General Practice, Solo & Small Firm Division

American Bar Association
General Practice, Solo, and Small Firm Division
The Compleat Lawyer
Fall 1997
copyright American Bar Association. All rights reserved.

Legislative Update/E. E. Anderson
Estate Taxes

E. E. Anderson, a retired general in the U.S. Marine Corps, is the director of the Solo and Small Firms Division of the ABA General Practice, Solo and Small Firm Division.

Many say that the estate tax was created in 1916, but in reality it was originally enacted in 1797 during hostilities between the United States and France and repealed in 1802. It was reenacted in 1862 during the Civil War and repealed in 1870, only to become law again in 1802 during the Spanish-American War. It was repealed in 1902, only to once again become the law in 1916 during World War I.

While there have been changes to the law since then, it is now a permanent part of our body of tax law. While many liberals contend that reducing or eliminating the estate tax would benefit only the wealthiest Americans, Edward L. McCaffery, Professor of Law at the University of Southern California and a self-described liberal, has said that unlike taxes on cigarettes and alcohol, the estate tax is "an anti-sin, or a virtue tax. It is a tax on work and savings without consumption, on thrift, on long term savings. There is no reason even a liberal populace need support it."

Today, many more middle-income families and especially farmers and small business owners are being hit with sizeable estate tax bills. There was a time when only the wealthy were subjected to these taxes, but today, a family with a nice home and sizeable insurance coverage can be pushed into paying the tax, as all assets owned by the decedent at the time of death are subject to the tax. This tax starts out at 37 percent, but quickly jumps to 55 percent.

As serious as the burden is on married couples, the tax is even more detrimental to small businesses and farmers. A 1993 study determined that for nine out of ten family businesses that failed within three years of the principal owner s death, the business s failure could be attributed to the payment of estate taxes; and eight out of ten family-owned businesses fail to make it to the second generation.

The waste and economic inefficiencies caused by estate taxes are well known. These taxes raise only approximately 1 percent of total federal revenues. Tax accountants and estate lawyers are hired to set up trusts designed to reduce or avoid these taxes. On January 21, 1997, Senator Jon L. Kyl (R-AZ), introduced S.75, The Family Heritage Preservation Act, a bill that would repeal the estate tax. In discussing this bill on the floor, he said that a 1994 study had concluded that compliance costs totaled $7.5 billion in 1992, a year when the estate tax raised only $11 billion. Further, a recent study by the Heritage Foundation estimates that if the estate tax were repealed, the following would result:

  • The nation's economy would average as much as $11 billion per year in extra output.
  • An average of 145,00 new jobs would be created.
  • Personal income could rise by an average of $8 billion per year.
  • The deficit would decline since revenues generated by extra growth would more than compensate for meager revenues of the estate tax.

When one considers the income and payroll taxes paid on these gains, they certainly would exceed the estate taxes collected. Starting with the 1981 tax reforms, the exemption was increased yearly until 1987, when it reached $600,000. The exemption has not been increased or indexed for inflation since then. If it had been indexed, the exemption today would be $840,000. The 104th Congress passed H.R. 2491, The Budget Reconciliation Bill, which contained, inter alia, a provision that increased the exemption to $750,000, but President Clinton vetoed the bill. While Clinton's position on the increase was not specified, the tax writers in Congress are of the opinion that he believed the increase was too generous.

In addition to Senator Kyl's bill, Senator Charles F. Grassley (R-IA) introduced S.479 on March 19, 1997. This bill, with the support of a bipartisan group of senators, would increase the $600,000 general exemption, starting at $700,000 in 1997 and increasing to $1 million by 2002. Additional credits would be offered to family farmers and small business owners.

Senator Richard G. Lugar (R-IN) introduced three pieces of legislation S.29, S.30, and S.31 on January 21, 1997, aimed at mitigating the impact of estate and gift taxes. S.29 would repeal the estate and gift taxes. S.30 would immediately raise the unified credit from $600,000 to $5 million. S.31 would phase out the tax over five years by gradually raising the unified credit each year. The credit in 1998 would be $1 million and increase to $5 million in 2002, at which time the tax would be repealed.

