Tax Increases Are In Sight

September 7, 2021 | Tax

Summertime in Washington

On August 11, the Senate passed the $3.5 trillion budget resolution for the 2021-2022 fiscal year – S. Con. Res. 14, as amended – by a vote of 50 to 49, strictly along party lines, including Democratic Senators Manchin and Sinema who have repeatedly questioned the wisdom of such an expensive measure. The Senate’s overview[i] of the budget resolution began as follows:

On July 13th, 2021, the Senate Budget Committee, with the support of Leader Schumer and President Biden, announced a framework agreement of $3.5 trillion in FY2022 Budget Reconciliation instructions to enact the Build Back Better agenda. The agreement calls for the $3.5 trillion in long-term investments to be fully offset by a combination of new tax revenues, health care savings, and long-term economic growth. In addition, the agreement would prohibit new taxes on families making less than $400,000 per year, and on small businesses and family farms.

Then, on August 24, the House also passed the budget resolution – H. Res. 601 – by a vote of 220 to 212, also strictly along party lines, including every Democrat who threatened to vote against the resolution unless it included a provision that repealed the cap on the SALT deduction, and including those moderates who threatened to oppose the resolution unless the $1 trillion bipartisan infrastructure bill was enacted first, all of whom submitted to the Speaker.[ii]


With the passage of the resolution by both Chambers of Congress, the Senate’s Democrats may now use that Chamber’s budget reconciliation process to pass the President’s $3.5 trillion budget – including the related tax increases – by a simple majority vote, along party lines with the Vice President[iii] providing the tiebreaking vote in her capacity as president of the Senate.[iv] Although the Democrats control the House, they can afford to lose the votes of only three of their members if they are to pass the budget along what would otherwise be party lines.[v]

Of course, the budget resolutions passed by the Senate and the House must first be drafted into legislation. The budget resolution instructs various Senate and House committees to prepare and submit this legislation to their respective Budget Committees by September 15 – next week.

As it so happens, the Senate will be returning from its summer recess on September 13, and the House on September 20.[vi] You can be certain that Senate Leader Schumer and House Speaker Pelosi are both chomping at the bit[vii] to review the committees’ legislative proposals, reconcile any differences between the Senate and House[viii] versions thereof, and bring the final bill to the floor of each Chamber for a vote as soon as possible.[ix]

In “Boardrooms”

Meanwhile, across the country, the owners of many closely held businesses who had been thinking about selling their businesses in the not-too-distant future have accelerated their plans out of a not-unreasonable concern that the tax hikes called for by the proposed 2022 budget may jeopardize their exit strategies and retirement plans if enacted.

Some have already sold their business under the assumption that the expected increases in the corporate income tax and in the individual long-term capital gains tax will not be applied retroactively to April of this year (when the President officially announced his tax plan[x]).

Other owners are in the process of selling their businesses before the enactment of the expected tax increases – the assumption being that the legislation will only be effective for transactions closed on or after the date of enactment; letters of intent have been signed, due diligence is underway, and drafts of purchase and sale agreements (along with ancillary documents) are being prepared and circulated for comments.[xi]

Still others are in the process of vetting potential suitors, of both the strategic and financial type,[xii] with an eye toward completing a sale as soon as possible, and certainly before the yearend; these folks are hoping the budget will not be enacted until late in the year, thereby increasing the odds of a January 2022 effective date.

In almost every case, cash at closing is king. Earnouts, escrows, installment obligations, and other deferred payments are often necessary – indeed, are required by most buyers to protect themselves – but these expose the seller to the potential of higher tax rates during the years they are paid or released, with the potential of significantly changing the economics of the deal, a fact that should not be lost on either party.

The receipt of equity in the buyer on a tax-deferred basis is less attractive to someone who is looking to dispose of their business than it once may have been, especially when one contemplates the President’s tax plan. That said, financial buyers usually require the seller or its principals to keep some “skin in the game” by accepting some of the purchase price in the form of equity in the buyer or in the buyer’s parent company.

