The Convention

The Democratic Party’s “virtual” convention last week seems to have gone pretty well. All the stars of the Party’s firmament were on hand and spoke in “virtually” one voice in their assessment of the individual who currently occupies the White House and of his performance in carrying out the duties of the nation’s chief executive.

Speaking of performance, the Party’s Nominee for the Presidency delivered a relatively well-received speech.[i] After accepting the nomination – “with great honor and humility”[ii] – Mr. Biden set the theme for his campaign against Mr. Trump as one of “light vs darkness.”[iii]

Among the plots woven into this theme, taxes figured prominently. What follows are three excerpts from Mr. Biden’s speech:

“Working families will struggle to get by, and yet, the wealthiest one percent will get tens of billions of dollars in new tax breaks.”

“And we can pay for these investments by ending loopholes and the president’s $1.3-trillion tax giveaway to the wealthiest 1 percent and the biggest, most profitable corporations, some of which pay no tax at all.”

“Because we don’t need a tax code that rewards wealth more than it rewards work. I’m not looking to punish anyone. Far from it. But it’s long past time the wealthiest people and the biggest corporations in this country paid their fair share.”

If one were to search Mr. Biden’s speech for the root words “tax” and “wealth,” one would find that they appear together every time, usually in the same sentence.

In other words, he left little doubt of his intentions.

Recap of Biden’s Tax Plan

Last week’s post explored how these soundbites may be manifested as legislation to be enacted, Mr. Biden hopes, by a Congress controlled by the Democratic Party. Many of these proposals last appeared in President Obama’s Fiscal Year 2017 Budget[iv] – when he was a “lame duck” President facing a Republican Congress.[v]

In any case, the following outlines some of the key parts of Mr. Biden’s tax plan:[vi]

  • 6% tax rate for ordinary income[vii]
  • 6% tax rate for capital gain for individual taxpayers with more than $1 million of income[viii]
  • Eliminate the qualified business income deduction[ix] for individuals making over $400,000
  • Limit itemized deductions for those in higher tax brackets (above 28 percent)[x]
  • Impose the 12.4% Social Security tax[xi] on all wages over $400,000[xii]
  • Eliminate tax deferred like kind exchanges of real property[xiii] for investors with annual income in excess of $400,000[xiv]
  • Eliminate the basis step-up[xv] for a decedent’s assets,[xvi] or tax immediately the gain inherent in a decedent’s assets as if they had been sold at their date of death
  • Reduce the basic exclusion amount for purposes of the gift, estate, and generation skipping transfer taxes (the “transfer taxes”) from $10 million to $5 million,[xvii] and
  • Increase the flat corporate income tax rate from 21 percent to 28 percent.

Last week’s post also indicated that any tax legislation coming out of a federal government managed by the Democrats is not likely to adopt Mr. Biden’s proposals verbatim. The foregoing measures are intended to win an election.[xviii]

So, in the event of a Biden victory – not a sure thing – what can we expect?

Let’s start with his running mate, Senator Harris – after all, according to the popular aphorism, the vice president is only “a heartbeat away” from the presidency.[xix]

Senator Harris and Taxes

Senator Harris dropped out of the Democratic primary contest in late 2019, before the pandemic. Before then, however, she expressed a strong desire for repealing the 2017 Tax Cuts and Jobs Act, which would include, among other things:

  • reinstating the maximum 39.6 percent rate for ordinary income received by individuals,
  • re-imposing limits on itemized deductions,[xx]
  • returning the basic exclusion amount for transfer taxes to $5 million,
  • eliminating the $10,000 limit on itemized deductions for state and local taxes,[xxi]
  • eliminating the deduction based on qualified business income, and
  • reinstating a graduated corporate tax, with a maximum rate of 35 percent.

