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Attorney Suggests Amendments to Family-Owned Business Exclusion

MAY 12, 1998

Attorney Suggests Amendments to Family-Owned Business Exclusion

DATED MAY 12, 1998
DOCUMENT ATTRIBUTES
  • Authors
    Bellatti, Robert M.
  • Institutional Authors
    Bellatti & Barton
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    estate tax, family business exclusion
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 98-16462 (5 pages)
  • Tax Analysts Electronic Citation
    98 TNT 103-22
====== SUMMARY ======

Robert M. Bellatti of Bellatti & Barton, Springfield, Ill., has suggested further amendments to the new estate tax exclusion for family-owned businesses. Those suggestions include not basing the 50 percent adjusted gross estate requirement on section 2032A values; and providing that the section 2057 deduction reduces the numerator and denominator of the section 6166 percentage computation.

====== FULL TEXT ======

May 12, 1998

Ms. Judy Owens

 

Joint Committee on Taxation

 

204 Dirksen Senate Office Building

 

Washington, DC 20510

Re: Amendments to section 2033A; Technical Corrections in IRS

 

Restructuring Bill; Conference Agreement

Dear Judy:

[1] This is a supplement to my May 1 letter and enclosures to you with my suggestions for further amendments to section 2033A. It is also a follow-up to our telephone conversation on May 8.

[2] First, the supplement. There are two further changes that should be made to section 2033A (new section 2057) that I had not discovered when I sent you my May 1 letter. Both of them have to do with percentage requirements.

SECTION 2057 50% OF ADJUSTED GROSS ESTATE REQUIREMENT

 

SHOULD NOT BE BASED UPON SECTION 2032A VALUES

[3] Section 2033A as enacted created distortions in the application of the section 2032A and section 2033A percentage qualification requirements for estates which should be eligible to elect both section 2032A and section 2033A. When section 2033A is converted to a section 2057 deduction, that will eliminate the distortion of the section 2032A percentage qualification requirements, because the section 2057 deduction will not change the numerator or the denominator of those section 2032A percentage qualification fractions, and section 2032A already provides that those fractions are to be determined without regard to section 2032A. The determination of eligibility for section 2032A and section 2057 should be based on "real values", not the values artificially determined under section 2032A and section 2057.

[4] However, the section 2057 50% of adjusted gross estate percentage requirement is based on the values artificially determined under section 2032A, because section 2057(c) and section 2057(d) fail to contain the clause "(determined without regard to section 2032A)". This can easily be corrected by adding at the end of section 6007(b)(1)(D) of the Senate version of H.R. 2676 "and inserting '(without regard to section 2032A)'", and by adding a new section 6007(b)(1)(G) to the Senate version of H.R. 2676 which provides: "(G) Subsection (d) of section 2057 of the 1986 Code (as so redesignated) is amended by striking '(determined without regard to this section)' and inserting '(determined without regard to this section and section 2032A)'."

SECTION 2057 DEDUCTION SHOULD REDUCE NUMERATOR AND

 

DENOMINATOR OF SECTION 6166 PERCENTAGE COMPUTATION

[5] Section 2033A as enacted grossly distorted the section 6166 percentage computation in favor of the taxpayer. The section 2033A value exclusion did not reduce the numerator of the fraction, but did reduce the denominator of that fraction, providing the absurd result of having a reduction in the taxable value of an estate's business assets actually increase, even substantially increase, the portion of the estate tax attributable to the business assets which is deferrable under section 6166!

[6] The conversion of section 2033A to a section 2057 business deduction eliminates part of this absurdity, because that deduction will not reduce either the numerator or the denominator of the section 6166 percentage fraction. However, that means that the reduction in the portion of the taxable estate attributable to the business assets will not result in any reduction of the percentage of the estate tax deemed attributable to the business assets, which is still not the correct result.

[7] Section 6166 should be amended so that the section 2057 deduction will reduce both the numerator and denominator of the section 6166 percentage computation, which produces the correct result: the section 2057 deduction's reduction in the portion of the taxable estate attributable to the business assets produces a corresponding reduction in the percentage of the estate tax attributable to the business assets. This is also what occurs as a result of a section 2032A value reduction.

[8] The following two amendments should be made to section 6166 to achieve this result:

1. Section 6166(a)(1) should be amended by adding at the end

 

thereof the following new sentence:

"For purposes of the preceding sentence, the value of an

 

interest in a closely held business should be reduced by any

 

deduction under section 2057 allowed for such interest".

