United States: Capital Markets Tax Quarterly - Volume 5, Issue 1

Editor's Note

Each year, the US Administration submits its budget to Congress. Accompanying the budget is a separate document titled "General Explanations of the Administration's Revenue Proposals," or "Greenbook" prepared by the US Treasury. It explains the revenue measures in the President's Budget. In this year's Greenbook, released in March, the Biden Administration proposes a Billionaire's Minimum Income Tax ("BMIT") which we discuss beginning on pp. 3. Capital Markets Tax Quarterly has reported on "billionaires taxes" before, going all the way back to the 2020 Democratic Party presidential primaries. Last fall, Sen. Ron Wyden (D., OR) floated one as part of the Build Back Better debate.¹ The proposal, which he dubbed the "Billionaire's Income Tax" or "BIT" fell flat, but that didn't stop the Administration from proposing another "billionaires" tax in the Greenbook. Reading beyond the headlines, the BIT and the BMIT are actually very different. BIT would force all taxpayers with either $100 million in annual income or $1 billion in assets onto a "mark-to-market" system for tradable assets and also impose an anti-deferral tax when non-tradable assets are sold. Long-term capital gain rates would apply to the MTM gain and existing tax rates would apply to recognized gain on non-tradable assets. The Biden BMIT, on the other hand, would lay a minimum tax on top of the existing federal tax system to be imposed on "total income" in excess of $100 million a year. Generally speaking, the minimum tax, as the name suggests, would only be paid if it exceeded a taxpayer's regular tax. "Total income" would include income and gain under existing law but also unrealized capital gains of the affected taxpayers. Therefore, the Biden plan would require valuation of non-tradable assets. Also, "illiquid" taxpayers (those with less than 20% of their wealth in tradable assets) could elect to include only unrealized gain in their minimum tax base under Biden's plan. These taxpayers would be subject to a deferral charge on the realization of gains on non-tradable assets that would not exceed ten percent of unrealized gain.

If it all sounds complicated, believe us, it is. One can only imagine the tax planning that would go into advising the affected individuals particularly in conjunction with whatever estate tax changes accompanied a billionaires tax (the Biden proposal includes gain recognition at death). CMTQ also wondered whether the changes in the BMIT vs the BIT were made with an eye to garnering support from Sen. Joe Manchin (D.WV). Within a few days of its release, however, Sen. Manchin announced that he did not favor the BMIT, so its fate is uncertain at best.

The BMIT and other proposals in the Greenbook are certainly grand proposals. Reality in 2022, however, may be less grand. The reader will recall that around this time last year, we studied the Congressional calendar and came away concluding that Congress had to act fast to pass ambitious legislation proposed by the incoming Biden Administration. The result was passage of the Infrastructure Investment and Jobs Act (dubbed the "Bipartisan Infrastructure Act") but not of the Build Back Better Act. This year, the calendar is equally revealing: in the House both August and October (actually through Election Day on November 8) are District Work Periods, i.e, when the House is not in session. The schedule for the Senate includes the full August break and only nine session days in October. So September seems to be the last time both House and Senate will be together in Washington DC and in session before Election Day. Not much time to do anything (for better or worse) until after the US mid-term elections in November.

This edition of CMTQ includes a chart comparing the BMIT and BIT and also covers the revocation of a REIT ruling on what constitutes qualifying rental income, recent LIBOR replacement legislation (which is missing any tax provisions), and more.

Footnote

1 For our prior coverage, see CMTQ Vol. 4, Issue 3, available at https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2021/11/capital-markets-tax-newsletter--volume-4-issue-3final2.pdf Wyden's draft legislation is available at https://www.finance.senate.gov/imo/media/doc/Billionaires%20Income%20Tax.pdf

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