An investigation into the effect of death taxes on transfer of farms from one generation to another

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1977

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Abstract

In recent years there has been much controversy regarding the effect of Federal estate tax on forced liquidation of family farms. This increased attention resulted in the demand for Federal estate tax reform and introduction of a number of proposals - some subsequently adopted - for preferential treatment of farm estates. The hypothesis of this investigation was that Federal estate and gift taxes are in need of a major revision and that, contrary to popular belief, present estate and gift provisions have no material effect on forced liquidation of family farms. Thus, no special farm provisions are deemed necessary. Consequently, it was the purpose of this study to investigate the effect of Federal estate tax on forced liquidation of family farms. It also evaluated provisions of the Tax Reform Act of 1976 that were designed to resolve the alleged liquidity problem or that may affect farm transfers from one generation to another. A statistically conputed sample of estate tax returns, filed in the State of Texas in 1974, were examined and evaluated to ascertain the magnitude of the liquidity problem in Texas farm estates. The results of this examination were compared with results of local studies in other states and results of a national study on liquidity in farm estates in 1973. Special fam provisions in the Tax Reform Act of 1976 were evaluated in terms of five criteria used in a previous doctoral, dissertation: (1) As a revenue producer; (2) As an equitable distributor of the tax burden; (3) As a rule that could be readily interpreted by both the taxpayer who must comply with the law and the government who must administer it; (4) As a tool for controlling the economic and social behavior of the taxpayer; and (5) As an integral part of the total Federal tax system. When the new law appeared to be a workable solution to the problem / passed the evaluation criteria /, no alternatives were recommended. However, where the new law appeared defective, alternative solutions were recommended and subjected to the same evaluation criteria. In order to ascertain the treatment of fam estates in selected foreign countries, statutes that govern the taxation of fam estates and general estate tax in Canada, Great Britain, Australia, and France were reviewed. The examination of estate tax treatment of estates in these countries generated a comparison between estate tax provisions governing fam estates in the United States and their counterparts in other advanced economic systems. The following conclusions and recommendations resulted from the study. The Federal estate and gift tax provisions do not have material effect on forced liquidation of family farms. Thus, no special farm provisions are necessary. Contrary to the intent of estate and gift tax to minimize the concentration of wealth, the new carryover basis rules of Section 1023 tend to promote and discriminate favorably toward wealth concentration. Alternative solutions to the basis rule and other estate tax problem areas identified in this study are: 1. Abolition of the current estate and gift tax system and replacement with an inheritance tax. 2. Abolition of the current estate and gift tax system and replacement with a capital gains tax with free inter-spousal transfers. 3. Maintenance of the current system with free inter-spousal transfers and other modifications presented below. 4. An extension of time for payment of estate tax provision with Interest assessed at the regular market rate for any hardship estate to qualify for the deferral. 5. Total deletion of the special valuation provision enacted in the Tax Reform Act of 1976 from the Internal Revenue Code.

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