It Seemed Like a Good Idea

In July of this year, one of my partners, who chairs the board of a local grantmaking public charity,[i] asked if I would present at a CLE program to be sponsored by the charity on October 28 (last Thursday). When I asked if she had a particular topic in mind, she suggested I update the group on the tax features of the President’s $3.5 trillion Build Back Better plan.

Great, I thought, by then we should have some legislation (and new rules) to talk about. In late May, the Treasury had published the 2022 Green Book, which included a fairly detailed description of the Administration’s proposed budget, including its tax provisions. Indeed, many business owners and their advisers had already begun to plan for third and fourth quarter sales of their businesses, or for transfers to or for the benefit of family members, based upon some of the tax increases and other tax-related provisions put forward by the budget.[ii] After all, the President’s Party controls the House, and the Vice President holds the tie-breaking vote in an otherwise evenly split Senate.[iii] Pretty good odds that his 2022 Budget would be passed.[iv]

I felt even more comfortable about the topic’s relevance and timeliness following the passage by both Chambers[v] in August – albeit strictly along Party lines – of the budget reconciliation resolution that directed various House and Senate committees to begin the process of drafting the legislation to implement the budget.

On September 12, almost three weeks after the House passed the budget resolution, the Ways and Means Committee released its text of the tax bill which included many of the revenue-generators requested by the President, surprisingly omitted or softened others,[vi] and added some that were not in the Administration’s proposed budget.[vii]

That’s when Senator Manchin hit the brakes on the size of the budget, though he said little, at least publicly, about the proposed tax changes. Senator Sinema said nothing at all, either to her colleagues or the press.

Manchin and Sinema

As I watched the Administration’s budget whittled away in response to Senator Manchin’s objections over its size, I nevertheless felt comfortable that its tax provisions would survive – these were expected to generate approximately $2 trillion of revenue, which would still be needed to fund whatever version of the budget was finally passed. Therefore, I expected I would still have something to talk about at the CLE program on October 28.

Then, the week before the program, Senator Sinema suddenly found her voice. She informed the White House and her Congressional colleagues that she did not support increasing the marginal income tax rate for individuals (from 37 percent to 39.6 percent) or corporations (from 21 percent to 26.5 percent, as proposed by the House Ways and Means Committee).

Interestingly, neither Senator Sinema nor Senator Manchin made any specific reference, at least not in public, to any of the following provisions in the President’s budget: (i) the increase in the capital gains rate, (ii) the overhaul of the grantor trust rules, (iii) the de facto elimination of profits interests, (iv) the limitation on the amount of gain that may be deferred under the like kind exchange rules, (v) the reduction of the gain that may be excluded from income on the disposition of Section 1202 stock, (vi) the expanded application of the surtax on net investment income, or (vii) the reduction of the basic exclusion amount under the estate and gift taxes.

Yet, overnight, the Democratic Party’s leadership started scrambling for alternative funding sources; among those mentioned were a 15 percent minimum tax on certain publicly traded corporations and an annual wealth (or mark-to-market) tax on billionaires.[viii]

The wealth tax[ix] – that old chestnut. The Chair of the Senate Finance Committee, Senator Wyden, along with Senator Warren – both long-time proponents of such a tax – were in their glory for a day or two; that is until Senator Manchin, on the day before my presentation, indicated he could not support a tax that targeted such a small number of individuals.[x]

Great, I thought. What am I going to tell these folks tomorrow?

I decided to describe the evolution of the Administration’s Build Back Better plan, starting with its inception during the Obama years, its evolution during the 2020 presidential campaign, the President’s formal announcement of the plan in April, the Treasury’s Green Book in May, and the Ways and Means Committee’s draft in September which, as of the evening of Wednesday, October 27, was the only tax bill in print and “under consideration” by Congress.

I would then focus on those earlier proposals (mentioned above) that neither Senator Manchin nor Senator Sinema had identified as objectionable, and that the Party leadership had not publicly stated were off the proverbial table; for example, the “reformation” of the grantor trust rules.