In the House, Representative Philip M. Crane (R-IL) introduced H.R.525 on February 4, 1997, calling for the repeal of the estate and gift taxes, and the tax on generation-skipping transfers. On March 3, Representative Christopher Cox (R-CA) introduced H.R.902, a companion bill to Senator Kyl's S.75. On March 20, Representative Wes W. Watkins (R-OK) introduced H.R.1208, which also called for the repeal of the estate, gift, and generation-skipping transfer taxes.

While much activity is being generated to eliminate or reduce the estate tax, on June 9, House Ways and Means Committee Chair Bill Archer (R-TX) offered a five-year, $85 billion tax cut package. In the package, Archer proposed raising the exemption to $1 million from $600,000, but the change would not be fully phased in until 2014. Many Republicans immediately objected, protesting that the estate tax reduction was too small and that the provision repealing the corporate alternative minimum tax would play into the hands of the Demo-crats. After a GOP conference on June 11, a faster phase-in of the bill's increase in the estate tax credit from $600,000 to $1 million was agreed to, reaching the $1 million credit by 2007 rather than 2014.

Congressional Election Probes

Two widely publicized congressional investigations of alleged fraudulent elections to Congress are underway. In the Senate, Senator John W. Warner (R-VA), heading the Senate Rules and Administration Committee, has launched a large-scale investigation of Senator Mary L. Landrieu's (D-LA) election over Republican candidate Louis Jenkins. Jenkins has asked the Senate to void the election, declare the seat vacant, and order a new election.

The fact that Warner's committee has launched a full-scale investigation has heartened Jenkins and fellow conservatives who were quite piqued over the decision of Senate Majority Leader Trent Lott (R-MS) to seat Landrieu "without prejudice." The committee, by a 9-7 party-line vote, did not follow the recommendation of their two appointed lawyers, who recommended a limited investigation on only three of Jenkins's allegations. The probe will now be conducted by four recognized election-law lawyers from a leading Virginia law firm. Heading the group is Richard Cullen, who in June was sworn in as the attorney general of the Commonwealth of Virginia. While the committee agreed to a 45-day investigation, the Democrats were able to limit subpoena and deposition power of these investigators and FBI agents. Only members of the committee will have this power.

Jenkins has submitted 8,000 pages of documents to the committee in order to buttress his charge of vote buying, fraudulent voter registration, and phantom votes. He testified before the committee on April 15 and won bipartisan praise for his performance. He mainly stressed the fraudulent practices of the political machine in the Orleans Parish and the involvement of gambling interests, but did not allege that Senator Landrieu or her campaign staff played a role in the fraud.

Of course, not all Democrats on the committee spoke out in praise of Jenkins. Senator Dianne Feinstein (D-CA) said, "Hell hath no fury like a man beaten by a woman." She also tried to eliminate the words "or improper activities" from the scope of the probe, which said "illegal or improper activities" would be investigated. She failed in this effort by a 7-9 vote.

As earlier stated, the group appointed to examine the allegations was limited to a 45-day investigation and a $100,000 budget. This group asked Louisiana officials to copy the voting records but the state refused to do so without pay. The investigators had the records transported to their Richmond offices for copying. This cost will cut into the limited budget and additional funding may have to be requested from the committee.

The other contested election is in the House and is being conducted by a task force headed by Representative Vernon J. Ehlers (R-MI). It involves the alleged fraudulent election of Representative Loretta Sanchez (D-CA) over former Representative Robert K. Dornan. An all day hearing was held on April 19 in Orange County by Ehlers and Representative Bob Ney (R-OH). As a result of this hearing, both Ehlers and Ney believed that a more extensive investigation was necessary. Ehlers said he was convinced that there was illegal voting, but stated, "The question is how much."

