[Congressional Record (Bound Edition), Volume 146 (2000), Part 11]
[Senate]
[Pages 15102-15103]
[From the U.S. Government Publishing Office, www.gpo.gov]



                       DEATH TAX ELIMINATION ACT

  Mr. KYL. Mr. President, last Friday, the Senate concluded debate on 
the Death Tax Elimination Act, H.R. 8, and passed the bill by a 
bipartisan vote of 59 to 39. I am very grateful to Senators on both 
sides of the aisle who supported this important legislation.
  The broad, bipartisan support the death-tax repeal bill received 
suggests that we have finally found a formula for taxing inherited 
assets in a fair and common sense way. Unrealized gains will be taxed, 
but they will be taxed when they are earned--not at death. Death itself 
will no longer trigger a tax.
  This change--effectively substituting a capital-gains tax, which 
would be due upon the sale of inherited assets, for an estate tax at 
death--is itself a compromise.
  When I first introduced a death-tax repeal bill in 1995, I did not 
propose any change in the stepped-up basis--a change that is at the 
heart of this bill. My original legislation would have repealed the 
death tax and allowed heirs to continue to step up the tax basis in the 
inherited property to the fair market value at the date of death.
  That is obviously the ideal world for taxpayers: No death tax, and a 
minimal capital-gains tax when the inherited assets are later sold. The 
problem was, that approach sat idle for four years. We could not get it 
to the Senate floor for a vote, and we could not attract bipartisan 
support for it.
  The idea behind this bill really came out of a hearing before the 
Senate Finance Committee in 1997. At the hearing, Senators Moynihan and 
Kerrey acknowledged that the death tax was problematic, but expressed 
the concern that, if we repealed the death tax without adjusting the 
basis rules, unrealized gains in assets held until death could go 
untaxed forever.
  It struck me then that we had the basis for a compromise. If we could 
agree that death should not trigger a tax, we should be able to agree 
that death should not confer a tax benefit, either. The answer was to 
simply take death out of the equation. Coupling death-tax repeal with a 
limitation on the step-up in basis does just that.
  So H.R. 8 represents a compromise. And that is why, I think, we were 
able to win the votes of 59 Senators, including nine Democrats. And 
that is why 65 Democrats were able to support the legislation in the 
House of Representatives.
  During consideration of the death-tax repeal bill last week, some of 
our colleagues on the other side proposed a different kind of 
compromise. They

[[Page 15103]]

said theirs would repeal the death tax for virtually all family-owned 
businesses and farms. Some have suggested that, if President Clinton 
vetoes the death-tax repeal initiative, the Democratic substitute might 
serve as a basis for further compromise. The problem is, the approach 
taken in the substitute--while well-intentioned--is fatally flawed.
  Here is how the Wall Street Journal put it in an editorial on July 
13:

       Senate Democrats also offer to expand a small-business and 
     farm exception that is a tax-lawyer's dream. The loophole, 
     known as IRS Code section 2057, is so complicated and onerous 
     that few estates qualify.

  Let me take a few moments to explain the deficiencies of this 
Democratic substitute. First, there are requirements that more than 50 
percent of the decedent's assets must be made up of the qualifying 
business; that the decedent or immediate family must have actively 
operated the business for five of the eight years preceding death; and 
that a member of the immediate family must agree to continue to operate 
the business for at least 10 years after the decedent's death.
  If any of these conditions is not adhered to for 10 full years after 
death, the government can still collect the original estate-tax that 
was due, plus accrued interest.
  And understand this: to protect its right to recapture the estate tax 
if the business fails to comply, the Federal Government attaches a 
Federal tax lien to the property for a full 10 years. For a business, 
like farming, which is credit-dependent, such tax liens can make it 
virtually impossible to secure loans and financing for business 
operations, for growth, and for viability. In addition, the heirs are 
held personally liable for the estate tax and any penalties.
  So, far from providing meaningful relief, the Democratic substitute 
leaves a cloud over the family business for up to a decade after death. 
The government can come back any time and recapture the estate tax that 
was due, plus interest, if the business, at any point, falls out of 
compliance. The threat of reimposition of the tax absolutely limits the 
family's flexibility in managing and disposing of business assets in 
its best interest.
  The Democratic substitute relies on the current law's onerous 
material participation requirement, which, in effect, forces the family 
to work in the day-to-day operation of the business, or face the death 
tax, plus severe penalties. These requirements may be difficult to 
satisfy if, for example, the present owners are disabled or other 
family members are not yet involved in the business.
  It relies on very complex rules for determining the value of farms 
and closely-held business interests. Historically, the IRS has 
challenged virtually every valuation method used, and these challenges 
typically wind up in Tax Court.
  There are currently 149 tax cases which have been decided and 
reported involving 2032A issues. The IRS has challenged the validity of 
2032A election or planning, and has won in approximately 67 percent of 
the cases. An equal number may be embroiled in the administrative 
process before court action. So much for relief--two-thirds of the few 
who do think they qualify, do not ultimately qualify and have to pay 
the tax with interest.
  The so-called family business ``carveout,'' which is embodied in 
Section 2057 of current law, is so bad that the Real Property and 
Probate Section of the American Bar Association has urged its repeal.
  The reason the ABA condemns this section so strongly is that it is 
extremely complex and has an extremely limited application. It provides 
little practical help to families trying to preserve the family-owned 
farm or small business. It incorporates 14 sections from Section 2032A, 
which the ABA considers the most dangerous section of the estate-tax 
law because of the risk of malpractice claims against estate-planning 
lawyers and accountants.
  So the fact is, if you rely on these sections of the tax code, you 
can raise the value of the estates eligible for relief as high as you 
want, and still few estates are going to get the intended relief. 
Estimates are that only about three to five percent of estates would 
benefit, and even then, as I said before, if they do not continue to 
meet all requirements for 10 years after death, the government can 
still come back and collect the original estate-tax bill plus accrued 
interest. The government's interest is protected by a lien that is 
maintained on the business for 10 years.
  Of course, because the family-business carveout is so complex--
because it requires determining compliance and ensuring continued 
compliance for 10 years--business owners have to continue to engage in 
expensive estate-tax planning. That is a tremendous waste of 
resources--resources that would otherwise be plowed back into the 
business for new jobs, better pay for current employees, business 
expansion, or research and development.
  A recent report by the National Association of Women Business Owners 
(NAWBO) found that, ``on average, 39 jobs per business or 11,000 jobs 
have already been lost due to the planning and payment of the death 
tax.'' NAWBO projects that, on average, 103 jobs per business, or a 
total of 28,000 jobs, will be lost as a result of the tax over the next 
five years. That would not change under the Democratic substitute, 
because there would still be a need for expensive estate-tax planning.
  Mr. President, 59 Senators voted for a better approach--one that 
takes death out of the equation and taxes inherited assets like any 
other assets for tax purposes. A capital-gains tax would be paid when 
the assets are sold, with only a limited adjustment in the decedent's 
tax basis to ensure that no one is subject to new tax liability.
  That is the true compromise. Tinkering with an already unworkable 
section of the tax code is not an effective substitute. I hope the 
President will sign the Death Tax Elimination Act when it reaches his 
desk. If not, we will be back next year when a new President is in the 
White House, and I predict that we will prevail.
  I yield the floor.

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