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Tax Notes Quotes Beth Kaufman on Assessing Assets

September 25, 2019, Tax Notes

A key question in designing a wealth tax that works as intended is how to efficiently obtain the value of property subject to the tax annually, but experts say there’s no easy answer.

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“We see this every day when we’re working with taxable gifts and estates,” noted Beth Kaufman of Caplin & Drysdale Assessing the value of assets like closely held businesses, real estate, private equity investments, oil and gas interests, and many others is “a major undertaking,” she said.

Estate planners have up to 15 months to file an estate tax return after a decedent dies, and it often takes the full 15 months to get all of the estate’s assets valued, according to Kaufman. “So obviously, that’s a system that would have to become a lot more efficient if it was something you were going to do on an annual basis,” she said.

Moreover, Kaufman added, “appraisals are just appraisals and they’re basically all wrong,” usually amounting to somebody’s “best estimate of what the value is on a given day.”

To make a wealth tax’s annual assessment process workable, policymakers would need to come up with a way to make that process simpler, Kaufman said. “Maybe we just excuse some level of accuracy in order to have efficiency and create some rules of thumb,” she said.

Kaufman suggested a formula-based approach that could be used to value something like a closely held business that doesn’t require a taxpayer to spend $100,000 every year for an appraisal. That approach sacrifices accuracy, but it allows for an across-the-board rule that applies to everybody, “and we’d just accept those as the wealth tax values that we’ll use for that purpose,” she said.

Kaufman also said she had yet to see any of the major wealth tax proposals address how they would deal with trusts. Although some proponents have suggested attributing the assets in a trust back to the person who put it in the trust, she said she didn’t think that would work.

Most likely, the wealth tax would have to be applied to the trusts themselves, though perhaps with a different exemption threshold, similar to how trusts are taxed on their income now, Kaufman said.

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Warren’s wealth tax proposal has sparked a heated debate over its constitutionality, and Kaufman said that if a wealth tax is enacted, it would certainly be challenged and “take years to work its way through the court system.”

Meanwhile, Kaufman cautioned that the “devil is in the details” and argued that discussions about the merits of a wealth tax “can’t just stay at a lofty policy level.” Stakeholders need to know how it would work and what taxpayers would need to do to comply, she said.

For the full article, please visit Tax Notes’ website (subscription required).

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