In addition, Senator Harris supported taxing capital gains realized by individuals at the same rate at which ordinary income is taxed (39.6 percent under her plan),[xxii] as well as imposing a financial transaction tax on trades of marketable securities. She also talked about imposing an additional 4 percent income-based premium on households making more than $100,000 (to help fund Medicare).[xxiii]

Therefore, it appears that the Senator’s stance on tax policy is not incompatible with Mr. Biden’s.

In fact – if I may take some poetic license[xxiv] – based on the restoration after 2025 of many provisions that were added to the Code in 2017 by the Republican Congress,[xxv] or that were temporarily suspended, the Democratic ticket is inadvertently “aligned” with the Republicans on many tax provisions, differing only as to the timing of their implementation or reinstatement.

Unfortunately for them – and perhaps for many closely held businesses and their owners – the Democratic Party is hardly a monolithic centrist block.

The “Progressives”

Last week, Senator Sanders had the following to say on the Daily Show: “We’re going to come together to defeat Trump, and the day after Biden is elected we’re going to have a serious debate about the future of this country.”

I wondered whether the “we” to which the Senator referred was the Democrats and the Republicans, or the progressive and centrist wings of the Democratic Party.

As he did in 2016, Senator Sanders emerged as a serious contender in 2020, challenging Mr. Biden for a long stretch of the Democratic primary race.[xxvi] Then there was Senator Warren.

And Senators Sanders and Warren weren’t the only ones challenging established centrist Democrats. Witness what happened to Democratic incumbents like Rep. Engel and Rep. Clay in the primaries.

And why was Rep. Ocasio-Cortez – the unofficial spokesperson for the progressive wing – chosen to step onto the national stage to second the nomination for Mr. Sanders for purposes of the formal roll call required by the rules of the convention?

The answer is clear: because the progressive wing of the Democratic Party has emerged as a factor to be considered in any legislative agenda. Indeed, according to some, “Progressives are expected to grow their numbers in the House . . . which they hope will give them more influence. ‘If we actually get to 15 to 20, which it looks like we will, that is a potent force. I mean, that can help set the agenda for our party,’ ” said Rep. Khanna of the Congressional Progressive Caucus.[xxvii]

What does that mean for taxes?

Of course, you’ve heard about the wealth taxes proposed during the Democratic primaries. There are many more ideas being floated within the Democratic camp; for example, Rep. Ocasio-Cortez wants to increase to 70 percent the rate on those individuals making at least $10 million; she has called for taxing capital gains at the same rate as ordinary income; and she wants to tax on an annual basis the appreciation in the value of investments (i.e., a “mark to market” system), rather than wait until the investments are sold.

Still others have argued that the best way to raise extra tax dollars from the so-called wealthy is by eliminating various deductions[xxviii] and exemptions.

The “Target” Taxpayers?

Which begs the question: Who are the “wealthy”? Are they the folks who make more than $400,000 per year, and thus are marked for “special” treatment by Mr. Biden based on an Obama Administration proposal from 2012? Who are the members of the “one percent” to whom he referred in his acceptance speech? For whom do Rep. Ocasio-Cortez and her coterie reserve their ire?[xxix]

Good questions. According to a recent article in USA Today, “it takes an annual income of $538,926 to be among the top 1 percent [nationally]. Among the approximately 1.4 million taxpayers who meet this threshold, the average annual income is about $1.7 million – about 20 times the average income of $82,535 among all taxpayers.”[xxx]

In New York, the article continues, the top 1 percent earn at least $702,000, and the average income of the top 1 percent is almost $2.9 million.[xxxi]

Still, the question remains unanswered.

Please indulge me as I try to impersonate an economist. (No, I did not stay at a Holiday Inn Express last night.)

The Target “Assets”

How much of this income is attributable to what an economist might describe as human capital, which rewards individuals based on their productivity or special skills? As long as the individual can perform, they will be compensated for their services. The higher salary, the year-end bonus, the nonqualified deferred compensation plan that vests upon the completion of a specified service or the achievement of a production goal, and similar measures of compensation, all represent a return on one’s human capital. It is not an asset that may be passed down to other generations.[xxxii] The value of this compensation is taxable as ordinary income.

