Wyden Billionaires Tax | Cadwalader, Wickersham & Taft LLP


On October 27, 2021, Senate Finance Committee Chairman Ron Wyden (D-Ore.) Released law Project which, if enacted, would tax the wealthiest 700 or so Americans on a modified market value basis by requiring them to pay taxes at long-term capital gain rates on their marketable assets as if they were selling these assets on the last day of each year and imposing a “deferral fee” in the form of interest on transfers of non-marketable assets. On the same day, the Senate Finance Committee issued a brief description and a more detailed summary section by section of the proposal.

Wyden’s proposal has recently received considerable attention as a potential revenue stream in light of opposition from other Democrats to increasing marginal corporate and personal tax rates.

Here are the main aspects of the proposal:

  • Relevant taxpayer. The proposal would only apply to “affected taxpayers”, which includes individuals who, in each of the three immediately preceding taxation years, had:
    • Adjusted gross income greater than $ 100 million (or $ 50,000,000 for married people filing separately); Where
    • Assets with an aggregate value greater than $ 1 billion (or $ 500 million for married people reporting separately). The value of a marketable asset is its fair market value, while the value of a non-marketable asset is the greater of its initial cost base, its adjusted basis, its value at the date of the most recent event establishing value, its value reflected in an applicable financial statement, and the value used to secure indebtedness.

If an individual were an applicable taxpayer in the year of their death or in any of the three preceding years, the individual’s estate would also be an applicable taxpayer. Certain non-grantor and non-charitable trusts would also be applicable taxpayers if they meet a $ 10 million income or $ 100 million asset test similar to the criteria for individuals.

  • Mark-to-market covered tradable assets. The proposal would require affected taxpayers to mark-to-market their “tradable covered assets” each year and to recognize the long-term capital gain or loss on any increase or decrease in their value, regardless. the period of detention.

US individuals are generally taxed at a rate of 20% on long-term capital gains. House Ways and Means Committee bill would increase rate to 25%. Individuals can normally only deduct capital losses up to the extent of their capital gains plus $ 3,000 per year, and cannot carry them back, but Wyden’s proposal would allow individuals to carry losses forward. market value up to three years and apply them to mark-to-market. market gains.

Marketable covered assets are generally all assets, other than certain savings and retirement plans, insurance and annuity contracts, and cash and cash equivalents, which are traded on an established securities market, are readily tradable on a secondary market or are available on an electronic or electronic trading platform. Derivatives on tradable covered assets are themselves tradable covered assets.

  • Carry forward charges on non-negotiable covered assets. Under the proposal, when an affected taxpayer sells a non-tradable covered asset, it will pay its normal tax on any gain plus “deferral charges”.

They would calculate the deferral charge by (1) attributing the gain pro rata during their holding period, (2) reallocating the gain for any period before they become a taxpayer applicable in the year they became so, and (3) calculating the amount of tax that they should have on each year’s allocated gain based on the longer term the term capital gain or tax rate (if any) in effect for that year. The deferral charge is the total amount of interest they would be owed on a late payment of the deemed tax amount each year, using a short-term AFR underpayment rate plus 1% (except that (no interest accumulates for the periods preceding the adoption of the proposal). The Short-term AFR for November 2021 is 0.22%.

The deferral charge would be capped so that the total tax imposed on a sale does not exceed 49% (plus the 3.8% tax on net investment income).

Capital gains dividends paid by a non-tradable REIT would be treated as a gain from the sale of a non-tradable covered asset held during the shorter of the taxpayer’s holding period in the shares of the REIT and the period of time the REIT is held in the gain-generating asset (which the REIT would report to the taxpayer). Dividends from the AC company exceeding 125% of a three-year moving average (or, if shorter, the taxpayer’s holding period in the company’s stock) would also be treated as a gain from the sale of the company. ” a non-negotiable hedged asset.

  • Analysis rule for pass-through entities. A relevant taxpayer must notify a partnership, S corporation or other flow-through entity specified in the regulations if the taxpayer is a “significant owner”, that is, the taxpayer (1) owns directly, indirectly or implicitly at least 5% of the capital or profits of the entity (in the case of a partnership or other intermediate entity) or shares by voting right or by value (in the case of a company S), or (2) owns at least $ 50 million of non-negotiable interests in the entity (calculated as described above under “Applicable Taxpayer”). The flow-through entity must notify other flow-through entities in which the taxpayer is a significant owner indirectly through it.

Each intermediary entity is required to declare to the taxpayer, and the taxpayer is required to take into account for the year, its share of (1) mark-to-market gain or loss on the tradable covered assets and (2) the costs of carry forward on sales of non-negotiable covered assets (considering the taxpayer’s holding period as the shortest between the entity’s holding period in the asset and the taxpayer’s holding period in the entity). The proposal leaves it to the regulations to provide for the corresponding adjustments to the internal and external taxpayer base.

  • Reputable sales treatment. The proposal would require affected taxpayers to account for gains or losses on bequests, otherwise non-taxable contributions to controlled companies and similar exchanges, and to account for gains (but not losses) on donations and gifts. trust transfers. The disallowed loss on a gift or trust transfer reduces the gain that the transferee subsequently recognizes on the asset. The proposal’s recognition rule would not apply to transfers to a spouse, surviving spouse or ex-spouse resulting from divorce or to charitable contributions.
  • First year elections. Three choices would be offered to taxpayers for the first year they are applicable taxpayers.

First, they can choose to pay tax on their mark-to-market gains for that year in five equal annual installments.

Second, they can choose to mark their non-marketable assets to the market at whatever value they choose (as long as it exceeds the adjusted asset base) and pay tax on the resulting gain, thereby potentially reducing the costs. deferral costs on a subsequent sale of these assets. assets. However, the second choice is only available for flow-through entities if the taxpayer is a significant owner (as described above under “Transparency rule for flow-through entities”).

Finally, it is only in 2022 that they can designate up to $ 1 billion of tradable Company C shares as a non-tradable hedged asset (and thus avoid valuing them in the market).


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