At Kitchen Tables[xiii]

Many individual taxpayers are also concerned about the estate and gift tax consequences of a testamentary or lifetime transfer of assets following the enactment of the budget legislation.

Many of these taxpayers, a not-insignificant number of whom are also owners of closely held businesses, are eager to take advantage of their remaining federal unified gift and estate tax exemption amount,[xiv] not to mention their GST exemption, lest these disappear during the final negotiations.

These folks are making gifts – often with spouses participating[xv] – both outright and in trust. Some are leveraging their exemption by transferring minority interests[xvi] in their business and by engaging in purchase and sale transactions with “intentionally defective” grantor trusts[xvii] which, if successful, freeze or reduce the value of the grantor’s property while shifting appreciation to a trust for a younger generation of family members.

Others are using grantor retained annuity trusts[xviii] (“GRATs”) – which do well in low-interest rate environments – to transfer assets and the appreciation thereon to the next generation without significant gift tax consequences.[xix]

Then there are those who are simply reluctant to give up every opportunity to enjoy the property to be gifted; they and their spouse each establish a separate trust called a “SLAT” (spousal lifetime access trust) of which the other spouse is a beneficiary.[xx]

First a “Scream,” Then Whispers

Amid all this consternation and the activity it has stimulated, the last few days have seen some developments that, at least on the surface, have been encouraging and others that are downright disturbing from the perspective of the closely held business, its owners, and their advisers.

On Thursday, the “Wall Street Journal” carried an op-ed piece by Senator Manchin in which he expressed his oft-repeated – but not yet acted upon – misgivings[xxi] over the size of the proposed budget. Citing the potential impact on the federal debt and the risk of inflation, the Senator questioned why his fellow Democrats were in such a rush to spend so much money.[xxii]

His sentiments were not well-received by the more progressive members of his Party in the House. In contrast, Senate Minority Leader McConnell was quoted as saying that he prays for Senator Manchin’s “good health and wise judgment every night.”[xxiii]

One day later, “Bloomberg Tax” and “Roll Call” each reported they had obtained information from a source familiar with the deliberations of the Senate Finance Committee regarding some of the tax proposals being explored by the Committee, including several options that were not included in President Biden’s plan.[xxiv]

The President’s Plan

You will recall that among the changes to the Code proposed by the Administration are the following:

  • an increased corporate income tax rate (from 21 percent to 28 percent),
  • an increased individual income tax rate for ordinary income (from 37 percent to 39.6 percent),
  • an increased rate for long-term capital gains recognized by individuals (from 20 percent to 39.6 percent),
  • the taxation of a carried interest as ordinary income,
  • the elimination of the basis step-up[xxv] for property passing from a decedent,
  • the taxation of property passing from a decedent as if it had been sold,
  • the limitation of the tax-deferred like kind exchange[xxvi] of real property, and
  • the expansion of the employment and net investment income taxes.[xxvii]

The Finance Committee

According to the above-referenced reports, among the tax proposals being considered by the Senate Finance Committee[xxviii] that were not part of the Administration’s plan are the following:

  • additional limitations on the ability of a corporation to deduct executive compensation,
  • mark-to-market rules[xxix] that would require wealthier individuals to pay income tax on the unrealized gain (i.e., appreciation) of their assets every year,
  • limits on the size of qualified, tax-advantaged retirement accounts,[xxx]
  • the phase-out of the 20 percent qualified business income deduction[xxxi] for taxpayers with more than $400,000 of income,
  • limits on the use of GRATs, which probably means elimination of the “zeroed-out,” short-term GRAT,[xxxii]
  • limits on the use of “intentionally defective” grantor trusts,[xxxiii] which will probably target sales to such trusts in exchange for promissory notes, and
  • the reintroduction of proposed Treasury regulations that would limit the use of discounts for valuing interests in closely held businesses for estate and gift tax purposes.[xxxiv]

You will note that this list reflects many of the gifting vehicles and techniques that individual taxpayers are utilizing today (as described earlier) in advance of what they expect will be the enactment of the President’s budget plan. Thus, if any of these proposals make into the Code, future estate and gift tax planning will be undertaken in a very different, less friendly environment.