“Wealth” on the other hand is something else. It represents the value of one’s property and, in particular, the ability of such property to generate income without effort on one’s part. It is often acquired by investing the after-tax proceeds from the compensation received in exchange for one’s human capital. By its very nature, it may be passed from one generation to the next – it is not dependent upon the expenditure of the next generation’s human capital.

Unlike compensation, the payment of which is required as a matter of law,[xxxiii] a distribution or other form of “return” with respect to one’s investment in an asset that represents equity in a business is not, strictly speaking, legally required; rather, it depends upon the success and well-being of the asset into which the taxpayer has invested their funds, and it depends upon the needs of the asset or business.[xxxiv] Such an investment entails a long-term risk, at least in the case of a closely held business, and one’s investment in such a business, once committed, is difficult to withdraw.[xxxv]

Speaking of the closely held business, it represents the intersection of the foregoing concepts.[xxxvi] It involves the taxpayer-owner’s “expenditure” of their human capital[xxxvii] and the investment of their after-tax funds,[xxxviii] thereby putting both at risk in the hope of realizing an asset that (i) will produce income, taxable at non-preferential ordinary rates,[xxxix] without the taxpayer’s continuing involvement, or (ii) may be liquidated through the sale of the asset.

On which form of “wealth” or income are Mr. Biden and the Democrats going to focus? Are they going to say to those of productive human capital, “you make a lot of money, you should pay more taxes in order to support the government and its programs.”[xl] Or will they focus on income-producing property instead? If the latter, will they distinguish between the closely held business, on the one hand, and marketable securities on the other?[xli]

Much remains to be seen, including how influential or demanding the progressives will be. Either way, the selection is fraught with political consequences.

The Closely Held Business Needs Protection

I can accept many of the income tax and employment tax provisions in Mr. Biden’s proposal.

Like Kind Exchange

I can even get behind some limitation on the use of like kind exchanges to defer gain recognition, but not based on the taxpayer’s overall income, and certainly not at $400,000.[xlii]

President Obama’s 2017 Green Book proposal for limiting the gain deferred to a specified amount – he proposed $1 million of gain per taxpayer per year – is much more palatable; for example, in the case of a partnership with three equal partners, $3 million of gain may be deferred in total.

That being said, and for the reasons mentioned earlier, a $3 million gain in the New York metro area is very different from the same gain in almost any other part of the country. Historically, Congress has been reluctant to match tax consequences to the cost of living in the geographic area in which they are realized, yet that is the only way the above limitation will make any sense.

That said, I do not understand Mr. Biden’s thinking on capital gains, on dividends and on the basis step-up[xliii] at death.

Capital Gain

Let’s assume an individual with $X of disposable cash. This individual may invest their money in the stock of a corporation that is readily tradeable on an established market, or they may choose to invest it among several such corporations so as to diversify their risk. Although they may not be guaranteed dividend distributions (periodic or otherwise), they are free to liquidate their investment at any time.  In addition, they will never be called upon to guarantee any indebtedness or other obligations of the business, nor will they ever be asked to make to make additional capital contributions.[xliv]

What if the same individual used their $X to organize a closely held business? They may pay themselves the equivalent of a relatively small salary (at least initially) for the services they render to the business and they forego the types of benefits often provided for key employees in established companies. If they are fortunate enough to have any after-tax profits, those will more likely than not be reinvested in the business by hiring employees and making capital expenditures necessary for the business. In the vast majority of cases, the business will be organized as a pass-through entity; thus, its profits will be taxed to the individual as ordinary income whether or not the individual receives a distribution from the business. What’s more, the operation of the business will occupy this individual’s every waking hour, seven days a week. In time, after a lot of effort (human capital) and a bit of luck – 90 percent of startups fail, 75 percent of venture-backed startups fail, under 50 percent of businesses make it to their fifth year, 33 percent of startups make it to the 10-year mark, and only 40 percent of startups actually turn a profit[xlv] – the business may be doing well enough to draw the attention of a larger competitor[xlvi] or of a private equity fund.

