Section 1411(c)(6). For partners, this would mean intentionally subjecting the distributable share to self-employment tax by following the reasoning of Renkemeyer. For S corporation shareholders, W-2 compensation would need to be increased. These choices make sense for individuals already above the social security wage base, as the 50% deductibility of the 2.9% Medicare tax for regular income tax purposes makes employment taxes "cheaper" than NIIT. Although the face rate of NIIT at 3.8% is the same as self-employment tax or FICA (2.9% + 0.9%), the partial deductibility of the employer share brings employment taxes down to an effective rate of slightly above 3%.

The legislation attempts to simplify Treas. Reg. Section 1.1411-10 as it applies to controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs) but leaves the IRS to handle transition rules between the regimes. In essence, the change would basically force every taxpayer to make a "10(g) Election" for CFC and qualified electing fund (QEF) income. (The 10(g) Election allows US individual shareholders of a CFC or PFIC/QEF to report and pay US tax on undistributed income in the same year for both regular tax and NIIT purposes.) In practice, the vast majority of CFC and PFIC taxpayers made the 10(g) Election, so this change would have little impact for most taxpayers. For the ones that intentionally did not make the election, however, the IRS will need to provide some fairly creative transition guidance.

Finally, the legislation would eliminate the concept of a "Section 1411 NOL," which was created in the final regulations issued in late 2013. Recall, the IRS originally said that NOLs should be considered in calculating NII; after strong pushback from the public, the IRS relented and created a very complex calculation called the Section 1411 NOL. The elimination of the Section 1411 NOL would likely have little impact on taxpayers because the NIIT calculation is based on the lesser of modified AGI or NII. By eliminating the Section 1411 NOL from the NII calculation, while keeping it in the modified AGI calculation, taxpayers would still get the NIIT reduction benefit of the NOL because they would be paying on modified AGI, and not NII.

2. IRC Section 461(l) limits

Summary: Amending IRC Section 461(l), this provision (section 138205) would permanently disallow noncorporate taxpayers from claiming excess business losses (i.e., net business deductions exceeding business income). However, disallowed losses could be carried forward to the next tax year. These changes would apply for tax years beginning after December 31, 2020.

Implications: As noted, the proposal would make the annual IRC Section 461(l) disallowance a permanent item within the Code. The House Ways and Means Committee's summary of the proposal does not highlight annual retesting of any net operating loss (NOL) created by the application of IRC Section 461(l). Congress adopted the California-461(l) model, which treats the carryover losses as excess business losses, not as NOLs, and has existed since 2018. Therefore, an individual could not have greater than a $500k loss in any given year. However, NOLs not created by IRC Section 461(l) (or so-called natural NOLs) would not be tested under this rule (e.g., NOLs under $500k, NOLs arising from casualty/theft losses, etc.).

Through this proposal, Congress is essentially creating a brand-new tax attribute for individuals, trusts and estates to track. When IRC Section 461(l) was enacted, the output of the loss disallowance was an NOL. Taxpayers could rationalize the application of the statute, absent any guidance from the IRS other than the instructions to the Form 461, Limitation on Business Losses, as a variant of an NOL calculation. If the output of IRC Section 461(l) is an NOL, it seems logical that the inputs for what constitutes business income and business deductions should be the same as those that go into calculating an individual NOL under IRC Section 172. However, now that the output of IRC Section 461(l) is its own, new disallowed loss, a legitimate question arises as to whether the same inputs of income and loss should apply, or new ones should be considered.

The creation of this new individual tax attribute should not be taken lightly by Congress. Some complex rules dealing with the use of similar attributes under IRC Section 465 (at-risk rules) and IRC Section 469 (passive-activity rules) have not been given due consideration here. For example, this provision offers no guidance on the treatment of gain or loss from the disposition of a partnership, S corporation or corporation as business income or business loss. Specifically, there is no corollary to IRC Section 1411(c)(4), Treas. Reg. Section 1.469-2T(e)(3) or Prop. Reg. Section 1.465-66.

