of the Internal Revenue Service to use jeopardy and termination assessments and to issue administrative summons also is limited by providing better court review in these cases. At the same time, rules are provided for the publication of private letter rulings so everyone will have an equal opportunity to know the view of the IRS on the proper interpretation of the tax law. New rules are also added to aid the Service in reviewing the way in which tax return preparers carry out their duties. In the case of withholding tax provisions, a number of changes are made, including provision to withhold at the rate of 20 percent on income from most wagering where the amount won is $1,000 or over. Further, in the case of fishing vessels where the catch is shared, sternmen are classified as independent contractors for tax purposes. The Act also provides mandatory withholding of State and local income taxes for members of the Armed Forces. F. ESTATE AND GIFT TAX PROVISIONS The estate and gift tax provisions provide a comprehensive revision of these taxes. In this area, the Act provides substantial relief for moderate-sized estates, farms and other closely-held businesses, alleviates the liquidity problem for estates comprised largely of farms and other closely-held business, while at the same time it removes tax avoidance devices from the present system. This is accomplished with a balanced set of provisions which in the long run will at least maintain the present level of revenues. The Act substantially reduces estate taxes for medium-sized estates. The existing $60,000 estate tax exemption was enacted in 1942 and since that time the percentage of decedents whose estates have been subjected to the Federal estate tax has increased from 1 percent to 8 percent. This increase has resulted from inflation and the greater ability of people to accumulate wealth because of the unprecedented economic prosperity in the post-war era. The Act increases from $60,000 to $175,000 the level at which the taxation of estates begins. It also changes the exemption into a tax credit in order to confer the maximum possible tax relief on the small and medium-sized estates. In addition, the prior estate tax imposed acute problems when the principal asset of the estate was equity in a farm or small business. Because assets are valued at their "highest and best use" for estate tax purposes, rather than on the basis of the specific use to which the assets were being put (and also because these assets are illiquid), family members have often been forced to sell farms and small businesses in order to pay the estate tax. To deal with these problems the Act allows farms (and other family businesses) to be valued (to the extent of $500,000) at the value for farming purposes (or other small business use), if they remain in the family for a period of ten to fifteen years after the death of the decedent, rather than being valued at the "highest and best use" market value. Also, in these cases, the Act extends the time for payment of estate tax liability and provides for a low 4-percent interest rate on the tax on up to $1 million of farm or small business value. These changes are intended to preserve the family farm and other family businesses-two very important American institutions, both economically and culturally. The estate and gift tax structure is an important part of the Federal tax system and as such needs to be as nearly equitable as possible in its application. Tax liability should not depend on the method used to transfer the property from one generation to the next. Because of this, a number of steps were taken to reform the estate and gift tax provisions. This reform provides assurance that in the long run these provisions will not lose revenue. Two features of prior law which give rise to considerable variations in estate and gift tax burdens for people who transfer the same amount of wealth were the separate rate schedule and exemption provision for estates and gifts. There were several tax advantages to lifetime gifts. The gift tax rates were 75 percent of estate tax rates; and, unlike the estate tax, the amount of the gift tax itself was not included in the tax base. Also, someone who split his total transfers between gifts and bequests achieved the advantage of "rate splitting," since the first dollar of taxable bequests was taxed at the bottom estate tax rate even where there had been substantial lifetime gifts. These opportunities for reducting the overall burden by lifetime giving were inequitable, especially since many people are not wealthy enough to make lifetime gifts. The Act unifies the estate and gift taxes-both the exemptions (which have been converted into a credit) and the rates to deal with these inequities. Another cause of unequal treatment of taxpayers with the same amount of wealth transfers has been the ability to use "generation skipping" trusts. When weath is bequeathed from the parent to his child, then from the child to a grandchild and finally from the grandchild to a great-grandchild, the estate