2. The first sentence of section 6166(b)(6) should be amended by

 

adding at the end thereof "or 2057".

"TECHNICAL"

 

FURTHER AMENDMENTS TO SECTION 2033A SUGGESTED

 

IN MAY 1 LETTER AND THIS LETTER ARE

 

NECESSARY TO IMPLEMENT CONGRESSIONAL INTENT

[9] It is clear that when Congress enacted section 2033A it intended to provide estate tax relief for the estates of owners of farms and other qualified family-owned businesses. If the statute cannot effectively be used to carry out that intention because of lack of certainty of results under an unclear statute, an excessively harsh "recapture tax", overly complicated drafting techniques necessary to effectively utilize it which are beyond the competence of the advisors of most such taxpayers, and inconsistency with other such estate tax relief provisions like section 2032A, then the statute should be "technically corrected" to eliminate those problems so that the intent of Congress will be implemented.

[10] I understand that this bill is generally limited to purely technical corrections, and that in the prior paragraph I am giving a very broad interpretation to the term "technical correction". However, several of the section 2033A amendments in the Senate version of H.R. 2676 are clearly far more than just "technical corrections" in the sense in which that term is usually used, which indicates a recognition that section 2033A must immediately be amended as much as is necessary to make it a workable provision for the taxpayers it was intended to benefit. All I am saying is that to truly carry out the intent of Congress when it enacted section 2033A last year, the further amendments to section 2033A described in my May 1 letter and this letter also need to be included in the Conference bill now.

[11] I would also like to briefly address the comment you made in our May 8 telephone conversation, * * *

[12] Frankly, the staff of the tax-writing committees need to take very seriously the type of advice included in my May 1 letter and this letter. No one is paying me to provide you with this advice. I have no personal financial interest in this matter. My "self- interest" is to try to correct problems in this legislation so that it will not cause the public to ridicule tax lawyers and estate planners who must prepare expensive and complicated estate plans because of unnecessary problems in the technical design of this statute and how it relates to other statutes.

[13] The suggestions in my May 1 letter and this letter for further amendments to section 2033A are fair and balanced. Some appear to "benefit taxpayers", but others clearly "benefit the government". But taken together, all of these amendments will make the statute much more workable, produce fair results and simplify estate planning and administration for owners of farms and other qualified family-owned businesses, not only for themselves and their heirs, but also for the government.

[14] Perhaps unfortunately, but certainly correctly, I must absolutely stress the importance of making the rules for section 2033A (new section 2057) be as consistent as possible with the rules for section 2032A. No other consideration is as important as this one for purposes of making section 2057 provide meaningful estate tax relief in a manner that can be understood by taxpayers and their advisors, particularly by farmers and their advisors. This is why I suggested that the basis and interest on recapture tax rules for section 2057 be made the same as the section 2032A recapture tax rules. The interest on recapture tax provisions in section 2057 appear to be excessive and unnecessary if the income tax basis of the QFOBI is reduced by the section 2057 deduction, which is what I am proposing when I suggest that the section 2057 rules on these issues be made the same as the section 2032A rules.

[15] Another major concern with the Senate version of section 2057 is the unnecessary complexity added to the estate plans of business owners by not making section 2057 applicable for purposes of the Chapter 13 generation-skipping transfer tax. A special and incredibly complicated two share, four part, three formula will and trust drafting technique will have to be used when doing GST estate planning for any farm or non-farm business owner whose estate might elect to claim the section 2057 deduction. This complexity can be eliminated if the section 2057 deduction is allowed for Chapter 13 purposes.

[16] I believe that I speak not only for myself, as an estate planner with substantial expertise and experience in advising owners of farms and other qualified family-owned businesses, but also for the great majority of other such estate planners, when I urge that the additional amendments to section 2033A suggested in my May 1 letter and this letter be included in the Conference version of H.R. 2676 to be enacted this summer, effective for estates of all decedents dying after December 31, 1997.

Sincerely,

Robert M. Bellatti

 

Bellatti & Barton

 

Springfield, Illinois

mc: Ms. Beth Kaufman

DOCUMENT ATTRIBUTES
  • Authors
    Bellatti, Robert M.
  • Institutional Authors
    Bellatti & Barton
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    estate tax, family business exclusion
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 98-16462 (5 pages)
  • Tax Analysts Electronic Citation
    98 TNT 103-22
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