Estate tax critics gird for fight over business valuations

Opponents of the estate tax are preparing to fight a push in Congress to require that minority-held interests in private companies be valued the same as majority-held interests for estate tax purposes. A proposal to limit discounts on minority shares was introduced in the House of Representatives in January by Rep. Earl Pomeroy, D-N.D., a member of the Ways and Means Committee. “When you look at the valuation discount, oftentimes, these are used solely for the purpose of avoiding the estate tax,” said Sandra Salstrom, his press secretary. “By modifying that, it treats everyone fairly and lowers the loss of revenue to the U.S. Treasury.” So far, no action has been taken on that bill.
Senate Finance Committee Chairman Max Baucus, D-Mont., also is considering the idea of imposing limits on minority-share discounts, according to one of his aides, who asked not to be identified. Under current tax rules, minority shares in privately held companies are valued at less than shares held by majority owners. “It makes a big difference whether you have majority or minority ownership,” said Dick Patten, president of the American Family Business Institute in Washington, a trade association of family business owners that is trying to get estate taxes eliminated altogether. “The minority can be cut out of decision making.” Owners of family businesses frequently distribute minority shares of their businesses to relatives as part of their estate planning, Mr. Patten said. If those shares are assessed the same as majority-owned shares, the total assessment of the business increases, thereby increasing the tax on the estate when the business owner dies.

$60B IN REVENUE

Imposing a limit on minority-share discounts would raise about $60 billion in tax revenue over the next 10 years, Mr. Patten said. The American Family Business Institute plans to focus its lobbying efforts on 17 states where it believes that members of the Senate are on the fence about the proposal, Mr. Patten said. The group expects to raise $8 million to fund its efforts by this fall. The group also hopes that it can persuade enough members of both houses of Congress to agree to lower the estate tax rate to 35%, while raising the exemption from the tax to $5 million per person. The Obama administration has called for keeping the estate tax at the current maximum rate of 45% and $3.5 million per-person exemption. The estate tax is due to expire in 2010 but will revert to earlier levels of 55% and a $1 million per-person exemption in 2011. In April, the Senate approved a resolution by a vote of 51-48, with 10 Democrats supporting it, that would lower the tax to the 35%, $5 million per-person exemption in 2010. However, the measure was stripped from the budget resolution in conference committee. In fiscal 2008, the federal government collected $28.8 billion in estate and gift taxes, about 1% of the total federal tax revenue that year, ac-cording to Internal Revenue Service figures.

THE CASE TO ABOLISH

While the administration has made it clear that it wants to keep the estate tax, some experts believe that the government could raise more revenue if the tax expired as scheduled next year. Under current estate tax law, heirs receive a stepped-up basis for assets they inherit. If the estate tax were abolished, heirs would receive a lower carry-over basis for assets. Capital gains taxes that would have to be paid on the assets when they are sold would likely exceed estate tax revenue, said Nico Willis, president and chief executive of NetWorth Services Inc. of Phoenix, which makes software used by brokerage firms and others to track cost basis for tax purposes. Capital gains taxes paid in fiscal 2005, the latest figures available from the IRS, totaled $102.2 billion. “The government could increase its tax receipts using the carry-over method versus the step-up method because of the appreciative value of those investments that are being taxed,” Mr. Willis said. E-mail Sara Hansard at shansard@investmentnews.com.