As another example, a single rule in the proposed IRC Section 461(l) language acknowledges that a disallowed IRC Section 461(l) loss passes to beneficiaries when an estate or trust terminates. (This new rule is based on a rule in IRC Section 469(j)(12), which had to be added to the provision shortly after enactment in 1986 because the general attribute rule in IRC Section 642(h) did not cover it.) But it still appears that IRC Section 461(l) applies in the year of death, which would result in permanent disallowance of losses not claimed on the final return. Several sets of rules are lacking and would be helpful. For example, there are no rules for:

• Allocating disallowed losses for married taxpayers following death or divorce
• Applying IRC Section 461(l) to nonresident aliens with effectively connected business losses
• Applying the interaction between IRC Section 461(l) and the NOL "siloing rules" for tax-exempt trusts with losses that go into the calculation of unrelated business taxable income
• Dealing with self-charged interest and self-charged rent

All of these situations would need to be addressed when a new loss disallowance system is created, though it will likely be years before a system will be fully functional.

Finally, business casualty losses will get caught in this rule; so, the next time a catastrophic natural disaster occurs, Congress would need to provide relief for those losses because the IRS has no ability to "turn off" IRC Section 461(l) as part of its standard disaster relief package. Just as IRC Section 461(l) was temporarily suspended under the COVID-19 relief rules, the excess business loss provision will likely be suspended again the next time a notable economic downturn occurs.

3. 5% and 3% surtax

Summary: This provision (section 138206) would add IRC Section 1A to impose a 5% tax on a taxpayer's modified AGI that exceeds $10m for couples filing jointly ($5m for a married individual filing separately) or $200k for an estate or trust. An additional 3% tax would apply to taxpayers' modified AGI that exceeds $25m ($12.5m for a married individual filing separately) or $500k for an estate or trust. "Modified AGI" is AGI reduced by any deduction allowed for investment interest (defined in IRC Section 163(d)). These changes would apply to tax years beginning after December 31, 2021.

Implications: This would not be the first time a surtax has been imposed on individuals. Surtaxes have come in many shapes and forms over the last century. The most interesting part of this surtax is the base on which the tax is imposed — AGI less investment interest expense.

Because the tax would apply to AGI less investment interest expense, charitable contributions would not be deductible (except for a trust or estate, due to how AGI is defined for estates and trusts). This would increase the significance of determining which items are included in AGI and what may be claimed as itemized deductions, which could, for example, encourage more individuals to participate in the SALT-workaround sanctioned by Notice 2020-75. In addition, the provision states that credits (general business credits, foreign tax credits, etc.) may not offset the surtax.

The $10m and $25m threshold is the same for single and married taxpayers, effectively creating a marriage penalty. A couple making $30m per year would pay $1.15m of surtaxes while married, but only pay $500k if they are divorced and the income is split equally between them.

Additionally, non-grantor trusts would be disproportionately impacted — especially non-grantor trusts that own S corporation stock. Often these trusts qualify as S Corporation shareholders via the Electing Small Business Trust (ESBT) election. Trusts that make ESBT elections are not eligible for deductions related to income paid out to beneficiaries. Therefore, ESBTs would be subject to the 8% surtax on income over $500k. For this purpose, the income from the S-side and non-S side would be combined to determine the AGI threshold (similar to their treatment under the NIIT regime).

Individuals who have utilized incomplete gift trusts to mitigate state-level taxation may want to reexamine the aggregate tax rate in light of the proposed surtax on non-grantor trusts.

The final version of H.R. 5376, as passed by the House, made necessary revisions from prior versions regarding charitable trusts. The modified legislation had to exempt charitable trusts to prevent the trusts from being subject to income tax, despite lacking any funds to pay the income tax. For example, a charitable lead trust must pay all income to charity. Under the first iteration of the legislation, the trust would have been subject to the surtax if income exceeded $200k. The fact that all the income went to a qualifying charity did not affect the taxable income. As a result, the trust would have been subject to the surtax without any funds to pay it.

4. Changes to IRC Section 1202

Summary: This provision (section 138150) would amend IRC Section 1202(a) to prohibit the special 75% and 100% exclusion rates for gains realized from certain QSBS from applying to taxpayers with AGI equal to or exceeding $400k or to any trust or estate. The baseline 50% exclusion in IRC Section 1202(a)(1) would remain available for all taxpayers. The amendments made by this section would apply to sales and exchanges after September 13, 2021, subject to a binding contract exception.