Speaking of Which

I’m glad I mentioned future estate planning. Among the other whispers[xxxv] coming out of the Senate Finance Committee is one regarding the “deemed sale at death” proposal included in the Administration’s budget plan.

That plan requires that the transfer of a decedent’s property upon their death be treated as a taxable sale of such property for purposes of the income tax; coupled with the proposed elimination of the basis step-up rule, this provision would impose an immediate tax upon the appreciation in the decedent’s assets as of the date of death.[xxxvi]

However, the proposal also allows a $1 million per person exclusion from the proposed tax, meaning that $1 million of “gain” would not be taxed at death under the deemed-sale rule. Moreover, this exclusion would be portable between spouses, effectively making the exclusion $2 million per married couple.

OK, you ask, why is this relevant? Because, according to the above-referenced whisper, the Committee would increase the exclusion to $5 million (or $10 million per couple). By doing so, the Committee would ensure that such a hypothetical couple with zero basis assets would not be subject to either the proposed income tax (arising from the deemed sale at death) or to the federal estate tax, assuming the reduction of the estate tax exemption – from a basic exclusion of $10 million to one of $5 million, which is otherwise scheduled to occur in 2026 – were accelerated.

Query: Are members of Congress considering the immediate reduction of the unified estate and gift tax exemption (and, therefore, of the GST tax exemption) to its pre-2018 level? The President has made no mention of this and, until last week, there were no indications that it was on the table.[xxxvii]

Almost There

The legislative process that began in earnest in late April is nearing its conclusion. Within a week or so, the Democrats in Congress will be considering the legislative text prepared by the Committees – we are talking about reconciliation, after all, so the Republicans will merely be noisy observers, like the hecklers (Statler and Waldorf) in the Muppets.

Notwithstanding the hope of many that Senator Manchin will put a stop to this process – something he could have done at the resolution stage – it is likelier he will extract some small tax-related concessions, some of which we will see (a 25 percent corporate tax rate as opposed to 28 percent?), and some valuable non-tax concessions that only his constituents will enjoy.[xxxviii] In other words, he will toe the Party line.

What does that mean for the closely held business and its owners? It means that many of the proposals outlined above will be enacted; hopefully, others will not. It remains to be seen which will be signed into law, and in what form, as does the date on which they will be effective.

In the meantime, those taxpayers who are already selling their businesses should not pause in their efforts, but they should also be mindful not to make a bargain sale in their haste to avoid a higher tax bill by completing the sale before the tax increases are enacted.

Those who are thinking about a sale may want to hit the “pause button,” to paraphrase Manchin. Why do they want to sell the business? Is it “time”? Are there non-tax economic reasons for doing so?

Similarly, those taxpayers who are planning to make gifts or otherwise transfer assets[xxxix] to family or to trusts for their benefit should continue their preparations. Unlike the sale of a business in which there is an adverse party on the other side which may influence the nature and timing of the transaction, the gift transfer is almost entirely within the control of the individual grantor.

Stay tuned folks.

[i] .

[ii] In fact, there was no separate vote on the resolution in the House. Instead, Speaker Pelosi employed what may be described euphemistically as a “workaround” to attach the resolution to another resolution, for consideration of the Voting Rights Advancement Act of 2021, which was passed by the margin described in the text. .

[iii] Who has been acting very “Vice Presidentially” of late – has anyone seen her?

[iv] Article I, Section 3 of the Constitution.

[v] 217 to 215. The Democrats have 220 votes against 212 for the Republicans. Based upon the “resolve” shown by moderates during the budget resolution process, I think it very likely that all members will stay in line.

[vi] .

[vii] I may have mentioned I am idiom-challenged. Is it “champing or chomping”? Is it “at” or “on”?

[viii] All revenue (i.e., tax) bills must originate in the House. Article I, Section 7.

No this is not turning into a civics course. That said, students should be required to study the Constitution as part of their pre-college education.

