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Potential Constitutional Challenge: Biden Budget Proposes Mark-to-Market for High-Net-Worth Individuals

In President Biden’s State of the Union address, he called on all Americans to pay their “fair share.” The Treasury Department’s General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals (the “Greenbook,” available here) contains several proposals aimed at addressing this goal. One significant proposal would apply a minimum tax (with an embedded mark-to-market component) on high-net-worth taxpayers, essentially departing from the historic tax norm of requiring a realization event. Other proposals take a more traditional approach to revenue raising by adjusting tax rates and eliminating the preferential treatment for capital gains.  

As previously reported here, various legislative proposals targeting high-net-worth individuals have been introduced at both the federal and state level in recent years. See, e.g., recent New York state legislative proposals to increase personal income tax rates here and here. The Greenbook carries on this trend by making various proposals based on gradations of a taxpayer’s income or net worth. As elaborated on in the Greenbook, some of the Biden Administration’s more noteworthy proposals would:

  • Impose a 25% minimum tax on income (with an embedded mark-to-market component) on taxpayers with a net worth greater than $100 million. This proposal would eliminate income deferral on unrealized gains for subject taxpayers by effectively forcing a periodic mark-to-market without any realization event for appreciated assets. While illiquid assets would not need yearly valuations, correlative rules would provide estimates, which would be used between actual valuation dates. For the first year, the taxpayer could pay its tax in nine equal annual installments. The minimum tax paid would be credited against future regular taxes paid on the taxpayer’s income (which would include income generated by actual realization events in respect of the appreciated assets).  
  • Eliminate capital gains rates for high earners and gain deferral on certain gifts or transfers at death. This proposal would tax long-term capital gains for taxpayers with income in excess of $1 million at the highest ordinary tax rate (e.g., effectively raising the marginal capital gains tax rate from 23.8% to 40.8%, each inclusive of the net investment income tax). The proposal would also trigger gain on certain gifts or transfers at death, which historically have been treated as nonrecognition events. Importantly, in treating death as a recognition event, the proposal would effectively eliminate the ability of a taxpayer to shield appreciated assets from income taxation by using the so-called stepped-up basis rules whereby the adjusted basis of a decedent’s property in the hands of a transferee is increased to its fair market value at the time of the decedent’s death.
  • Expand the Net Investment Income Tax (“NIIT”) and increase to 5%. This proposal would broaden the NIIT base, thereby curtailing the use of pass-through entities to eliminate the 3.8% NIIT on an owner’s earnings (e.g., limited partners effectively claiming statutory exemptions from self-employment taxes on partnership distributions). Additionally, a separate proposal would increase the NIIT from 3.8% to 5% for taxpayers with more than $400,000 of earnings (the 3.8% rate would still apply for taxpayers with greater than $200,000 of earnings but less than $400,000).
  • Increase the top marginal income tax rate from 37% to 39.6%. This proposal to increase the top marginal income tax rate may further exacerbate tax liabilities for high earners depending on whether other Biden tax proposals were also enacted, such as the elimination of capital gains rates for high earners, as well as the expansion of the NIIT.

Key Contacts

Linda Z. Swartz
T. +1 212 504 6062


Adam Blakemore
T. +44 (0) 20 7170 8697

Jon Brose
T. +1 212 504 6376

Andrew Carlon
T. +1 212 504 6378

Mark P. Howe
T. +1 202 862 2236

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