Implications: IRC Section 1202, better known as the QSBS exemption, would be significantly limited by this provision. Essentially, qualifying QSBS stock had two benefits: (1) excluding potentially 100% of the gains and (2) enabling the rollover of gain into qualifying IRC Section 1202 stock. The proposed modifications would eliminate the 75% and 100% exclusion rates for taxpayers with AGI exceeding $400k.

Assume an individual sold QSBS for a $10m gain on June 20, 2021. The full gain would be excluded from income, saving the individual approximately $2.38m in federal taxes. If the same stock was sold on September 20, 2021 (assuming enactment of the provision), the individual could exclude $5m of gain, but the remaining gain would be subject to tax at 28% + 3.8% NIIT (there is also an AMT adjustment, but it is ignored for the sake of simplicity in this example). Thus, the individual would pay $1.59m. Of course, if the stock weren't QSBS, the individual would have paid $2.38m, so the fact that it was QSBS stock saved him $790k.

This provision also specifically addresses what the IRS considers abusive use of non-grantor trusts by eliminating the 75% and 100% exclusion for all trusts and estates. This provision has a transition rule because it would apply to sales and exchanges after September 13, 2021, with a binding-commitment exception.

5. Increase to deduction for state and local income taxes and real estate taxes

Summary: This provision (section 137601) would increase from $10k to $80k (not indexed for inflation) the cap on the federal tax deduction for state and local income and real estate taxes (aka the SALT cap). It would also extend the time the cap is effective. For trusts, the SALT cap would be 50% of the individual amount, or $40k. (The Tax Cuts and Jobs Act of 2017 (TCJA) added IRC Section 164(b)(6), imposing the $10k SALT cap.) Under the TCJA, the cap will expire after 2025, but this modification would extend the cap to 2030. The provision also clarifies that real estate taxes attributable to cooperative housing corporations are included in the capped amounts.

Implications: This provision is almost certain to change in the Senate. The increase from $10k to $80k was so expensive that an additional five-year extension was required to pay for it (i.e., absent the extension, the resulting revenue loss would need to have been made up either by cutting spending provisions or increasing taxes).

Regardless of the ultimate change to the SALT cap, it is unlikely to remain at $10k. It will be interesting to see the fate of the workaround in Notice 2020-75 if the SALT cap increases significantly.

Since the creation of the SALT cap in 2018, there has been rigorous debate about whether (a) taxes passed through from cooperative housing corporations are included in the cap, and (b) an ESBT gets two limitations or only one (or none at all). The amended language would end the debate on real estate taxes from co-ops by specifically including them in the capped amounts. But the provision remains silent on ESBTs. Recall, under the surtax, the S-portion and non-S portion are combined to determine whether AGI exceeds the surtax threshold; there is no similar language in the SALT cap language. Evidently, for purposes of this provision, ESBTs may treat each side separately.

Retirement plan provisions

Overall, the retirement plan provisions are expected to raise approximately $6.2b over the next 10 years.

1. IRA contribution limits

Summary: Current law allows taxpayers to contribute (but certain higher-income taxpayers may not deduct the contribution) to individual retirement accounts (IRAs), regardless of how much they have already saved in their IRAs. To avoid subsidizing retirement savings once account balances reach very high levels, this provision (section 138301) would create new rules for taxpayers with large balances in IRAs and defined contribution retirement accounts, effective for tax years beginning after December 31, 2028.

If the total value of an individual's balances in qualified defined contributions plans (such as 401(k) plans), 403(b) plans, governmental 457(b) plans and IRAs exceeded $10m at the end of the most recent calendar year that closed before the start of the individual's tax year, the provision would prohibit the individual from making additional contributions to a Roth or traditional IRA for a tax year. This rule would apply to (1) single taxpayers, or married taxpayers filing separately, with modified adjusted gross income exceeding $400k, (2) married taxpayers filing jointly with adjusted taxable income exceeding $450k, and (3) heads of household with adjusted taxable income exceeding $425k; these amounts would be indexed for inflation.

Further, the provision would require employers to annually report any employer defined contribution plans with aggregate account balances of at least $2.5m (adjusted for inflation) by notifying both the IRS and the plan participant whose balance is being reported.

Implications: Although the $10m limit includes an individual's account balances under certain employer-based retirement plans (such as 401(k) plans) in addition to the individual's IRA account balances, IRA contributions are only affected if the $10m limit is exceeded. For example, assume an individual has adjusted taxable income of $500k and a combined balance of $9.999m in employer-based defined contribution retirement plans in the previous year. Under this provision, the individual could only make a $1k IRA contribution during the year.