October 28

I stuck to the above “agenda” for about three-quarters of the way through the program last Thursday morning. At that point, a colleague raised her hand to get my attention. “According to this piece,” she said while looking at her phone, “the grantor trust provisions are no longer in play. Neither is the reduction of the estate tax exemption.”

I asked her if the House had announced amendments to the bill that had been approved by Ways and Means and was now sitting with the powerful Rules Committee – basically the final stop before being sent to the House floor for a vote. Nope. The White House had announced a revised $1.75 trillion budget, and folks “familiar with the discussions” had leaked some of its details.[xi]

I apologized to those in attendance for having wasted their time, said I hoped they enjoyed the coffee, and suggested to the sponsoring organization that donuts be served at the next event.

After returning to the office, I went to the House Rules Committee’s website. Look at that, I thought – a meeting announcement – “The Committee on Rules will meet today, October 28, 2021 at 3:00 PM EDT in H-313, The Capitol on the following measure: H.R. 5376 – Build Back Better Act.” Hmm.

At around noon, the President announced the “new” framework for his “Build Back Better Agenda.”[xii] A statement released by the White House provided some of the details that always seem to be missing from the President’s remarks:[xiii]

  • The Build Back Better framework includes a new surtax on the income of multi-millionaires and billionaires – the wealthiest 0.02 percent of Americans. It would apply a 5 percent rate above income of $10 million, and an additional 3 percent surtax on income above $25 million. The Build Back Better framework will also close the loopholes that allows [sic] some wealthy taxpayers to avoid paying the 3.8 [sic] Medicare tax on their earnings.
  • The framework will create a fairer tax system through transformation [sic] investments in the IRS: hiring enforcement agents who are trained to pursue wealthy evaders, modernizing outdated IRS technology, and investing in taxpayer service, so regular Americans can get their questions answered and access to the credits and benefits they are entitled to. Additional enforcement resources will be focused on pursuing those with the highest incomes; not Americans with income less than $400,000.[xiv]

Later in the afternoon, the remarks of the ranking Republican member of the Rules Committee were posted to the Committee’s website; these included the following:[xv]

“. . . For the last several months, Democrats have run around in circles trying to unify their caucus with their Senate colleagues on a massive spending bill that would alter American society as we know it – and not for the better.”

“. . . Yesterday, I found out about this hearing the same way most did: from Twitter and press reporting on a Dear Colleague from Speaker Pelosi to Democrats indicating the Rules Committee would meet. That is a sad state of affairs, Mr. Chairman. Relying on the press to tell us what is happening is the furthest thing from how we should legislate.”

“And the legislation before us today? Well, the ink is barely dry. We received the text only an hour ago and, even though my colleagues on the other side of the aisle marked up a reconciliation bill in committee over a month ago, the legislation before us today was spun out of whole cloth, behind closed doors and, as the Chairman noted to the press last night, is only a starting point.”

“Mr. Chairman, this is ludicrous. The Speaker is asking the committee to meet on one of the largest tax-and-spending bills of all time – a bill that spends untold trillions of dollars. We have no score from the Congressional Budget Office or the Joint Committee on Taxation and no idea when we will get one. . . .”

“Given what has been reported to be in the final version of this bill, and given how consequential these provisions reportedly are, this process is patently absurd. If you want to fundamentally change our country, as your side has claimed this package will do, at least have the decency to do so in the light of day. Have a process so robust and fulsome that members of all political persuasions can feel confident that their ideas were considered and their constituents’ voices were heard. . . .”

That evening, the 1,684 pages of legislative text to which the Ranking Member referred in his remarks was posted to the Rules Committee website.[xvi] There is no table of contents, but if you’re curious about the tax provisions that would be of most interest to closely held businesses and their owners, they begin on page 1509, “Subtitle G – Responsibly Funding Our Priorities.”

Of course, I read them.