[ix] Of course, there is the issue of increasing the federal debt ceiling – the legal cap on how much debt the federal government can accrue.

With the new fiscal year set to begin on October 1, 2021, without a budget agreement in place, and with the debt ceiling about to be reached (perhaps in October), Congress will have to act to temporarily increase the ceiling while also passing a continuing resolution to temporarily fund the federal government.

The Republicans have made it crystal clear that they want no part of increasing the debt limit – they have told the Democrats to use the reconciliation process to increase the limit themselves.

[x] You will recall that Secretary Yellen more than intimated as much a few months back. Can you imagine?

[xi] Among the lawyers reading this post, does it drive you crazy that drafts emailed to you are prefaced, almost as a matter of course, by something like this: “Please be advised that this draft is being circulated prior to being reviewed by our client and remains subject to their additional review and comment.” Why is that? Expedience is one thing, but hedging? Or as a ploy? It is usually the case that I have never worked with the folks on the other side. I don’t know what they’re thinking. It really turns silly when our corporate folks respond in kind when returning a mark-up of the draft. “So let me get this straight, neither client has looked at this agreement?”

[xii] In general, a strategic buyer is already in the seller’s business, or is engaged in some aspect of the same business. They may be looking to eliminate a competitor, enter a new geographic market, acquire customers, strengthen a line of business, etc. – they tend to take a longer-term view toward the benefits to be generated by the acquisition. By contrast, the financial buyer – including a private equity firm – is generally a fund that is owned by investors who may or may not have any experience in the seller’s industry. They are looking for a business to add to their portfolio with a potential for growth, and a return on their investment, over the relatively short-term.

[xiii] I like being within striking distance of the refrigerator and pantries. Mind you, we’re talking about really big kitchens.

[xiv] $11.7 million per individual, or $23.4 million per married couple. The basic exclusion amount is scheduled to drop from $10 million per individual to $5 million after 2025.

[xv] Or they are splitting gifts. IRC Sec. 2513.

[xvi] The leverage comes in the form of the valuation discount that would normally be applied in determining the FMV of a nonmarketable, minority interest in a closely held business. See Rev. Rul. 59-60.

[xvii] The grantor receives a promissory note in exchange; the note bears interest at the AFR; it usually provides for a balloon payment at maturity.

[xviii] IRC Sec. 2702.

[xix] The grantor receives an annuity from the trust (consideration for gift tax purposes) in exchange for the property transferred.

[xx] Yes, being mindful of the reciprocal trust issue.

[xxi] Just so many words. Don’t hold your breath.

[xxii] Why, then, did he vote in favor of the budget resolution? I smell pork in all its varieties and refinements: kebabs (my favorite), ham, chops, bacon, loin, ribs, on a spit, knuckles, SPAM (a staple of the Scouting diet), you name it.

[xxiii] “Manchin Jolts Democrats by Urging ‘Pause’ on $3.5 Trillion Bill,” Bloomberg Tax, September 3, 2021.


[xxv] IRC Sec. 1014.

[xxvi] IRC Sec. 1031.

[xxvii] .

[xxviii] It is certainly the case that the House committees charged with drafting the tax provisions for the budget legislation are likewise not limiting themselves to the President’s suggestions.

[xxix] Yes, Senator Warren sits on this Committee.

[xxx] .

[xxxi] IRC Sec. 199A.

[xxxii] The Clinton and Obama Administrations had proposed eliminating these.

[xxxiii] “IDGTs.” See IRC Sec. 671 et seq. for the grantor trust rules.

[xxxiv] These regulations caused quite a stir when they were proposed in 2016. The Trump Administration stopped work on the proposed regulations and eventually withdrew them altogether. Please see my articles on the internet in which I analyzed these proposed rules: .

[xxxv] Among my favorite characters on “Game of Thrones” was Varys, the “master of whisperers” as he was called.

[xxxvi] This would be in addition to the estate tax.

[xxxvii] Which has baffled many observers.

[xxxviii] We are talking about politicians, after all.

[xxxix] Only “disposable” assets, please.

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  • Louis Vlahos

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