Taxing Middle Class Trust(s)

Abstract

The Internal Revenue Code is, by all accounts, the Inequitable Revenue Code. The middle class bears a disproportionately high percentage of the overall tax burden, in part, because complex interactions of various provisions of the Code produce unintended results. Tax simplification addresses this aspect of inequity, and so it is a centerpiece of tax reform. Simplification itself,  however, can produce unintended complexity and exacerbate inequity if the drafting and interpretation of the simplification provisions are removed from the realities to which they will apply.
A prime example of unintended inequity brought about by tax simplification is section 67(e). Section 67 denies individuals  a deduction for specified expenditures (labeled “miscellaneous itemized deductions”) except to the extent that they exceed 2% of that individual’s adjusted gross income. Section 67(e) extends this “deduction reduction” to trusts except for expenditures that “. . . would not have been incurred if the property were not held in [trust].” The purpose of section 67(e), as its language suggests, was to assure that section 67’s “deduction reduction” could not be circumvented by placing income producing assets in trust. Yet section 67(e), as it is presently interpreted, affords a tax advantage to trusts established by taxpayers wealthy enough to accumulate income for future generations and at the same time disadvantages those who establish smaller trusts for non-tax purposes as well as outright owners.