The Day After

Friday morning, I reported to clients and colleagues that the current version of the proposed tax changes was a shadow of its former self. In fact, the following measures were eliminated from the bill:

  • the increased corporate income tax rate
  • the increased tax rate on the long-term capital gains of noncorporate taxpayers
  • the increased top rate on the ordinary income of noncorporate taxpayers
  • the reduction by 50 percent of the unified estate and gift tax exclusion amount
  • the elimination of the basis step-up for property acquired from a decedent
  • the additional restrictions on profits interests
  • the limitation on the use of like kind exchanges
  • the limitations on the use of grantor trusts
  • the elimination of valuation discounts for interests in business entities to the extent the value thereof is attributable to marketable securities or other liquid assets
  • the requirement that banks disclose information regarding certain transfers to and from accounts.

That said, I also warned that the proposed tax bill still had some bite:

  • The exclusion of gain from the sale of Sec. 1202 stock would be limited to 50 percent of the gain realized in the case of taxpayers with AGI of at least $400,000; the remaining tax would be subject to tax as long-term capital gain; this rule would be effective retroactively, for sales after September 13, 2021
    • In addition, the other taxes included in the bill (see below) may also apply to the gain that isn’t excluded from gross income;
  • In the case of a taxpayer with modified adjusted gross income (“AGI”) over $400,000, the 3.8 percent Medicare surtax on net investment income[xvii] would be applied without regard to the taxpayer’s degree of participation in the activity generating the income; this rule would be effective for tax years beginning after 12/31/2021
    • This amounts to a 3.8 percent increase in the ordinary income tax rate (from 37 percent to 40.8 percent) and in the capital gains tax rate (from 20 percent to 23.8 percent) applicable to the share of business income or gain allocated to an owner of the business who materially participates in the business and whose modified AGI (based on a joint return) is greater than $500,000 but does not exceed $10 million;
  • A new 5.0 percent “surcharge” would be imposed on so much of the modified AGI of a noncorporate taxpayer as exceeds $10 million; an additional 3.0 percent surcharge would be imposed on so much of modified AGI as exceeds $25 million (bringing the top rate on ordinary income to 48.8 percent, and the top rate on capital gains to 31.8 percent); the surcharge would be effective for tax years beginning after 12/31/2021
    • At present, it appears that the surcharge would be added to an individual taxpayer’s regular income tax rate plus the rate of the surtax on net investment income;
    • Thus, if the 5.0 percent surcharge were applied to the ordinary income[xviii] of a business owner, it would increase the top tax rate on such income to 45.8 percent;[xix] the imposition of the 3.0 percent surcharge would bump that rate up to 48.8 percent; similarly in the case of long-term capital gains, where the top rate would increase to 28.8 percent and 31.8 percent;[xx]
    • The imposition of the surcharge, together with the 3.8 percent surtax, would likely be felt most keenly upon the sale of a closely held business; gain that would normally have been taxed at a rate of 20 percent would, instead be taxed at a rate of 23.8 percent for the first $10 million of long-term capital gain (assuming no other income for the year), at a rate of 28.8 percent on the next $15 million of gain, and at a rate of 31.8 percent for any additional gain recognized.
  • The IRS would be provided with the financial, technological, and other resources needed to pursue wealthy tax evaders.[xxi]

Are They Done Yet?

I sure hope so, but I have my doubts.

Senator Wyden, for example, has already said that he intends to continue pushing for his wealth tax.

Senator Sanders has stated that he wasn’t ready to support the smaller social welfare plan introduced by the President.

The “SALT caucus” continues to insist that the budget bill should include meaningful relief from the $10,000 cap on the itemized deduction for SALT.

Even Senators Manchin and Sinema have not yet publicly endorsed the $1.75 trillion budget.

The progressives have stated they will vote in favor of the bill, but who is to say that some of them won’t change their position by the time a final bill is presented to both Chambers for their approval.

In the meantime, the safest course for a taxpayer who is planning to sell their business this year is to stay on course if they hope to avoid the expanded reach of the 3.8 percent surtax and the imposition of the new surcharge.[xxii]

In the case of a taxpayer who was already committed to transferring property to family members in furtherance of the taxpayer’s estate plan, there is no reason to delay. However, if the primary impetus for such a transfer was the threat of losing the enhanced basic exclusion amount, that taxpayer probably has some breathing room now, though they should recognize the basic exclusion is still scheduled to revert to its much smaller, pre-2018, amount after 2025.

