Perhaps the most newsworthy item in the Treasury Department Greenbook was the Biden
Administration's proposal to increase taxes on capital gains on
a retroactive basis. Specifically, the Greenbook proposes to tax
long-term capital gains and qualified dividends of taxpayers with
adjusted gross income of more than $1 million at ordinary income
rates, with 37 percent being the highest rate (40.8 percent
including the net investment income tax). The proposal would be
effective for gains recognized after the undefined "date of
announcement," which could be interpreted as the April 28,
2021 date of the release of the American Families Plan or the May 28, 2021 date of the release of the
Greenbook itself. By contrast, the other proposals in the Greenbook
generally state that they will be effective prospectively for
taxable years beginning after December 31, 2021. The policy
rationale to propose a retroactive – in this case a
pre-enactment – effective date is to prevent market
manipulation (i.e., investors selling stocks or other
capital assets in advance of a known future prospective change to
the capital gains rate). It should be noted that there is precedent
by which Congress – through a variety of mechanisms
(including press releases and bill introductions) – has
announced such a retroactive effective date in the past. Given the
retroactive "date of announcement" contained in the
Greenbook, the question now being asked is whether that date will
"stick" and be included in any legislation enacted by
Congress. We expect stakeholders to argue to Congress that a
retroactive effective date is patently unfair because it removes
certainty in the marketplace and does not allow taxpayers to rely
on current law – creating a state of limbo for legitimate
transactions.
Although Congress could consider a different effective date –
perhaps exerting its jurisdiction over the Administration to
dictate the terms of legislation – it may have revenue
concerns over doing so since it could decrease the "revenue
score" of the proposal (i.e., raise less taxes). And
while Congress could advance the effective date – such as a
later date when a bill is introduced – it is difficult for
taxpayers to rely on the potential for such a future date for
planning purposes. Indeed, since taxpayers are already "on
notice" of the potential for a retroactive effective date,
Congress will likely not be particularly sympathetic to those who
engage in transactions despite this significant risk. While
Congress may entertain whether to consider the Administration's
capital gain tax increase at all, or perhaps reduce the proposed
amount of such increase or the scope of taxpayers that the increase
applies to, it seems that Congress may show less flexibility in
considering changes to the proposed effective date. The Greenbook
has placed a line in the sand ... and Congress may be reluctant to
cross the "date of announcement" line.
#TaxTake
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