Earlier this year I discussed President Joe Biden’s proposed tax policies, which was prepared in anticipation of President Biden’s impending announcement regarding the Build Back Better Act. As we approach the end of the Biden administration’s first year, tax professionals are on the edge of their seat. A plethora of different legislative changes directed at what seems like every aspect of taxation have been proposed this year. Perhaps the piece of legislation most dreaded by tax professionals, the Build Back Better Act, has recently been released by the United States House of Representatives (“House”) in a revised bill (“Revised Bill”). Fortunately for tax professionals and taxpayers alike, the Revised Bill seems to have had some of its sharpest teeth removed.
Brief Legislative History and Current Political Posture
The Build Back Better Act is a part of the Build Back Better Framework, which is touted as “President Biden’s Plan to Rebuild the Middle Class” by the White House website. It was spun off from the American Jobs Plan, along with the $1.2 trillion bipartisan Infrastructure Investment and Jobs Act, as a $3.5 trillion reconciliation package that included provisions related to climate change, family aid, and expansions to Medicare. On October 28, 2021, after months of negotiations, President Biden released his revised framework to help guide the drafting of the legislative language for the Build Back Better Act, with a newly negotiated budget of $1.85 trillion. That same day the House Rules Committee released a bill and a summary of the same. The House Rules Committee then released the Revised Bill on November 3.
While the Infrastructure Investment and Jobs Act was passed by the United States Senate (“Senate”) in August of this year, democrats in the House were recently insisting on voting on both pieces of legislation at once, ostensibly to use the momentum from the Senate passage of the Infrastructure Investment and Jobs Act to pass both pieces. However, a group of five conservative democrats refused to support the Revised Bill without revenue and cost scores. This led to the November 5, 2021 intra-party compromise between House democrats whereby progressives agreed to pass the Infrastructure Investment and Jobs Act and moderates promised to vote for the Revised Bill after an estimate about the bill’s price is completed. In a statement given before the November 5 vote, President Biden said, “I am confident that during the week of November 15, the House will pass the Build Back Better Act.”
The Extracted Teeth
Grantor Trust Changes
The piece of proposed tax reform most dreaded by estate planners is likely the changes to grantor trusts. Many current estate planning strategies revolve around the use of grantor trusts, such as sales to grantor trusts which remove assets from the taxpayer’s estate while not triggering income taxation, swapping around assets based on their adjusted basis via a grantor’s retained power of substitution, and the use of irrevocable life insurance trusts which are generally grantor trusts due to the ability to pay premiums with income. An amendment proposed by the House Ways and Means Committee on September 12 to a previous version of the Build Back Better Act attempted to make several changes to grantor trusts such as: to cause inclusion of the value of the trust assets in the grantor’s gross taxable estate upon death; to treat “contributions” (including sales) by a grantor to the grantor trust as taxable transactions; and to treat distributions from the trust (other than to the grantor or the grantor’s spouse) to one or more beneficiaries during the life of the grantor as a transfer by gift for purposes of Chapter 12. While these changes could have been weathered, given that estate planners would still have non-grantor trusts as an option going forward, these changes have been dropped in the Revised Bill.
Conservation Easement Changes
The same amendment which proposed to change the grantor tax rules also proposed a retroactive disallowance of tax benefits related to syndicated conservation easement transactions. The proposed change would have denied a Section 170 charitable contribution deduction if the value of the charitable deduction exceeds 2.5 times the taxpayer’s relevant basis in the passthrough entity that donated the easement. While these types of transactions are clearly the subject of much resentment by the IRS (such deals are listed on the IRS Dirty Dozen List, which I summarized a few months ago, also see Josh Sage’s article discussing the TOT Property case), it would seem that Congress is not ready to tackle the issue, given that the previously proposed changes related to syndicated conservation easements are not present in the Revised Bill.
Tax Rate Changes
A plethora of top tax rate changes have been proposed and revised throughout the life of the American Jobs Plan and its two spin-off acts. These include raising the top corporate rate from 21% to 28%, then 26.5% and the top capital gains from 20% to 39.6%, then 25%. Fortunately for taxpayers, neither rate increase made it into the Revised Bill.
Estate and Gift Tax Exemption Changes
A certain amount of each individual’s estate, $5 million in 2011, indexed for inflation, is exempted from taxation by the federal government. In 2017 the exemption amount was temporarily doubled, such that with inflation adjustments, the exemption is $11.7 million in 2021. This temporary doubling of the exemption expires after 2025. Previous versions of the Build Back Better Act proposed reverting the temporary doubling from its current expiration beginning in 2026 to the beginning of 2022, but that provision is absent from the Revised Bill.
A Few Additions
While not included in previous drafts of the Build Back Better Act, the Revised Bill also proposes to increase the deductibility of state and local income taxes on individuals’ federal income tax return, a change highly requested by states with a very high state income tax (such as California and New York). The Revised Bill would amend Section 164(b) to increase the deduction cap on state and local taxes from $5,000 for taxpayers married individuals filling separately ($10,000 for single taxpayers, married filing jointly, trusts, and estates) to $36,250 for married filing separately, trusts, and estates ($72,500 for single and married filing jointly) through 2031.
Similarly not included in a previous version of the Build Back Better Act is the “Billionaire Tax” proposed by Senate Finance Committee Chair Ron Wyden’s in late October, which is not included in the Revised Bill.
