Being a millionaire isn’t what it was back in the day, so the name for the wealth tax introduced by Senator Elizabeth Warren (She’s my Senator by the way.  Not bragging, just saying.) is the “Ultra-Millionaire Tax Act of 2021“.  By the good old days standard Senator Warren is a millionaire even if you adjusted for inflation back to the 1950s when they had that TV show The Millionaire.  She is far from an ultra-millionaire though.  Let’s get into the nitty gritty of the bill for that and some other definitions.

A New Chapter

The bill would add a new chapter to the Internal Revenue Code – Chapter 18 – Determination of Wealth Tax. There are five new sections 2901 – 2905 (Fortunately there are some gaps in the Code so there won’t have to be a lot of renumbering). It is  Subtitle B-1-Wealth Tax right after gift and estate taxes.

The tax is 2% of the net value of all taxable assets of the taxpayer between $50 million and $1 billion.  Over a billion it is 3% unless we enact universal health care which is defined as a health insurance program that provides comprehensive protection against the costs of health care and all health-related services and prohibits private entities from providing duplicate benefits.  If we have that, then the billion plus rate is 6%.

Over the real long haul 6% is arguably confiscatory.  Back in the days of the gold standard there was a saying (whose source I can’t trace) that a 7% discount rate at the Bank of England would draw gold from the moon.

Who Is Subject?

An “applicable taxpayer” is an individual or any trust “other than a trust described in section 401(a) and exempt from tax under section 501(a)” (Emphasis added).  The way I read that pension and profit sharing plans would be exempt, but not charitable trusts.  If I am right that is kind of a shocker.

Married individuals are treated as a single taxpayer.  This makes for the mother of all marriage penalties.  Consider Robin and Terry who are both worth $30 million.  Marriage will cost them $200,000 per year.  Then we have Blinn and Ashley who get married when we finally achieve universal health care.  They are each worth $900 million. Getting married will cost them $32 million per year.

How Do You Figure This?

The tax is figured on all assets of the taxpayer reduced by any debts.  Excluded assets are things worth less than $50,000 except for business and investment assets and boats, planes collectibles and a few other things like mobile homes.  I mean really.  What person with over $50 million in net worth has a mobile home worth less than fifty grand?

The taxpayer is considered to own anything that would be included in their estate and anything they are deemed to own under the grantor trust rules.  So all those intentionally defective grantor trust are going to seem really defective now.  After enactment, gifts to family members under 18 will be considered owned by the taxpayer until the recipient reaches 18.

The IRS has 12 months to establish valuation rules which may “utilize retrospective and prospective formulaic valuation methods”.  I think that is meant to make things simpler.  “Hey, you bought it for $10 million last year.  Don’t try to tell me a story that it is only worth a hundred grand.”  They will also address the use of valuation discounts.

There are some special rules which I will let you check out.

The Ferocious IRS

The bill calls for a 30% audit rate on individuals and trusts covered by the tax.  Given that there is a three year statute that comes close to auditing every return.  Of course the real project will be finding the people that are not filing that should. If the bill passes IRS will be getting an extra $100 billion for fiscal years 2022 through 2032.  I read that to be eleven years which means $9.09 billion per year, but if it is ten years that would make it $10 billion.

Anyway $70 billion is for enforcement of “this title” (The other thirty is for taxpayer services and business system modernization.).  At first I thought they were throwing the whole $70 billion at the wealth tax.  But the wealth tax is a chapter of a subtitle.  The title would be “Title 26” i.e. the Internal Revenue Code. The IRS budget for Fiscal year 2021 is just shy of $13 billion and only $5 billion of that is for enforcement.  So the bill more than doubles the enforcement budget.

This is a white collar jobs program of epic proportions.

After The Return The Refund Claim

If I was still practicing and this passed I would be preparing a few wealth tax returns.  After they were filed and mailed, but probably before the check cleared, I would be sending in a refund claim for the whole tax on the grounds that it is unconstitutional.  It would probably just be a protective claim, since we could count on people with deeper pockets suing after their claims were denied.  There will be suits in every circuit, if not every district and the Court of Claims.

