Wills, Trusts & Estates Prof Blog

US Supreme Court sidesteps wealth tax question in closely watched case

The US Supreme Court avoided ruling on the constitutionality of a wealth tax, disappointing both supporters and opponents. In a 7-2 decision, the court sidestepped the issue in a case involving a couple, the Moores, who contested a $15,000 tax on offshore profits, arguing it was an unconstitutional tax on unrealized gains. The court's narrow ruling, which did not resolve whether income must be "realized" to be taxed, left future wealth tax debates open, with justices expressing varied opinions on the matter.

Justice Brett Kavanaugh, writing for the majority, stated that the court did not need to address the disagreement over the requirement of realization for income taxation in this case. The dissenting justices, Clarence Thomas and Neil Gorsuch, argued that the Constitution only permits taxes on realized income, as per the 16th Amendment. Meanwhile, Justices Amy Coney Barrett and Samuel Alito agreed with the ruling but supported the need for income realization, contrasting with Justice Ketanji Brown Jackson's opinion that realization is not required.

Tax experts and campaigners had closely watched the case, hoping for a definitive ruling that could influence future wealth tax policies. The decision, which avoided challenging other existing taxes on unrealized gains, left both sides partially satisfied. It highlighted the court's cautious approach to potentially sweeping tax law changes, setting the stage for continued legal battles over the constitutionality of taxing unrealized income.

For more information see Stephen Foley "US Supreme Court sidesteps wealth tax question in closely watched case", The Financial Times, June 20, 2024.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

Supreme Court upholds Trump-era tax provision on offshore earnings

The Supreme Court is currently deliberating a pivotal case that challenges the constitutionality of a tax provision from the 2017 Tax Cuts and Jobs Act, known as the Mandatory Repatriation Tax (MRT). This tax targets the profits of U.S. shareholders from foreign corporations, regardless of whether the earnings were distributed. The case, Moore v. United States, was brought forth by Charles and Kathleen Moore, who argue that the MRT constitutes a property tax rather than an income tax, which would make it unconstitutional under the U.S. Constitution's restrictions on federal property taxes.

The justices are scrutinizing the broader implications of their ruling. A decision against the MRT could significantly impact not only this specific tax but also future legislative efforts to impose wealth taxes on unrealized gains. Both conservative and liberal justices have expressed skepticism about completely dismantling the MRT, yet they also appear wary of granting the government unrestricted power to define and tax income in ways that could open the door to new forms of taxation, including a wealth tax.

The debate has intensified due to the potential financial and policy repercussions. Should the Court strike down the MRT, it could result in substantial tax refunds for major corporations and disrupt current and future tax policies aimed at wealthier Americans. This case has attracted attention from various political and economic groups, emphasizing the high stakes involved in the Court's decision, which could reshape the landscape of U.S. tax law.

Ultimately, the Supreme Court seems to be leaning towards a narrow ruling that would uphold the MRT while avoiding a broader decision that might preempt future wealth tax legislation. This approach aims to balance the need to maintain existing tax frameworks with the caution against overextending federal taxing authority​.

For more information see Ann E. Marimow and Julie Zauzmer Weil "Supreme Court upholds Trump-era tax provision on offshore earnings", The Washington Post, June 20, 2024. 

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

Treasury, IRS unveil plan to close ‘major tax loophole’ used by large partnerships

The U.S. Treasury Department has announced a new plan to close tax loopholes exploited by large partnerships, as part of broader efforts to ensure that wealthy individuals and large corporations pay their fair share of taxes. This initiative follows findings that many IRS audits of large partnerships failed to uncover noncompliance due to the complexity of these business structures. The plan will utilize advanced data analytics and artificial intelligence to better identify high-risk entities for auditing​.

A significant component of the plan involves targeting specific compliance issues, such as scrutinizing the transfer pricing practices of foreign-owned corporations and expanding audits of the largest corporate taxpayers. These measures aim to address sophisticated tax avoidance strategies and ensure accurate reporting of U.S. profits​.

