Capital Letter
By Ronald D. Aucutt
No. 16
Washington, D.C.
April 10, 2009
The Senate employs nearly inscrutable budget techniques regarding the estate tax, and President Obama selects the new Assistant Secretary of the Treasury for Tax Policy.
Dear Readers Who Follow Washington Developments:

This Capital Letter reports on the progress of the estate tax provisions of the Administration’s budget proposals in the Senate and the progress of the Administration itself in filling the top tax position in the Treasury Department.

The Administration’s Budget Proposals

As mentioned in Capital Letter No. 15, the Obama Administration’s budget proposals  provide for the 2009 estate tax applicable exclusion amount of $3.5 million and estate tax rate of 45% to be made permanent.  Capital Letter No. 13 identified some reasons why that was expected, including residual impatience in Congress with the estate tax, the surprising identification of estate tax reform with middle class tax relief, and the fact that by some measurements the net increases in federal revenue from allowing the estate tax to revert to its pre-2002 levels would fall disproportionately on estates at the lower end of the array of taxable estates.

The ambitious document announcing the Administration’s proposed budget, “A New Era of Responsibility: Renewing America’s Promise,” was published February 26, 2009.  The document has few tax details.  But in a summary of the adjustments to baseline projections to reflect selective (targeted) continuation of the 2001 and 2003 tax cuts, a footnote (footnote 1 to Table S-5) states that “the estate tax is maintained at its 2009 parameters.”  Table S-4 sets forth the Administration’s projections of estate and gift tax revenues under these budget proposals, as follows:

Fiscal Year

Projected Revenue


$29 billion


$26 billion


$20 billion


$23 billion


$25 billion


$27 billion


$27 billion


$29 billion


$31 billion


$33 billion


$36 billion


$38 billion

Total 2010-2014

$121 billion

Total 2010-2019

$288 billion

The receipts for any fiscal year (which begins October 1) correspond generally to gifts made, and the estates of decedents dying, in the preceding calendar year.  The dip for fiscal 2009 presumably reflects depressed values in calendar 2008, and the larger dip for fiscal 2010 (although many would have expected it to be even larger) presumably reflects the increased exemption in effect in calendar 2009.  The plateau from fiscal 2013 to fiscal 2014 is a mystery.

The Budget Debate in the Senate

Like the Administration proposals, the House and Senate versions of the budget resolution, H. Con. Res. 85 and S. Con. Res. 13, both as proposed by the respective Budget Committees and as passed by the House and Senate respectively, allow for 2009 estate tax law to be made permanent.

In the 1990s, under congressional Pay-As-You-Go (or “PayGo”) rules, it was common for proposed amendments to congressional budget resolutions to provide for “deficit-neutral reserve funds” to acknowledge various aspirations within the constraints of the overall revenue and spending targets.  Reviving that technique, several Senate amendments to S. Con. Res. 13 provided for such “deficit-neutral reserve funds.”  These amendments do not literally create “funds”; they simply permit the appropriate committees to consider changes to the allocations in the budget resolution down the road, but only if the budget deficit would not be aggravated by those reallocations.  As a practical matter, a “deficit-neutral reserve fund” represents a commitment to consider certain actions agreed to be desirable if other mandated actions are scaled down or turn out to be less expensive than expected, if revenue estimates are adjusted upward, or if the appropriate committees discover that they can “afford” or “pay for” those actions in some other way.

In that tradition, on April 2, 2009, the Senate approved a “deficit-neutral reserve fund” provided for in an amendment offered by Senator Blanche Lincoln (D-AR) and cosponsored by Senators Jon Kyl (R-AZ), Ben Nelson (D-NE), Chuck Grassley (R-IA), Mark Pryor (D-AR), Pat Roberts (R-KS), Mary Landrieu (D-LA), Michael Enzi (R-WY), Susan Collins (R-ME), and John Thune (R-SD).  The precise wording of Senator Lincoln’s amendment is:

The Chairman of the Senate Committee on the Budget may revise the allocations of a committee or committees, aggregates, and other appropriate levels and limits in this resolution for one or more bills, joint resolutions, amendments, motions, or conference reports that would provide for estate tax reform legislation establishing–

    (1) an estate tax exemption level of $5,000,000, indexed for inflation,

    (2) a maximum estate tax rate of 35 percent,

    (3) a reunification of the estate and gift credits, and

    (4) portability of exemption between spouses, and

provided that such legislation would not increase the deficit over either the period of the total of fiscal years 2009 through 2014 or the period of the total of fiscal years 2009 through 2019.

This amendment was supported in the Senate debate by Minority Leader Mitch McConnell (R-KY) and Ranking Finance Committee Member Chuck Grassley (R-IA) and opposed by Majority Leader Harry Reid (D-NV) and Budget Committee Chairman Kent Conrad (D-ND).

Reprising themes of past Congresses, Minority Leader McConnell reminded his colleagues that “[n]o one should have to be taxed on their assets twice, and no one should have to visit the tax man and the undertaker on the same day.  It is the Government’s final outrage.  But if we can’t repeal this tax, then we should at least lower it at a time when Americans are already burdened by shrinking retirement savings.”