However, under the same facts, this provision would not limit the individual's IRC Section 401(k) contribution; a portion of the contribution would likely end up being purged in the following year under the new provisions of IRC Section 4974(e), described next.

2. IRA value purging

Summary: If an individual's combined balance in traditional IRAs, Roth IRAs and defined contribution retirement accounts exceeds $10m at the end of the preceding calendar year and the individual exceeds the taxable income limits outlined previously (section 138301), this provision (section 138302) would require, for tax years beginning after December 31, 2028, that at least 50% of the amount by which the aggregate balance exceeds $10m be distributed in the next tax year.

If the combined balance exceeded $20m, the individual would have to distribute the excess from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to lower the total balance in all accounts to $20m or (2) the aggregate balance in Roth IRAs and designated Roth accounts in defined contribution plans. After distributing the excess required under this 100% distribution rule, the individual could determine the accounts from which to distribute to satisfy this 50% distribution rule.

A new 35% mandatory withholding requirement would apply to amounts distributed under this provision, and these amounts would not be subject to the 10% early distribution tax imposed under IRC Section 72(t).

Implications: Proposed IRC Section 4974(e) would change the required-minimum-distribution (RMD) rules. As under current law, a taxpayer doesn't necessarily need to dispose of any investments to comply with RMD rules but does need to remove them from tax-favored accounts, thereby triggering income tax.

To illustrate the mechanics, assume a taxpayer has $700k of adjusted taxable income, a $6m Roth IRA, and $21m in his IRC Section 401(k) account at the end of year 1. Because the individual has $27m in total plan assets in year 2, he would need to purge the lesser of (a) $7m (the amount needed to get down to $20m), or (b) the Roth amount ($6m). Under step 1, he would be required to liquidate the entire Roth IRA account. Because it is a Roth IRA, the distribution would be nontaxable (assuming it is a qualified distribution).

The taxpayer would then be left with $21m in his plans. Step 2 would require him to distribute 50% of the amount in excess of $10m. This would result in a taxable distribution of $5.5m, which would be subject to mandatory withholding of 35% but would not be subject to the 10% additional tax under IRC Section 72(t).

In year 3, assuming no further change in balances, the individual would begin with an account balance of $15.5m ($21m - $5.5m). He would be required to take a taxable distribution of $2.75m (50% of the excess over $10m) from the IRA, subject to mandatory withholding of 35%. At the end of year 3, the account balance would be $12.75m.

Assume the same facts, except that the individual made a $15k contribution to a Roth 401(k) during year 2. Recall, new proposed IRC Section 409B would only prohibit IRA contributions. Thus, assuming no appreciation, the taxpayer would have $15.515m going into year 3. Because the taxpayer's plan balances would not exceed $20m at the end of year 2, the taxpayer would not be required to purge any of the new Roth 401K amounts just contributed. However, the taxpayer would be required to distribute 50% of the excess over $10m from the 401(k) plan.

3. No Roth conversions

Summary: This provision (section 138311) would end a higher-income taxpayer's ability to contribute to a Roth IRA through a conversion. Under current law, a single taxpayer whose income exceeds $140k may not contribute directly to a Roth IRA but may make a nondeductible contribution to a traditional IRA and then convert the contribution from the traditional IRA to a Roth IRA.

For tax years beginning after December 31, 2031, the provision would eliminate Roth conversions for IRAs and employer-sponsored plans for (1) single taxpayers, or married taxpayers filing separately, with adjusted taxable income exceeding $400k, (2) married taxpayers filing jointly with adjusted taxable income exceeding $450k, and (3) heads of household with adjusted taxable income exceeding $425k; these amounts would be indexed for inflation. In addition, the provision would prohibit all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to Roth IRAs, regardless of a taxpayer's income level. This prohibition would be effective for distributions, transfers, and contributions made after December 31, 2021.

Implications: Beginning in 2022, rollovers from non-Roth accounts into Roth accounts could only consist of taxable amounts. Therefore, the concept of making a $6k nondeductible IRA contribution and then rolling it into a Roth IRA would not be allowed because the $6k would be considered a nontaxable amount. However, a taxpayer could fund a nondeductible IRA with $6k on January 1 and roll over any appreciation on that amount every December under the rule.