The lawyers representing both parties differ quite markedly. Dornan's lawyers state that they discovered "the largest number of votes fraudulently cast in the United States in the last 50 years." On the Sanchez side, her lawyers contend that the number of questionable votes is 303 (her margin of victory was 984 votes) and that many of those voters were legally entitled to vote. They also said that many of these individuals became legal citizens between the time they registered and Election Day, and thus were legally entitled to vote.

One of Dornan's lawyers countered by quoting from the state registration card, which requires registrants to state that they are U.S. citizens. Also complicating the issue is the statement of California's Secretary of State that there was no way of determining how many of those 303 voters had voted for Sanchez. Recognizing many of the difficulties involved, Representative Ehlers has indicated that the investigation will take months to complete.

Juvenile Justice Legislation

The House Judiciary Committee approved H.R.3 on April 29, 1997. The bill authorizes prosecutors to try juveniles 14 and older as adults for certain federal violent crimes and drug trafficking offenses. The bill would permit the attorney general to seek prosecution as adults for certain 13-year-old offenders, and authorizes $1.5 billion in grants to states in exchange for state efforts to send more juveniles to adult courts for trial. The bill would require that those individuals be housed in facilities where they would not be in regular contact with adults. It would also permit states to use the grant funds to reduce recidivism rates. H.R.3 passed the full House on May 8, 1997.

A similar juvenile justice bill, S.10, is being debated in the Senate. The ABA opposes S.10 as well as H.R.3. S.10 provides that juveniles as young as 14 may be tried as adults for certain crimes at the sole and nonreviewable discretion of prosecutors. While the ABA believes that some juveniles who commit violent crimes should be tried as adults, that determination should be a judicial one, following a hearing on the issue held by a juvenile judge. Further, the ABA believes that only juveniles aged 15 or older should be considered for adult prosecution.

S.10 also lowers the minimum age for the federal death penalty from 18 to 16. The ABA is opposed to the imposition of the death penalty for any offense committed by a person under the age of 18. The bill would eliminate three of the four mandates on states under the Juvenile Justice and Delinquency Prevention Act (JJDPA). Those three mandates are: (1) deinstitutionalize status offenders; (2) remove juveniles from adult jails and lockups; and (3) make efforts to reduce disproportionate minority confinement.

The ABA juvenile justice policy is based upon the Institute of Judicial Administra-tion/American Bar Association Juvenile Justice Standards, which were carefully developed over a period of nine years through the contribution of judges, prosecutors, defenders, academics, and other justice officials. These standards represent long-term thinking on juvenile justice, and H.R.3 and S.10 will do much to undermine those standards.

Flag-Burning Amendment Passes the House

H.J.Res. 54, a proposed constitutional amendment to ban the desecration of the American flag, passed the House on June 12, 1997, by a vote of 310-114, a majority vote well above the two-thirds needed to adopt a constitutional amendment. This is the third time Congress has tried to pass such an amendment since a 1989 Supreme Court decision held that burning the U.S. flag was protected speech. The last time the amendment failed passage was two years ago, when the Senate failed to gain the necessary two-thirds majority by three votes.

H.J.Res. 54 differs from previous measures in that it designates Congress as the sole legislative body for protecting the national flag. Previous measures gave both Congress and the states the power to prohibit the physical desecration of the flag.

The ABA recognizes that flag desecration is abhorrent but believes the proposed amendment is an unwarranted restriction on freedom of speech and expression guaranteed by the First Amendment. President Lee Cooper wrote to House members on June 10, 1997, urging them to vote against the amendment, stating that it was unnecessary, unwise, and should be rejected. He went on to say that the "restriction in the proposed amendment would only suppress the very speech the First Amendment is designed to protect: peaceful, but offensive expressions of political dissent or protest."

His letter also quoted the Supreme Court position that "If there is a bedrock principle underlying the First Amendment, it is that Government may not prohibit the expression of an idea simply because society finds the idea itself offensive or disagreeable." Whether this amendment will obtain the necessary two-thirds vote in the Senate is difficult to predict. At this time, there is no comparable legislation introduced in the Senate.

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