In reply, the Majority Leader scolded that it was “so stunning, so outrageous, that some would choose this hour of national crisis to push an amendment to slash the estate tax for the superwealthy....  I can think of no way to describe this amendment other than stunning hypocrisy.”

In the end, the Senate approved Senator Lincoln’s amendment by a vote of 51-48.  Thus, the amendment gave expression to the congressional impatience with the estate tax by permitting a majority of Senators to “vote for” a $5 million exemption and 35% top rate – if it won’t increase the federal deficit.  In today’s economic and fiscal environment, can anyone believe that such an amendment will have much effect?

As if to leave no doubt about the purely aspirational nature of the Lincoln amendment, Assistant Majority Leader Richard Durbin (D-IL) immediately offered an amendment providing that “[i]n the Senate, it shall not be in order to consider any bill, joint resolution, amendment, motion, or conference report that would provide estate tax relief beyond $3,500,000 per person ($7,000,000 per married couple) and a graduated rate ending at less than 45 percent unless an equal amount of tax relief is provided to Americans earning less than $100,000 per year and that such relief is in addition to the amounts assumed in this budget resolution.”  Senator Kyl spoke in mild opposition to the Durbin amendment, but Senator Lincoln herself, as well as her co-sponsors Senators Nelson and Pryor, voted for it.  The Senate approved the Durbin amendment by a vote of 56-43.

The Durbin amendment only makes it even harder to do what was already very hard to do.  If the Lincoln and Durbin amendments are approved by the House and Senate in the final budget resolution, the Ways and Means and Finance Committees will be authorized to provide for all or part of the $5 million exemption and 35% top rate only if they can find, raise, or save enough money elsewhere to both pay for that relief over the next five and ten years and pay for the same level of additional tax relief for Americans earning less than $100,000 per year.  Otherwise, such provisions would be subject to a point of order in the Senate that could be waived only by a vote of 60 Senators.  In effect, the additional estate tax reductions contemplated by the Lincoln amendment would have to be paid for twice.

But Senators are talking about the estate tax.

A Nominee for Assistant Secretary of the Treasury for Tax Policy

Meanwhile, on March 28, 2009, President Obama announced his intention to nominate Helen Elizabeth Garrett as the new Assistant Secretary of Treasury (Tax Policy).  (Anticipating a question readers might have, the corresponding nominations by Presidents Reagan, Clinton, and George W. Bush were made on February 12, February 19, and February 26 of their first years in office.)

Beth Garrett is Vice President for Academic Planning and Budget of the University of Southern California and Sydney M. Irmas Professor of Public Interest Law, Legal Ethics, Political Science, and Policy, Planning and Development at the Gould School of Law of the University of Southern California.  She is a graduate of the University of Virginia School of Law and clerked for Justice Thurgood Marshall of the U.S. Supreme Court.  She is experienced in dealing with bureaucracies, finances, and resource allocations, and she was a member of the Advisory Panel on Federal Tax Reform appointed by President Bush in 2005.  Those who know her applaud her selection. Once Professor Garrett is confirmed by the Senate and sworn in as Assistant Secretary, we might anticipate the general freeze on administrative guidance imposed by the new Administration (like Administrations before it) on January 20 to begin to be relaxed with respect to tax guidance of interest to Fellows. Developments to watch for will then include some or all of the following:

  • Final regulations regarding the application of the “2-percent floor” to expenses of trusts and estates.
  • Rules regarding qualified tuition programs under section 529.
  • Final ordering rules for charitable payments made by a charitable lead trust.
  • Guidance about the coordinated sale of charitable and noncharitable interests in a charitable remainder trust to circumvent the rules governing commutation.
  • A revenue ruling addressing the tax consequences of using a family-owned trust company as a trustee.
  • Final regulations regarding the effect of restrictions imposed on estate assets within six months after death on the alternate value of those assets under section 2032 (sometimes referred to as the “anti-Kohler regulations,” after Kohler v. Commissioner, T.C. Memo 2006-152, nonacq., 2008-9 I.R.B. 481).
  • Guidance regarding the amount includable in the gross estate with respect to a “graduated” GRAT.
  • Final regulations regarding deductions under section 2053 with respect to claims that are uncertain, contingent, or contested.
  • Guidance about how to file and perfect the protective claims for refund that the final 2053 regulations are likely to require.
  • Guidance regarding the effect of personal guarantees and the application of present value principles in determining deductions under section 2053 for both claims and administration expenses.
  • Final regulations under section 2642(g) regarding extensions of time to make allocations and related elections pertaining to the GST exemption.
  • Proposed regulations under section 2704(b)(4) affecting entity-based valuation discounts.
  • Final regulations governing gift tax declaratory judgment procedures under section 7477.
  • Proposed regulations regarding the new requirements for supporting organizations and donor advised funds added by the Pension Protection Act of 2006.
  • Proposed regulations regarding the reporting of gifts and bequests received by U.S. citizens or residents from expatriates.
  • Regulations regarding the security required in connection with a deferral of the payment of estate tax under section 6166.
  • Revisions to Circular 230.

In short, members of Congress are not the only ones who will be busy.

Ronald D. Aucutt
© 2009 by Ronald D. Aucutt. All rights reserved