While much of the bite was taken out of the Revised Bill, it seems to at least have some teeth with which to raise revenue.
Expansion of 3.8 NIIT
High-income individuals are subject to a 3.8% Medicare tax on their wages and self-employment income. Section 1411 acts as a parallel 3.8% tax on the net investment income for high income individuals (“NIIT”). There is however a significant loophole to the NIIT, certain income of high-income individuals who own pass-through businesses (such as partnerships and S corporations) is not subject to either 3.8% tax. This gives high-income professionals a significant incentive to recharacterize their income, or rearrange their business structure, to avoid both taxes.
The Revised Bill amends Section 1411 to expand the NIIT to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income for those filling as single ($500,000 for married filing jointly). For trusts and estates, however, the newly expanded NIIT threshold is a mere $13,050. The provision clarifies that this tax is not assessed on wages on which FICA is already imposed.
Surtax on the Ultrawealthy
The Revised Bill adds Section lA, which imposes a tax equal to the sum of 5% of a taxpayer’s modified adjusted gross income that exceeds $5 million for taxpayers filing as single ($10 million for a married filing jointly) plus 3% of the taxpayer’s modified adjusted gross income that exceeds $12,500,000 ($25,000,000 for married filing jointly). For trusts and estates, the thresholds are $200,000 and $500,000, for the 5% and 8% taxes respectively, with a carveout for charitable trusts. For purposes of this new Section 1A, modified adjusted gross income means adjusted gross income reduced by any deduction allowed for investment interest and business interest.
This surtax applies before most deductions are taken into account and would apply to a broad range of income for applicable taxpayers, including realized capital gains, dividends, pass-through income, and ordinary income. Thus, this surtax might be seen as a middle ground for legislators with regard to the preferential treatment for carried interests (for more details see Gray Edmondson’s article from earlier this year discussing the Section 1061 final regulations).
Corporate Minimum Tax on Book Income?
The Revised Bill amends Section 55 to implement a new alternative minimum tax (“AMT”), whereby a 15% minimum tax would be imposed on C corporations with adjusted financial statement income (“AFSI”) in excess of $1 billion. Under the provision, an applicable corporation’s minimum tax is equal to the amount by which the tentative minimum tax exceeds the corporation’s regular tax for the year. Tentative minimum tax is determined by applying a 15% tax rate to the AFSI of the corporation for the tax year (after accounting for the AMT foreign tax credit and the financial statement net operating losses).
For the purpose of the amended Section 55, AFSI is the net income or loss of the taxpayer stated on the taxpayer’s applicable financial statement with certain modifications. This use of AFSI as a basis for taxation is completely contrary to the normal use of taxable income, especially given that the two different forms of income use separate accounting methods with opposite goals. Financial accounting generally focuses on maximizing income to make companies look more profitable, whereas tax accounting generally focuses on minimizing income to reduce tax liabilities.
This has certainly been an interesting year for proposed tax legislation, and the Build Back Better Act contributes to much of the uncertainty. While some of the proposed changes in previous versions were especially concerning, specifically the grantor trust revisions for estate planners, the Revised Bill is currently in a place that most taxpayers and practitioners can live with. I am personally interested to see how the corporate minimum tax based on a modified book income will function in practice. Given that estimated cost numbers are expected to be available in two weeks, the Revised Bill could be very close to a version eventually passed by the House. It will be interesting to see how much changes between the Revised Bill and whatever final version is ultimately enacted into law.
 Devin Mills, Update on President Joe Biden’s Proposed Tax Policies (April 28, 2021), https://esapllc.com/biden-tax-update-april2021/#_ftnref6.
 Caitlin Emma and Jennifer Scholtes, Democrats unveil $3.5T go-it-alone plan to fulfill Biden’s agenda (July 13, 2021), https://www.politico.com/news/2021/07/13/democrats-spending-plan-biden-agenda-499593.
 President Biden Announces the Build Back Better Framework (October 28, 2021),
 Full language of the bill can be found at:
 House Rules Committee summary can be found at:
 Full language of the Revised Bill can be found at:
 Catie Edmondson and Jonathan Weisman, Progressives withhold their support for the $1 trillion infrastructure bill, demanding more tangible progress (October 28, 2021),
 Sahil Kapur, Leigh Ann Caldwell and Rebecca Shabad, Democrats clear procedural hurdle for Biden’s $1.75 trillion social spending bill (November 5, 2021), https://www.nbcnews.com/politics/congress/democrats-eye-friday-vote-biden-s-spending-bills-still-wrangling-n1283353.
 Note that there was an exception for trusts established before the proposed effective date, such that those grandfathered trusts could potentially avoid this inclusion, depending on how those trusts were handled going forward.
 Joshua W. Sage, Deny It Like It’s TOT – Conservation Easement Denial Upheld (July 19, 2021), https://www.esapllc.com/tot-property-11thcir-2021/.
 (P.L. 115-97).
 Bill Section 137601.
 Code Sec. 1411.
 Bill Section 138201.
 Bill Section 138201.
 as defined in Code Sec. 163(d).
 as defined in Code Sec. 163(j).
 S. Gray Edmondson, IRS Issues Carried Interest Final Regulations (January 27, 2021), https://esapllc.com/carried-interest-final-regulations2021/.