Why would our hypothetical individual go into business, with all the risk and additional effort that it entails, only to be taxed upon the successful sale of the business at the same rate at which their salary would have been taxed had they gone to work for someone else (with the attendant employment and retirement benefits), and had invested their $X in publicly traded securities? It’s a basic principle of economics, is in not, that the greater the risk to which an investor exposes themselves, the greater the return they would require in exchange. It’s to encourage such investment, and to offer the possibility of that return, that long-term capital gains are taxed at a lower rate than ordinary income.

Qualified Dividends

Dividends are taxable at the rate applicable to long-term capital gain. Why? Because like capital gain they represent a degree a risk for which the investor has no contractual recourse against the C corporation to which the investor has contributed capital in exchange for shares of stock.[xlvii]

Broadly speaking, however, who owns the equity interests in respect of which any dividend would be payable, and whose income tax liability is the subject of this discussion?

According to an Urban-Brookings Tax Policy Center study conducted just a few years ago,[xlviii] approximately 75 percent of outstanding C corporation stock is held by non-taxable accounts; for example, qualified retirement funds;[xlix] insurance companies;[l] nonprofits;[li] foreigners; and others. The dividends paid to these holders in respect of their stock are generally not subject to federal income tax, nor is the gain they realize on the sale of such stock.

Foreign investors held approximately 25 percent of U.S. C corporation stock. The “default” federal income tax rate for dividends on such stock is set at 30 percent[lii] – well below the rate on ordinary income for U.S. individuals. Treaties, however, typically reduce this rate to 15 percent (and sometimes lower). What’s more, a foreigner’s gain from the sale of domestic stock is exempted from U.S. income tax. Thus, for purposes of the Urban-Brookings study, they were treated as non-taxable account holders.

In light of the foregoing, is it proper to tax the dividends paid to U.S. individuals at a rate of 39.6 percent? Actually, one also needs to consider the 3.8 percent surtax for net investment income.[liii] That would bring the total tax rate applicable to an individual’s dividend from a C corporation, or to their long-term capital gain from the sale of C corporation stock, to 43.4 percent.

Basis Step-up

In the alternative, let’s assume that our hypothetical business owner dies prematurely. The cause of death? Work.[liv]

The fair market value of the business is included in the decedent’s gross estate for purposes of the federal estate tax.[lv] Let’s assume that the taxable estate exceeds the decedent’s exclusion amount[lvi] – estate tax will be owing. Let’s also assume that the business will be sold.[lvii]

It is commonly understood that the basis step-up is intended to prevent the decedent’s estate from being taxed twice on the same asset: once upon the transfer of the asset at death, and again on the sale of the asset; the basis step-up addresses the gain realized on the sale.

The first factor to consider is whether there is a risk of double taxation: specifically, should there be a basis step-up where the decedent’s taxable estate is less than the decedent’s exclusion amount such that no estate tax is owing? What if the asset passes to the decedent’s spouse or to a charity, such that the marital deduction or charitable contribution deduction[lviii] applies to eliminate any estate tax exposure? When a property is gifted to a beneficiary without incurring any gift tax, the latter takes the property with the same basis it had in the hands of the individual making the gift.[lix]

The second factor is whether there is a sale of the asset, whether by the estate or by the decedent’s beneficiaries: should the basis step-up be accounted for only upon a sale of the asset, while the beneficiaries use a carryover basis for cost recovery purposes?[lx]

Does Kiss Have the Answer?

Assume Congress decides upon a scaled back basis step-up and an increased, but still preferential, capital gain tax for the disposition of a closely held business, along the lines alluded to above. What else in Mr. Biden’s tax plan may satisfy the progressive wing of his party without offending his centrist base, while perhaps even garnering some support from across the aisle?

