Yesterday, the House of Representatives once again voted to extend indefinitely the repeal of the estate tax (which is currently set to disappear in 2010, only to return the next year). An Associated Press report went out noting the vote and chronicling the “he said/she said” banter between Republicans and Democrats. The story — which showed up on the Web sites of the San Francisco Chronicle, Newsday and USA Today, among others, concluded with the following inscrutable paragraph:


A study by a senior aide to Democrats on the House Ways and Means Committee concluded that there would be more losers than winners if the estate tax is repealed. If the estate tax were repealed in 2009, the study estimated more than 71,000 estates could face new capital gains taxes. Under the estate tax laws scheduled to be in place that year, about 15,000 would owe estate tax.


More estates subject to taxation? Isn’t that the opposite of what supporters of killing off the tax are saying will happen? And if that’s the case, why is it stuck at the end of the piece?


It turns out that the “senior aide” — John Buckley, tax counsel at the Ways and Means committee — based his analysis (918K PDF) on the reappearance of a something called “carryover basis.”


Current estate tax law specifies that assets passed on to heirs are subject to capital gains taxes only on the value gained after the asset was inherited, instead of the value of the asset at the time it was acquired by the original owner. For instance, if one’s father bought stock for $5 million, which grew to $10 million and was then passed on, the heir would only be taxed on sale proceeds beyond that $10 million. That amounts to a huge tax cut.


The new law would tax the gain based on the value of the asset when it was acquired, minus an exemption of $1.3 million (or $4.3 million for spouses). So, if you sold the above stock for $10 million, you’d be subject to taxes on the $5 million it gained beyond the value at the time it was purchased, minus your exemption. In short, estates that have accumulated over $1.3 million in gains (or $4.3 million in gains for estates with spouses) will be subject to capital gains taxes that don’t apply to them under current law.


“Carryover basis” is nothing new. Congress first passed a “carryover basis” law in 1976 and repealed it retroactively in 1980 because of problems enforcing it. Of the proposed law, Buckley writes, “On the surface, the new carryover basis rules seem simpler than the 1976 version. However, that apparent simplification is only on the surface. In many respects, the new rules create as many problems as the 1976 version — they are just different problems. There is little question that the new rules will pose serious administrative problems for the estates.” For instance, many estates have trouble proving the original price of their assets — and are then subject to penalties for inaccurate reporting.


Politically, the “carryover” provision is palatable because it allows supporters of repealing the tax to defend against attacks that the law would give a huge capital gains tax break to the largest estates. The “carryover,” however, affects many estates that don’t benefit from the proposed repeal.


It’s complicated stuff, the details of which are buried deep in tax law. But the “carryover” is also potentially one of the biggest effects of the law. And for that reason, it’s something that shouldn’t be ignored, or squirreled away at the bottom of an article, just because it’s complicated.

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Thomas Lang was a writer at CJR Daily.