A Stealth Death Tax Increase

The Wall Street Journal reports

Less than five months before President Obama leaves office, his Treasury Department is rushing to implement a de facto increase in the federal estate tax,..

Treasury Secretary Jack Lew is up to his usual tricks, trashing established interpretations of tax law to bypass the legislative branch. Not even Mr. Lew has the gall to claim he can raise the federal death-tax rate of 40% without congressional approval. So the game here is to contrive ways to expose more of the value—or imagined value—of an estate to IRS revenue collectors.

Last month Mr. Lew’s Treasury announced a proposed rule to close what it calls an estate and gift tax “loophole.” Until now, the IRS permitted realistic values for portions of closely held corporations and partnerships.

For example, consider a minority stake with limited rights in a family business. While the business as a whole may have considerable value, how much would an investor be willing to pay for a small, illiquid piece of a private business that she can’t control? The typical answer is not much. On the other hand, the investor might pay handsomely for a controlling interest.

The IRS has long recognized this reality and has allowed the discounting of interests in closely held businesses to more closely reflect what they could fetch on the open market, rather than simply assigning a percentage of a firm’s overall estimated value. A lower value assigned to an asset means a smaller tax bite.

But what seems like a reasonable interpretation to some looks like a wasted revenue opportunity to the Obama Treasury. So the feds are now accepting public comments on a plan to limit discounting and thereby raise the official value of many of these stakes in family firms, exposing them to higher tax bills. Treasury is hoping to roll out a final rule before Mr. Obama departs in January.