Beginning in 2032, rollovers into all Roth accounts for higher-income taxpayers would be prohibited. This would include taxable amounts in IRAs as well as conversions inside of employer plans like IRC Section 401(k) plans.

4. No FSCs/DISCs in IRAs

Summary: This provision (section 138503) would prohibit IRAs from owning a foreign sales corporation (FSC) or a domestic international sales corporation (DISC) by causing the IRA to lose its tax-exempt status if the FSC or DISC receives any commission or other payment from an entity owned by the IRA owner or beneficiary.

Implications: This provision would effectively overturn case law allowing FSCs and DISCs to be held in IRAs.

Highlights of proposals struck from House-passed H.R. 5376

Estate and gift tax provisions

1. Lowing the estate/gift lifetime exemption

This provision (section 318207) would have terminated the temporary increase in the unified credit against estate and gift taxes, reverting the credit to its 2010 level of $5m per individual, indexed for inflation, applicable for decedents dying and gifts made after December 31, 2021.

2. Estate tax valuation

This provision (section 318208) proposed to amend IRC Section 2032A by increasing from $750k to $11.7m the special valuation reduction available for qualified real property used in a family farm or family business. This reduction would have allowed decedents who own real property used in a farm or business to base the value the property for estate tax purposes on its actual use, rather than on fair market value, and would have applied to decedents dying after December 31, 2021.

3. Grantor trust inclusion

This provision (section 138209) would have created a new chapter 16 in subtitle B of the Code (containing the gift, estate and generation-skipping transfer tax rules) and added new IRC Section 2901 to specifically address grantor trusts for gift and income

tax purposes. The provision would have effectively closed the benefit of intentionally defective grantor trusts for estate and gift tax purposes, as it would subject a grantor trust to estate taxes (when the trust's deemed owner dies) or gift taxes (when grantor trust status is terminated while the deemed owner is still living). Further, it would have negated the gift and estate tax benefit of any trust with grantor status.

4. Taxable grantor trust sales

The provision (section 138209, highlighted above in #3 as well) would have added IRC Section 1062, which would have disregarded the treatment of a deemed owner as owner of a trust when determining whether a transfer between the deemed owner (under the grantor trust rules) and the trust is a sale or exchange for income tax purposes. Regarding the disallowance of a loss in the case of a related taxpayer, IRC Section 267(b) would have been amended to add a grantor trust and the trust's deemed owner to the list of related parties for purposes of the related party loss rule.

Valuation of nonbusiness assets

This provision (section 138210) would have amended IRC Section 2031 to clarify that a valuation discount should not apply for transfer tax purposes when a taxpayer transfers nonbusiness assets. Exceptions would be provided for assets used in hedging transactions or as working capital of a business.

Billionaire income tax proposal

Senator Ron Wyden (D-OR) proposed the Billionaires Income Tax in late October 2021. Affecting roughly 700 taxpayers, the tax was to apply to those with more than $100m in annual income or more than $1b in assets for three consecutive years. Taxation of gains and losses from assets like stocks and tradable assets (assets like stocks that are easily valued on an annual basis) owned by billionaires would have been marked to market each year. This would have required billionaires to pay tax on gains or take deductions for losses, whether or not they sold the asset. Taxpayers would have been able to carry back their losses for up to three years in certain circumstances.

The Joint Committee on Taxation estimated the Billionaires Income Tax would raise $557b in revenue over 10 years.

Final thoughts

The legislation now moves to the Senate, which has two choices: (a) pass it "as is" with at least 50 votes (the Vice-President breaks the tie); or (b) modify the bill to achieve a 50-vote threshold. If the Senate opts for choice (a), the bill goes to the President for signature. If the Senate opts for choice (b), the bill must go back to the House. The House would then have two choices: (a) pass the Senate version of the legislation "as is" with a majority; or (b) modify the bill and send it back to the Senate. If the House makes choice (a), the bill goes to the President for signature; under choice (b), the Senate decision tree springs up again.

Various senators support some proposals (e.g., estate and gift changes, and the Billionaires Income Tax) that are not in the current bill. So, if the bill changes, almost anything could be back on the table. The final version of the Build Back Better Act will likely remain a moving target for at least the next month.

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