Do you remember Gene Simmons,[lxi] the bassist for the rock group Kiss, and the co-lyricist for many of their hits?[lxii] It was reported in a March 31, 2019 article on, that he was not planning to leave his substantial fortune to his kids. “What I wanna do,” he said, “is what every bird does in its nest – it forces the kids to go out there and figure it out for themselves. In terms of an inheritance and stuff,” he continued, “they’re gonna be taken care of, but they will never be rich off my money . . . they should be forced to get up out of bed and go to work and make their own way.”

Gene Simmons is not the only wealthy individual who plans on spending their money. Many other celebrated entertainers and business folk likewise have been quoted in the press as having announced that the vast majority of their wealth will be transferred to various charities.[lxiii] They concede that their children will be given a degree of economic security not bestowed on others, but they also add that their children will have to work if they want to make their mark or build and accumulate wealth.

If the statements attributed by the articles to these people are true, then it appears that a significant number of wealthy individuals – many of whom ceased using their human capital long ago – are not interested in leaving all, or even most, of their wealth to the next generation.

That being said, and considering Mr. Biden’s support among many members of this well-heeled group, might the least politically disruptive approach to “making the rich pay their fair share” be one that borrows liberally[lxiv] from President Obama’s 2017 Green Book?

The Green Book would have:

  • made “permanent” the estate tax, generation-skipping transfer tax, and gift tax parameters that applied during 2009
    • thus, the top tax rate would be increased from 40 percent to 45 percent, and
    • the exclusion amount would be reduced from $10 million to $3.5 million per person (rather than the $5 million under Mr. Biden’s proposal) for purposes of the estate and GST taxes, and to $1 million for gift taxes[lxv]
  • revised the rules applicable to grantor retained annuity trusts (GRATs)[lxvi]
    • require a ten-year minimum term
    • require a maximum term tied to the life expectancy of the annuitant plus ten years
    • prohibit the grantor from engaging in a “tax-free exchange” of any asset held in the trust[lxvii] by requiring that the asset received by the trust be included in the grantor’s estate
      • another proposal, but not included in the Green Book, would have eliminated “zeroed out” GRATs by requiring that the funding of the GRAT result in some taxable gift
    • provide that, on the 90th anniversary of the creation of a trust,[lxviii] the GST tax exemption amount allocated to the trust would terminate, thereby rendering the trust subject to the GST tax
      • this was aimed at so-called “dynasty” trusts, the creation of, and the distributions from which, would have escaped gift, estate and GST taxes
    • eliminate the present interest requirement for gifts to qualify for the gift tax annual exclusion, but impose an annual limit of $50,000 (indexed for inflation) per donor on the donor’s transfers of property that will qualify for the gift tax annual exclusion[lxix]
      • this would likely result in some taxable gifts in the case of life insurance trusts that hold policies with large premiums.

Why Lou, Why?

Some readers may wonder why a tax adviser to closely held businesses and their owners would espouse any of Mr. Biden’s proposals, and even suggest the adoption of some of President Obama’s 2017 Green Book proposals.

Because some of them are reasonable – they make sense;[lxx] some address what I have long believed were unintended consequences.[lxxi] I would add, as a second reason, because there are folks in Congress who want to do a lot worse; they may be well-intentioned, but their policies will ultimately hurt us. Some reasonable compromise is called for. Moreover, let’s not forget that the $10 million basic exclusion is a recent development, of a temporary nature, and not a long-recognized constitutional right.

If I could bend your ear a bit longer, it may be a good idea to cap the estate tax deduction for charitable contributions[lxxii] made to private non-operating foundations, as opposed to public charities. The removal of a significant amount of wealth, and the income therefrom, beyond the reach of the estate tax and the income tax in exchange for an annual charitable distribution based on 5 percent of the fair market value of the foundation’s assets does not seem like a good deal from the perspective of the general public.