tax is imposed three times. However, if the parent places the wealth in a trust in which the child and then the grandchild has the right to the income from the trust, with the principal going to the great-grandchild, the parent will achieve virtually the same result and, in effect, skip two generations of estate tax. In these cases, the estate tax could be avoided for 100 years or more under prior law. Since such trust arrangements have been used largely by wealthier people, this failure to tax generationskipping trusts has undermined the progressivity of the estate and gift taxes. The Act significantly limits estate tax avoidance through generation-skipping trusts by imposing a tax at the time of the death of the child or grandchild, in the example cited above, of substantially the same size as would be imposed had the property passed directly from the child to the grandchild and to the greatgrandchild, although the additional tax in this case is payable by the trust. However, an exception to this rule is provided for up to $250,000 passing from a child to one or more grandchildren. Still another inequity in the prior law resulted from the fact that when appreciated property was transferred at death, the basis of the property for the heirs (on which any capital gain or loss is computed) was the fair market value at the time of death rather than the basis of the decedent. This contrasted with the rule for gifts, where the donee must carry over the basis of the donor. One unfortunate result of the prior law has been that people were reluctant to sell appreciated property in anticipation of the step-up in basis at death. Another result has been that assets accumulated out of savings from ordinary income bore a heavier total tax burden than those resulting from appreciation in value where the gain had not been realized. To reduce the inefficiency and inequity of the prior system, the Act generally provides for a carryover basis at death but provides, however, that there will continue to be a step-up in basis for appreciation which has occurred through the end of the calendar year 1976. G. INTERNATIONAL TRADE AMENDMENTS Another area of the Act involves changes in the operation of the U.S. International Trade Commission and amendments to the Trade Act of 1974 regarding tariff treatment of countries aiding or abetting international terrorists. The Congress concluded that the voting procedures of the International Trade Commission, needed revising in order to facilitate the functioning of the Congressional override mechanism in cases where a plurality of three commissioners reached agreement on a particular remedy but, because a majority of the commissioners voting did not agree on a remedy, there was no "recommendation" by the Commission which Congress could implement under the override provisions (contained in the Trade Act of 1974). Thus, the Act provides that if a majority of the Commissioners voting on an escape clause or market disruption case cannot agree on a remedy finding, the remedy finding agreed upon by a plurality of not less than three Commissioners is to be treated as the remedy finding of the Commission for the purposes of the Congressional override mechanism. The Act also modifies the rule for the term of office for a member of the Commission so that a Commissioner may continue to serve after the expiration of the term of office until the successor is appointed and qualified. In addition, the Act amends the Trade Act of 1974 to add a new category of reasons for denying preferential tariff treatment to "beneficiary developing countries." The new provision would prohibit preferential tariff treatment to such countries that aid or abet any individual or group which has committed an act of international terrorism. The President, however, could waive this prohibition (as he may for certain of the other categories for denial of preferential treatment) if a waiver is determined to be in the national economic interest of the United States. II. REVENUE EFFECTS Table 1 gives the revenue effects of the tax reform, estate and gift tax, and tax cut provisions of the Act, and lists the revenue impact of each title of the Act. As the table indicates, the tax reform provisions are estimated to raise about $1.6 billion in revenues in fiscal year 1977 and $2.5 billion by 1981. The tax cut extension amounts to $17.3 billion in 1977. The title-by-title analysis of the table indicates that $417 million of revenue will be raised from tax shelter provisions in 1977, a figure which rises to $527 million by 1981. Table 2 lists the revenue effect of each section of the Act by title. Tables 3 and 4 give the estimated decreases in individual income tax liability for calendar year 1977 and 1978 under the tax cut extensions contained in the Act. TABLE 1.-REVENUE EFFECT OF TAX REFORM, ESTATE AND GIFT TAX, AND TAX CUT PROVISIONS OF THE ACT, SUMMARY AND BY TITLE 1 1 Does not include Title I-Short Title and Title XIX-Repeal and Revision of Obsolete, Rarely Used, Etc., Provisions. 2 Less than $5,000,000. (15) |