Tax Quote of the Week

"I know of no power, indeed, of which a free people ought to be more jealous, than of that of levying taxes and duties."




Proposed Bank Tax to Pay for TARP

During the financial crisis in October of 2008, Congress authorized a fund of up to $700 billion under the Emergency Economic Stabilization Act of 2008. The funds were transferred to the Treasury for the purpose of buying "toxic assets" during the banking crisis that month.

During the next year, substantial loans were made to large and small banking institutions, including AIG, CitiCorp, Fannie Mae, Freddie Mac and many major banks. In addition, the automotive industry was also bailed out through loans to General Motors and Chrysler.

Many of the banks have now repaid their loans with interest. The Federal Reserve reported a substantial profit in 2009 due to the interest on the repayments. However, the expectation is that there will eventually be net losses of an estimated $117 billion. A portion of the loans to AIG, CitiCorp, Fannie Mae, Freddie Mac, General Motors and Chrysler's will probably not be recovered.

In order to repay the Treasury, President Obama is proposing a tax on large banks. The tax will be 0.15% of their covered liabilities. The banks will start with total assets and subtract equity capital, disclosed reserves and FDIC-insured deposits. The balance represents the banks' liabilities and will be subject to the tax. It is estimated that the tax will raise approximately $90 billion during the next decade.

House Majority Leader Steny Hoyer (D-MD) supported the tax. He stated, "At a critical moment in our history, taxpayers rescued the financial sector from a crisis that could have brought down our entire economy. Thanks to U.S. taxpayers, the big banks are healthy, recording huge profits and paying large bonuses. Therefore, it is only right that Wall Street repay the taxpayers in full for their actions."

Minority Leader John Boehner (R-OH) responded, "The last thing American families and small businesses need right now is a new tax that makes it harder to save, invest and hire."


Healthcare Conference Claims Compromise

House and Senate Democrats have been meeting behind closed doors to merge their respective healthcare bills. A key issue has been the tax levied to fund the healthcare plan.

Many unions and several Senators and Representatives have opposed the 40% excise tax on "Cadillac" plans in the Senate bill. The Senate bill would levy that tax on plans for single persons costing over $8,500 per year and on plans for married couples with costs over $23,000. The concern by House Democrats and unions is that the tax, even though it is paid by the medical insurance companies, will lead to benefit reductions for some union members.

The White House has continued to support the "Cadillac" healthcare plan excise tax. It indicated again that this is the preferred method for funding healthcare reform.

Following meetings this week in Washington, unions claimed that they had negotiated a proposed reduction in the excise tax. The 40% excise tax would apply for single persons with plan cost over $8,900 and families with plans over $24,000. Healthcare plans under collective bargaining agreements and those of state and local employees would be exempt from the tax until 2018. Vision and dental coverage would also be exempt. Finally, the limits would increase at the urban cost of living index plus 1%.

Editor's Note: If the excise tax on "Cadillac" plans is reduced, there will necessarily need to be increases in other taxes. The speculation by observers is that the increased taxes would be levied on drug companies and medical-device makers. These higher taxes will then be passed through to those who purchase drugs and medical devices.


How Will 2010 Executors Handle Carryover Basis?

As the first decedents pass away in 2010, executors and their advisors are now faced with great uncertainty. IRS Form 706 Estate Tax Returns will be due in nine months, although nearly all executors request an automatic extension of six months. Therefore, for individuals who pass away in January of 2010, estate tax returns are likely to be filed in April of 2011.

Attorney Conrad Teitell testified before the Senate Finance Committee on estate taxes on November 14, 2007. He explained that there are extraordinary differences in the level of estate taxation for the years 2008, 2009, 2010 and 2011. Estate taxes for taxable estates would be moderate in 2008, lower in 2009, zero in 2010 and very high in 2011.

On January 12, 2010, Mr. Teitell again wrote a letter to Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA). He noted, "Estate planning is serious business and not a game. Yet a retroactive change in the 2010 estate rules would literally make estate planning a role of the dice." To read the Conrad Teitell letter click here.

Mr. Teitell proposed two actions. First, he suggests that "the carryover basis rules be repealed retroactively." Second, he recommended that changes in estate tax laws be prospective. If the existing law is unchanged, 2010 estates will not be subject to estate tax, but also will not benefit from carryover basis. There is a $1,300,000 exclusion for each decedent and a $3,000,000 exclusion for a surviving spouse, but most assets in excess of these amounts will have a carry-forward basis.

Mitchell Gans is a respected estate commentator and teaches at Hofstra University School of Law. He published an article this week that discusses the constitutionality of a retroactive estate tax law. Mr. Gans "would favor a retroactive approach."

However, he is concerned that under United States v. Carlton, 512 U.S. 26 (1994), the retroactive estate tax compromise may not be upheld. While Carlton is a precedent for allowing retroactivity (similar to the Sec. 2057 rule that was imposed and upheld in Carlton), Professor Gans suggests that a retroactive estate tax could be determined to be a "new" tax. If so, the court may distinguish Carlton and determine that the new tax can not be retroactively imposed.

Professor Gans suggests that Congress should pass a contingent income tax that will be effective for 2010 if a retroactive estate tax is not upheld. He advocates that if "the estate [tax] were determined to be unconstitutional," a legatee would then be required to pay income tax on the inheritance.

Editor's Note: As estates now are entering the probate process during 2010, the situation becomes even less clear. As was discovered by executors in 1976 when there was another attempt to eliminate carryover basis, most estates will have great problems in establishing or proving basis for many assets (after a great outcry from executors and estate planners, the 1976 carryover basis law was repealed retroactively in 1980). But with two or three Democratic Senators dramatically behind in the polls and thus unwilling to vote for an estate tax compromise, it seems unlikely that Sen. Baucus and Sen. Reid will be able to gather the 60 votes necessary to pass an extension of the 2009 estate exemption and tax rate. As a result, the whole picture may remain unclear for most or all of 2010.


Applicable Federal Rate of 3.0% for January -- Rev. Rul. 2010-1; 2010-2 IRB 1 (21 Dec. 2009)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2010. The AFR under Sec. 7520 for the month of January will be 3.0%. The rates for December of 3.2% or November of 3.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return. Federal rates are available at clicking here.