Finally, and neither party ever makes this suggestion, Congress should increase the IRS’s enforcement budget. There are a lot of genuinely bad actors out there who are getting away with “murder.” Secretary Mnuchin reported in 2017 that for every one dollar spent on enforcement, the IRS collects four dollars.[lxxiii] That’s a great return in any circumstances.

There’s a lot more we can discuss, but I’ve already gone too long.


Including by some Republican pundits who “complimented” Mr. Biden; for example, Karl Rove, speaking on Fox News immediately after the convention concluded, commented that Mr. Biden’s presentation was “a very good speech,” acknowledging that Biden’s centrist position could present a challenge for Republicans. Having said that, however, he later added, “There were moments where – granted, he didn’t misstate, he didn’t lose words, the flow was pretty good – but you looked at him, and you said, ‘that’s an old guy and he’s doing his best.’”

[ii] I recognize that we are still in the introductory portion of this week’s post, but I have to digress. It irks me when candidates for election to an office – any office – state, as Mr. Biden did: “So, it is with great honor and humility that I accept this nomination . . . ”

“Humility?” This is Mr. Biden’s third attempt. It may have been his fourth if President Obama had not talked him out of running in 2016.

Politics is a dirty business – whether conducted at the national level or within the offices of a local business – and anyone who rises to, and succeeds at, its highest levels has probably compromised themselves in some morally questionable way.

By now, you’ve figured out that I enjoy quoting from certain movies to convey or stress a message. Among these is Gladiator. You may recall this exchange between Marcus Aurelius and General Maximus after the Emperor has asked Maximus to succeed him, temporarily, upon his passing:

Marcus Aurelius: Won’t you accept this great honor that I have offered you?

Maximus: With all my heart, no.

Marcus Aurelius: Maximus, that is why it must be you.

[iii] The Los Angeles Times published the full text of the speech:

[iv] The “Green Book.”

[v] I’ll endeavor to identify the similarities in the endnotes as we go along.


[vii] This is already scheduled to be reinstated in 2026. See the Tax Cuts and Jobs Act, P.L. 115-97; “TCJA”.

[viii] President Obama’s Green Book proposed raising the top tax rate on capital gains and qualified dividends from 20 percent to 24.2 percent. Perhaps this is where we will ultimately end up. For now, it’s the campaign season.

[ix] Already scheduled to disappear after 2025. TCJA.

[x] President Obama’s Green Book included this proposal. This limitation would reduce the value to 28 percent of the specified exclusions and deductions that would otherwise reduce taxable income in the higher income tax rate brackets.

[xi] The employer pays half of this, and collects the other half from the employee – each at 6.2 percent.

[xii] It currently stops at $137,700.

[xiii] IRC Sec. 1031.

President Obama’s last Green Book would have limited the amount of capital gain deferred under Sec. 1031 to $1 million (indexed for inflation) per taxpayer per taxable year.

[xiv] Anyone wondering “Why $400,000?” Why is Mr. Biden drawing the line there, and promising that folks making no more than that amount will not see an increase in taxes?

Let me take you back to 2012. (No, this doesn’t involve a crazy trip in a DeLorean.) We were approaching a “fiscal cliff;” specifically, the nation was facing over $500 billion in federal tax increases and budget cuts that were scheduled to go into effect on January 1, 2013 – the expiration of the so-called Bush tax cuts. The only way this could be avoided was if President Obama and a lame-duck Congress could reach an alternative agreement for reducing the deficit. (It’s laughable today, isn’t it?) The President’s plan at one point included higher taxes for folks making more than – you guessed it – $400,000.

In an article dated December 18, 2012, the U.S. News & World Report explained that although “$400,000 is unquestionably a high income . . . earnings are relative. A family earning $400,000 in Manhattan exists in a very different world than one earning $400,000 in” most any other part of the country. It went on to describe how the after tax cost of living in Manhattan was more than double the national average.