Funding for these efforts comes from the Inflation Reduction Act, which allocates resources to close the tax gap—the difference between taxes owed and taxes paid. The IRS plans to use these funds to enhance enforcement and modernize its technology infrastructure. However, some of the funding was recently reduced following negotiations with Congress.

The initiative also focuses on addressing the substantial portion of the tax gap attributed to unreported business income, particularly income shielded through partnerships. Recent estimates suggest that the tax gap could be as high as $1 trillion annually, underscoring the urgent need for improved tax compliance and enforcement​.

Overall, the Treasury's plan represents a concerted effort to close loopholes and enhance tax compliance among the wealthiest taxpayers and largest partnerships. By leveraging new technologies and enhanced enforcement strategies, the initiative aims to ensure a fairer tax system and reduce the tax gap​.

For more information see Kate Dore "Treasury, IRS unveil plan to close ‘major tax loophole’ used by large partnerships", CNBC, June 17,2024.

Special thanks to David S. Luber (Florida Probate Attorney) for bringing this article to my attention.

Article: The Nation's Transfer Tax Regime and the Tax Gap

Jay A. Soled (Rutgers University) recently published, The Nation's Transfer Tax Regime and the Tax Gap, 2024. Provided below is an Abstract:

For over a century, the nation’s transfer tax regime, comprised of the gift, estate, and generation-skipping transfer taxes, has played a pivotal role in curbing inherited wealth while simultaneously raising much-needed revenue. But for a variety of reasons, a sizable number of taxpayers are derelict in fulfilling their transfer tax obligations. This analysis explores the reasons for this phenomenon and the reforms that Congress should consider instituting to curb this behavior.

Income Tax Symposium

A Matter of High Interest: How a Quiet Change to an Actuarial Assumption Turbocharges the Life Insurance Tax Shelter

Andrew Granato recently authored an article entitled, A Matter of High Interest: How a Quiet Change to an Actuarial Assumption Turbocharges the Life Insurance Tax Shelter , Draft of Connecticut Insurance Law Journal, Forthcoming (2022). Provided below is the abstract to the Article:

Draft: America’s lengthy income tax code and financial regulations are notoriously full of special treatment for the politically favored. Academics and policymakers argue the relative merits of different approaches to tax and regulatory policy – given the complexity of economic life, should the law attempt to be highly tailored and specific? Or does the exacting approach risk getting lost in the weeds? This Article will showcase the limits of a highly technical approach to policy with the first analysis of an almost completely unnoticed sea change in life insurance tax law, one that engorges a tax shelter at a moment of great attention to laws that enable the wealthiest members of society to face lower effective tax rates than their secretaries.

Life insurance has received extremely favorable federal tax treatment since the inception of the federal income tax. In the 1980s, in response to an increasing wave of policies smuggling traditional investment products into products calling themselves life insurance, Congress formalized a mathematical definition of life insurance policies directly into the Internal Revenue Code (§ 7702). § 7702, a fully realized actuarial simulation, placed quantifiable limits on the degree to which policyholders could treat a life insurance policy like an investment (such as a mutual fund) rather than as insurance protection.

For decades, the provision was left alone; however, buried in the 2020 COVID-19 omnibus relief bill, Congress included – with essentially no public debate– a change to a key actuarial assumption of the § 7702 test. The result, though heavily obscured by layers of mathematics, was that § 7702 was made substantially more permissive, giving policyholders much greater leeway to use life insurance policies as conduits for tax-exempt wealth accumulation, rather than mere protection of beneficiaries in the event of the worst. After over thirty years of near-total absence of analysis of Congress’ life insurance definition in the legal literature, this paper resurrects the history, purpose, and structural limitations of § 7702 and the hyper-technical approach to tax policy it embodies. It further provides the first exhaustive analysis of the new world of life insurance after the stealth § 7702 amendment, one in which swathes of the industry are preparing to – as the Democratic Party eyes loophole crackdowns on the wealthy – leverage their extraordinary tax advantage into a new role at the center of high-end tax avoidance.

