Authored by: Michael C. Levy, Esq.

As 2010 approaches its halfway point, the currently repealed Federal Estate Tax seems to have fallen down the priority list in Congress.  With healthcare, financial regulation, jobs and immigration reform all taking precedence, the debate regarding resurrecting the estate tax has fallen silent.  Earlier this week, Senate Finance Chairman Max Baucus indicated that an estate tax fix may be in the offing, potentially tied to a bill related to taxes on small businesses.  But, with a third of the year over, what this “fix” will look like remains unclear.

One possibility is making the 2009 estate tax rates and exemption amount permanent, adjusted periodically for inflation.  As we previously discussed in our estate tax alert, several prominent members of Congress have suggested making this potential change retroactive so that it applies to persons who died in 2010 prior to any Congressional action.  It is unclear whether such retroactive taxation is constitutional and any fix that includes retroactive taxation could be challenged in court.  For most taxpayers, the cost and time it would take to pose such a challenge makes initiating a challenge to the law uneconomical.  However, for the families of two recent decedents, it may be worth the effort.

Glen W. Bell, the founder of Taco Bell, died in January less than three weeks after the estate tax was repealed.  Bell had sold his fast food Taco business to Pepsico in 1978 for $125 million and his estate, depending on how the sales proceeds were invested, could be worth significantly more today.  More recently, Texas billionaire Dan Duncan died, leaving behind an estate worth approximately $9 billion.  If Congress applies the estate tax retroactively, the fiduciaries of Bell or Duncan’s estate would have the means and the motivation to mount a challenge to the constitutionality of the retroactive fix.

Congress has very little time to act.  If the estate tax is reinstated retroactive to January 1st, the first estate tax return would be due on October 1st .  Retroactive taxation would become even more difficult to apply after that date.  Furthermore, with the Congressional mid-term elections upcoming, Senators and Representatives up for reelection might be hesitant to support any changes to the tax laws prior to November elections.  If Congress fails to act, the Federal Estate Tax will return with a $1 million exemption and a maximum tax rate of 55%, increasing the amount of estates that would owe tax.  Thus, while Congressional inaction at the end of 2009 cost the government billions in revenue to the benefit of those dying in 2010, continued inaction will shift the burden and cost of this failure to act onto the taxpayers in 2011.