By the way, $400,000 in 2012 is equal to over $451,000 today.

According to a July 29, 2020 article in Kiplinger, the cost of living in Manhattan was 145.7% above the national average.

[xv] IRC Sec. 1014.

[xvi] President Obama’s Green Book proposed the elimination of the step-up in basis at death, but with certain protections for the middle class, surviving spouses, and small businesses.

[xvii] IRC Sec. 2010, 2505 and 2631. This is already scheduled to occur after 2025. TCJA.

[xviii] Hence, Mr. Rove’s observation regarding Mr. Biden’s posture as a centrist.

[xix] Mr. Biden will turn 78 this November, after the election. Senator Harris will turn 56 years of age in October.

[xx] Also set to be reinstated in 2026. TCJA.

[xxi] Ironically, this would benefit higher income taxpayers. What’s more, this limitation is set to expire at the end of 2025. TCJA.

Other deduction limitations that will expire after 2025, and from which higher income taxpayers will benefit, are the limitation on qualified resident interest and the suspension of home equity interest.

According to the “List of Expiring Federal Tax Provisions 2016-2027” prepared by the Staff of the Joint Committee on Taxation, JCX-1-18 (Jan. 9, 2018), twenty-three provisions from the TCJA relating to individual income taxes will expire with 2025, as a result of which the amount of tax owing by most taxpayers will increase. Among these expiring provisions are the following: the reduced individual income tax rates, the increased AMT exemption and phase-out threshold, the increased standard deduction, the qualified business income deduction for pass-through business entities, and the increased estate and gift tax exemption. With the expiration of these provisions, and the restoration of others that have been suspended, the Code will look very much as it did at the end of the Obama Administration, with the exception of the reduced corporate tax rate and the taxation of overseas earnings on a current basis, which will continue (and which was long overdue).

[xxii] She did not indicate whether this increased rate would apply only to individuals with income in excess of a prescribed threshold, as Mr. Biden has. In any case, it should cover profits interests.


[xxiv] It’s my post after all.

[xxv] In accordance with the schedule set by the TCJA.

[xxvi] Query the effect of the pandemic.

[xxvii] “Biden Unites Democrats – for now,” by Jordain Carney and Mike Lillis, The Hill, August 22, 2020. According to the article, “Democrats are bracing for an all-out fight over their agenda” if Mr. Biden wins the White House in November.

[xxviii] The deduction for interest on acquisition indebtedness for a principal residence has been mentioned, as has the deduction for state and local taxes. Occasionally, there have even been whispers about the depreciation deduction in respect of real property.

[xxix] I can’t explain why, but when I think about this group I am reminded of Robespierre, the Committee of Public Safety, and The Reign of Terror. It’s a visceral reaction.

[xxx] “How much do you need to make to be in the top 1% in every state? Here’s the list,” by Samuel Stebbins and Evan Comen, USA Today, July 1, 2020.

[xxxi] Manhattan skews these figures.

[xxxii] This point is reinforced in the rules that govern the taxation of IRD (income in respect of a decedent), the most common example of which is compensation for services that has accrued to the service provider’s date of death but which remains unpaid. This “asset” is included in the decedent’s gross estate but it does not enjoy the benefit of a step-up in basis. Instead, the beneficiary to whom the IRD will be paid must pay tax at the ordinary income rates; however, in recognition of the fact that the value of the IRD has been included in the service provider’s gross estate, the beneficiary is allowed to deduct one-half of that portion of the estate tax paid by the estate that is attributable to the value of the IRD. IRC Sec. 691.

[xxxiii] The same holds true for interest paid to a creditor with respect to a loan. The creditor has recourse against the debtor’s property, and has a preference over the debtor to the latter’s property. That’s why compensation and interest are taxed as ordinary income. Similarly as to rent from real property, or a royalty in respect of a license. These are contractually enforceable payments.