ACTEC Shares Useful Resources

ACTEC 2022 Pocket Tax Tables  (helpful resource for professionals)

The ACTEC Pocket Tax Tables guide is a handy resource available for download as a pdf, online and mobile devices, and as a printed booklet. Content includes tables for Income Tax; Social Security; Estate and Gift Tax; Generation-Skipping Transfer Tax; Treasury Unisex Actuarial Table Examples; Inflation-Adjusted Numbers; Life Expectancy Tables; Qualified Plans, including SECURE Act details; Interest Rates; and Charitable Deduction.

ACTEC Trust and Estate Talk  (podcast series for professionals)

The Future of Digital Assets and the Dollar  Estate planning and family law attorneys share what to be aware of and some pitfalls when drafting premarital agreements and prenups.

Capital Letter No. 56: The Administration’s Fiscal Year 2023 Budget Proposals 

ACTEC Fellow Ronald D. Aucutt offers commentary regarding the Treasury Department's "General Explanations of the Administration's Fiscal Year 2023 Revenue Proposals" and how it provides a few new and a lot of previously presented ideas.

ACTEC Trust and Estate Talk  (podcast series for professionals)

California Tax Trap and Residency for Trusts - Words of caution for trust fiduciaries, beneficiaries and residents; CA has liberal definitions of who is considered a resident and subjected to tax on trusts.  

14 States That Won't Tax Your Pension

Some states have pension exclusion with limitations based on age and/or income. Most states tax "at least a portion of income from private sector defined benefit plans." However, there are 14 states that don't tax pension income at all, despite your age or how much money you have. 

Below is a list of the 14 states that don't tax pension income: 

• Alabama
• Alaska 
• Florida 
• Hawaii
• Illinois 
• Mississippi
• Nevada
• New Hampshire 
• Pennsylvania 
• South Dakota
• Tennessee
• Texas
• Washington 
• Wyoming 

See Rocky Mengle, 14 States That Won't Tax Your Pension, Kiplinger, April 6, 2022. 

Special thanks to David S. Luber (Florida Probate Attorney) for bringing this article to my attention.

Article: Dynasty 529 Plans and Structural Inequality

Victoria J. Haneman recently published an article entitled, Dynasty 529 Plans and Structural Inequality, Wills, Trusts, & Estates Law ejournal (2022). Provided below is the abstract to the Article:

The tax advantages available through 529 accounts, such as the potential for perpetual tax-free growth, have been maximized by the wealth defense industry that operates to the advantage of high income and wealth families in the United States. This essay is more a thought piece than a polemic, with the goal of starting a conversation on an important issue not often discussed: a 2018 change to the 529 structure slipped into the Tax Cuts and Jobs Act (TCJA) has essentially turned 529 plans into a government-subsidized school voucher scheme for the wealthy. Through this change, the dynasty education trust has become an even more attractive umbrella under which multiple 529 accounts may be managed by an affluent family to pay not just for college but also all private school (K-12) on a tax-sheltered basis.

 

Oscar nominees will receive gift bags worth nearly $140,000—but they could come with a hefty tax bill

The 94th Academy Awards this Sunday will host a slew of Hollywood A-listers hoping to walk out with an Oscar Statuette. 25 of the nominees will also receive a gift bag worth over $137,000. 

The gift bag is given to the five nominees in each of the four acting categories and nominees for "Best Director." The gift bag includes a collection of expensive items, including gold-infused olive oil and even up to $10,000 worth of plastic surgery. 

Unfortunately, if the gift bag is accepted by the nominees, they will also be accepting a "hefty tax burden." The tax must be applied because the gift bags are not technically "gifts" that were given "solely out of affection, respect or similar impulses for the recipients. . ." 

According to Eric Bronnenkant, head of Tax at Betterment, it comes down to intent. With the gift bag, the intent of providing these gift bags is to influence behavior and get celebrities to use a certain product or go on a specific vacation. 

Thus, the value of the gifts is calculated as income on the recipients' taxes. 

See Nicolas Vega, Oscar nominees will receive gift bags worth nearly $140,000—but they could come with a hefty tax bill, CNBC, March 27, 2022. 

Special thanks to David S. Luber (Florida Probate Attorney) for bringing this article to my attention.