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Proposed altering of 'death tax' inflicts the estate tax on nearly every successful family business

In this 2000 file photo, House Speaker Dennis Hastert of Ill.,  center, points to a mock coffin filled with tax regulations. The Obama administration proposes altering how inherited assets are valued by the IRS.
In this 2000 file photo, House Speaker Dennis Hastert of Ill., center, points to a mock coffin filled with tax regulations. The Obama administration proposes altering how inherited assets are valued by the IRS.
Dennis Cook, Associated Press

President George W. Bush’s tax cuts eliminated the estate tax in 2010, but since Congress failed to make the Bush tax cuts permanent, the so-called “death tax” returned the following year.

The death tax represents an impediment to entrepreneurship, especially since all these assets were taxed once during life. It also creates a clear disincentive to save money. Fortunately, its effects are mitigated by a sizable exemption for an estate’s first $5.34 million of assets. That exemption is more than five times what it was when Bush first proposed eliminating the estate tax, and it means that most families — and family businesses — don’t have to forfeit a large portion of their assets before providing an inheritance to the next generation.

Yet President Barack Obama has found a workaround that would make the death tax more oppressive than ever before, even without raising the rate or lowering the exemption. He would accomplish this by altering how assets are valued by the IRS. The result would have far-reaching consequences, even for families who are far below the $5.34 million threshold when the estate tax kicks in.

Here’s how it would work. Currently, when someone receives an inheritance, the basis for that inheritance is calculated at current fair market value. In other words, if your father leaves you a family business worth $100,000 and you later sell it for $150,000, you are liable for taxes on only the capital gain of $50,000 you made at the time of the sale. But under the Obama proposal, you would inherit not only an asset, but also that asset’s original basis. So even if the business your father leaves to you is worth $100,000 today, the IRS would measure its value based solely on what your father originally paid for it.

Imagine a scenario where your father’s business was originally only worth $1,000, but over 30 years, it is now worth $100,000. If you were to inherit it, manage it and then turn around and sell it for $150,000, the IRS would calculate your capital gain based not on the difference between the business’ market value when you inherited it and the sale price, but rather the difference between the sale price and what what it was worth three decades ago. You would then have a tax liability on $149,000 of profit, not $50,000. That would likely eat up all the money you made from the sale — and then some.

This is a sneaky way to circumvent the $5.34 million exemption and inflict the estate tax on nearly every successful family business in the country. It’s irresponsible, it’s oppressive, and it should not become law.