[xxxiv] Does a real property require major capital improvements? Does a manufacturer have to purchase new equipment? Does the business need to invest in research in order to improve an existing product or process, or to develop a new one? Is the business expanding in order to take advantage of a new opportunity?

[xxxv] Certainly not without significant loss. Compare that to a marketable security, or to a publicly traded corporation that regularly offers to redeem its shares.

[xxxvi] Think of it as the overlapping parts of a Venn Diagram.

[xxxvii] Often for below market pay.

[xxxviii] We’re not just talking about equity. Remember, borrowed funds are repaid with after-tax dollars. Only the interest incurred for the use of such funds is generally deductible.

[xxxix] Think of the sole proprietorship, the partnership and the S corporation – all are pass-through entities the profits of which are taxed to their owners as ordinary income. These business entities are the vehicles of choice for the closely held business.

[xl] “From each according to his ability,” as Herr Marx wrote in his “Critique of the Gotha Program” (1875).

[xli] They should.

[xlii] Have any of these folks ever been in business?

[xliii] I am disregarding the proposal that calls for taxing the “gain” from the deemed sale of assets at death as it requires the introduction and implementation of an entirely new tax scheme – this is not the time. If we ever determine that such a system is right for us, it will take a couple years to figure it out, and it should be introduced during a relatively stable period. In any case, we cannot have both an income tax on the deemed sale of assets and an estate tax on the value of such assets.

[xliv] As an aside, they have no exposure as a “responsible person” for the sales tax and employment taxes of the business.


[xlvi] A “strategic” buyer.

[xlvii] Preferred stock is the exception, in certain circumstances, but even there the holder is junior to every other creditor of the business. Compare interest, rents and royalties which are payable in exchange for the payor’s use of the payee’s property.

[xlviii] “The Dwindling Taxable Share of U.S. Corporate Stock,” Steven M. Rosenthal and Lydia S. Austin (2016).

[xlix] Defined contribution and defined benefit.

[l] Held in non-taxable segregated reserves to fund annuity contracts and whole life insurance.

[li] See IRC Sec. 512(b)(1).

[lii] IRC Sec. 871 and Sec. 881; fixed or determinable annual or periodical gains, profits, and income.

[liii] IRC Sec. 1411.

[liv] No joking here. I’m serious.

[lv] IRC Sec. 2031 and Sec. 2033.

[lvi] IRC Sec. 2010.

[lvii] All too often, owners fail to consider succession. In addition, their children often have no interest in continuing the business.

[lviii] IRC Sec. 2056 and Sec. 2055.

[lix] IRC Sec. 1015.

[lx] For example, beneficiaries who receive real property from a decedent, and continue to hold it for investment or for use in a business, may depreciate their stepped-up basis for such property.

[lxi] This Israeli-American was born Chaim Witz, changed his name to Gene Klein, became known professionally as Gene Simmons, and adopted the stage persona of “The Demon” as a member of Kiss.

[lxii] Including “Rock and Roll All Nite”.

[lxiii] It’s part of humanity’s relentless search for some form of immortality? Have you ever represented an institution that sought to change the name of a building after a subsequent donor offered a lot more money for the honor? I have.

You know what the ancient Greeks used to say about hubris, right? The gods have fixed limits on humanity; to disregard these limits, to challenge the natural order of the cosmos, to defy the gods, will elicit some form of punishment.

[lxiv] Like the pun?

[lxv] Thus limiting one’s ability to remove appreciation from one’s estate.

[lxvi] IRC Sec. 2702; Reg. Sec. 25.2702-3.

[lxvii] Under the grantor trust rules; specifically IRC Sec. 675(4). See Rev. Rul. 85-13.

[lxviii] Still very generous if you ask me.

[lxix] Thus eliminating the need for Crummey powers.

[lxx] Especially with respect to funding Social Security.

[lxxi] For example, the zeroed out GRAT.

[lxxii] IRC Sec. 2055.