The next week or two should be interesting.[xxiii] Stay tuned.

The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] The Long Island Community Foundation. In 2020, 97% of this organization’s expenditures were for grants in furtherance of its charitable mission. You should check it out: Of course, its success reflects the quality and dedication of its staff: Speaking of which, a special thank you to David Okorn (Executive Director) and Marie Smith (Director of Donor Relations), with whom I’ve had the pleasure to collaborate on several occasions, and who have patiently endured what passes for my sense of humor.

[ii] As I’m sure you’ve noticed, the activity has been off the charts. If an extraterrestrial being were asked to deduce from this activity the goals of the proposed tax changes in the 2022 budget, they could not be criticized – at least not on the basis of my own experience – for concluding that the legislation was aimed at (1) encouraging the sale of closely held businesses to, and their consolidation under the direction of, financial buyers, and (2) concentrating and insulating wealth in long-lived trusts.

[iii] “Thanks” to Georgia.

[iv] In early August, the Senate passed the $1.2 trillion bipartisan infrastructure bill, but its enactment has been held up by the progressives in the House pending an agreement among Democrats in the Senate on the social spending provisions of the Build Back Better plan.

[v] In July, Senator Manchin stated he would not stand in the way of the resolution’s passage, though he had some issues with the budget.

[vi] For example, the elimination of the basis step-up at death was omitted; the Committee recommended an increase in the long-term capital gains rate for noncorporate taxpayers from 20 percent to 25 percent, rather than the 39.6 percent requested by the President.


[viii] Approximately 200 corporations and 700 individuals would have been affected by these taxes.

As regards the wealth tax, Senators Wyden and Warren proposed the imposition of an annual tax on the year-to-year appreciation in the fair market value of any marketable security owned by any billionaire. In the case of all other assets owned by such an individual, the appreciation thereon would be taxed upon the sale of the asset, but an additional tax (basically, an interest charge – see IRC Sec. 453A, or the throw-back rules, for interpretations of the concept) would be imposed to defeat the deferred recognition and taxation of such gain.

[ix] Senator Sinema supported the tax.

[x] Elon Musk told us how he would rather use his “billionaire tax” bill: “My plan is to use the money to get humanity to Mars and preserve the light of consciousness.”

Who elected this guy?

Call me jaded, but I think it more likely that Musk, Bezos, and others who can afford to build their own spacecraft, would love to travel to, colonize, and govern the red planet, free from the “interference” of Earth-bound governments and their less affluent populations.

Think Hanseatic League, East India Company, and Dutch West India Company as examples of companies that were, by and large, independent of their respective “national” governments.

[xi] This is not the way to legislate.


[xiii] The number of typos is extraordinary – it speaks to the haste with which this was written, not unlike the haste with which the Democrats have thrown together the Build Back Better plan and its tax/revenue raisers.

[xiv] Query why that wasn’t already the case.

Of course, one cannot summarily dismiss the significant number of taxpayers whose reported income falls below the threshold set by the President only because they are cheating on their taxes.

[xv] For the full next of the Ranking Member’s remarks, see


[xvii] IRC Sec. 1411.

[xviii] Which includes net income from ordinary business operations, compensation received from the business, interest on loans to the business, rent or royalty payments from the business, and depreciation recapture on the sale of certain property.

[xix] 37% + 3.8% + 5% = 45.8%; plus 3% = 48.8%.

[xx] 20% + 3.8% + 5% = 28.8%; plus 3% = 31.8%.

Query whether Senator Sinema believes these surtaxes and surcharges are different from tax increases. Should someone tell her?

[xxi] The implementation of these will likely take several years.

[xxii] Besides, their buyer may not appreciate the seller’s sudden change of heart – costs have been incurred, and other opportunities may have been lost. Not a good situation.

[xxiii] Don’t forget that the House also has to vote on the approximately $1.2 trillion infrastructure bill that the Senate has already passed. Add that sum to the Build Back Better bill, and you have a $3 trillion bill on your hands.

And, of course, the issue of the federal debt limit has to be revisited by early December.