Not to file a protective refund claim would, in my mind, be malpractice.  There will be enormous upfront enforcement investment by the IRS.  What should the odds be on constitutionality in order to justify that investment given the potential prospect of having to give back almost all the tax collected – with interest?

Really A Horrible Idea

I would say the odds should be about 90% or better.  The odds may be better than 50% in the governments favor, but I don’t think they are up in the 90s.  I have written about what some experts say about constitutionality of a wealth  here and here. The issue is whether the wealth tax would be considered a “direct tax” which would require that it be apportioned among the states by population, which it seems is generally agreed to be an insurmountable obstacle. You will note that the Ultra-millionaire Act does not even have apportionment as a back-up.

We can see what the problem is from a letter on Senator Warren’s website. (It’s a download) The letter is arguing for constitutionality.  Here is the key paragraph.

Given Knowlton’s role in framing the debate surrounding the passage of the Sixteenth Amendment, no thoughtful “originalist” can conclude that Pollock’s dicta, announcing a broad reading of the “direct” taxation clause, has survived the constitutional decision by the American People to repudiate Pollock in 1913.

They are arguing that the 1895 decision that struck down the income tax can be ignored even though contemporaries concluded that it required a constitutional amendment to allow an income tax on income from all sources. Basically the scholars who are blithe about the constitutionality of the wealth tax say “Well Pollock was just wrong.  Let’s not worry about it even though it provoked a constitutional amendment.”

It is just too big a risk and there are much easier ways to address inequality. For example, how about marking publicly traded securities to market and limiting charitable contributions to basis.  That would get a few bucks from Bill Gates, Warren Buffett and Jeff Bezos. That 30% audit rate will bring in a lot of income tax,  Why don’t we see how we do with that?  Here are some other comments.

Louis Vlahos

Tax attorney Louis Vlahos of Farrell Fritz PC noted that the tax is imposed on the last day of the year which he finds reminiscent of the old FL intangibles tax. He notes the reduction for debt and speculates about planning opportunities.  There was a trust technique to get around the intangibles tax, which kind of killed it, but that probably won’t be available here.  Attorney Vlahos suggests that clients avoid funding grantor trusts and consider making oneself a discretionary beneficiary of a trust subject to the consent of an “adverse” party.  He also notes that valuation will be a fact intensive and subjective and there will be room for give and take.

Robbin E. Caruso

Robbin E. Caruso of Prager Metis CPAs LLC had some interesting thoughts, which I have abbreviated a bit:

The 3% annual tax proposed on wealth exceeding $1 billion, and with 2% on wealth between $50 million and $1 Billion, by Senators Elizabeth Warren, Bernie Sanders and other Democrats will pose many obstacles and unanticipated impacts, including how to effectively administer such a tax, the costs of compliance by taxpayers and the IRS, and other potential impacts to our economic output. The IRS is already burdened in addressing all the recent iterations of tax law changes,

 

The proposals provide funding of $100 billion for the IRS to audit at least 30% of the super wealthy annually, and we need to consider the impact and burden in terms of time and cost to these taxpayers. Are we really concerned about the burden to those with over a billion dollars? It would depend on who you ask. Many new jobs may be created through the efforts of enforcing the compliance of this plan. The complexity and cost of valuing all of their assets and enforcing the regulations alone seem almost insurmountable, but at some point we need to effectively address the imbalance of wealth in our country. I anticipate that this wealth tax will encourage those impacted and promotors to find new strategies for tax avoidance.

 

I believe that ultimately, it will require a combination of many tax provisions to truly address the concerns over tax inequity and our nation’s deficit.

·From A Veteran Tax Attorney

I heard from a fairly prominent tax attorney who is now savoring retirement.  He was brief.

First thought is to spend your money down below the threshold level before it becomes effective.  Second is a suggestion to you Massachusetts voters to not re-elect Elizabeth Warren.  ( I tend to be very practical since I retired.)

I can’t go along with that.  I have a real soft spot for Senator Warren.

Originally published on Forbes.com.

For great value continuing professional education.  I recommend the Boston Tax Institute

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