The President Speaks and Congress Listens; Estate and Gift Tax Repeal will be here soon; Do I have an Enterprise Zone Business?
1. May 23rd was the big day.
The China Vote was coming on the 24th and key votes were needed [The House Ways and Means Committee had voted the prior week with key Democratic Votes given by inner city Members], and thus on the night of the 22nd a deal was cut for Distressed Communities by the President and House Speaker Hastert. The best way to see how this all came about is to check out the Whitehouse Web Site for their daily briefing on May 23rd.
What you find out is the President called Senator Lott and got his commitment to move this legislation along, and that this will be a stand-alone bill, similar to the Social Security Income Limit. Reform. Target date for passage is on or before July 15, 2000, and on that date 126 Empowerment Zones and Enterprise Communities will be different.
How so you may ask? If you go to the Empowerment Zone/Enterprise Community Locator and check out Arizona. You may be surprised that Phoenix, like many other major cities, has an Empowerment Zone or Enterprise Community, generally in or near the inner city business district. As is typical it is not clear where the Phoenix Enterprise Community area is or what it covers. How about 2 North Central Ave, Phoenix 85004 home of Ernst & Young, LLP or 40 North Central Ave, Phoenix 85004 home of Lewis and Roca Attys, the American West Arena, or the Bank One Ballpark. If they are in the Enterprise Community will they be able to use IRC Sections 1045 or 1202 after July 15, 2000? How about their Dot-Com Incubators filled with the up and coming? Is it possible that they could sell and reinvest all capital gains after July 15, 2000?
2. Estate and Gift Tax Repeal is coming?
We have heard that message before, and for the latest version check out this PDF-format version of Chairman Archer's Amendment in the Nature of a Substitute to "The Death Tax Elimination Act of 2000" (H.R. 8) which passed the House Ways and Means on May 24th, 24 to 11 and will pass the House the week of June 6th with more than 240+ votes. What this means is that the 10 year phase out of the Estate and Gift provisions is coming, and with it the repeal of the stepup in basis rules, subject to certain exemptions for small property transfer [$1.3M] and transfers to surviving spouses [$3M].
What does this mean for community property owned by the decedent and their spouse? Who knows, but maybe over the next 10 years we may find out.
What id the stepup in basis rule you ask? It is the rule that allows property subject to the estate tax rules to take a new tax basis equal to the date of death values. Under the proposed rules there will be no estate tax and no stepup in basis, so that if you outlive the 10 years, December 31, 2009, then all property will retain the tax basis it had in the hands of the decedent. Thus capital gains will have replaced the estate tax unless the property is in a Community Renewal Zone, and held for more than 5 years under the proposed Distressed Communities legislation.
3. What is an Enterprise Zone Business?
As noted above the proposed Distressed Communities legislation will make all capital gains from the sale of an Enterprise Zone Business [EZB] subject to the deferral rules of IRC Section 1045 if reinvested into another EZB within 60 days. To find out what an EZB is we must check out IRC Section 1397B, which covers all types of businesses, including law firms, accounting firms, brokerage firms, restaurants, motels, hotels, real estate, etc., and these businesses may be in the sole proprietorship, partnership, S Corp. or C Corp. form. The key is that 35% of the employees [full time or part time] must be residents of the Empowerment Zone or Enterprise Community, as the case may be.
Is it relevent that the President and the Speaker of the House announced these proposed changes on May 23rd? or that the House Ways and Means will approve the Bill the week of June 6th? It might be if someone sells on or before July 15, 2000 and could have qualified for IRC Section 1045 treatment thereafter.
Jim Schneider, LL.M.
The Taxman86 Speaks... is copyright 1998-2010 by James E. Schneider, LL.M. Inc.