Congress Acts to Close Huge Tax Loophole

Senior tax writers in both the House and Senate, moving to close a $20-billion loophole inadvertently created by the new tax law, warned wealthy taxpayers Thursday that they will not be able to take advantage of the provision to avoid estate taxes.

In introducing a bill to clarify the estate tax provision, the top tax writers on the House Ways and Means and Senate Finance committees said any move to take advantage of the provision would be disqualified from the effective date--today--assuming that the bill is passed, as expected.

Congress often approves tax bills that actually go into effect from the time they were first introduced.

Under the provision as drafted, Ways and Means Chairman Dan Rostenkowski (D-Ill.) said: “This estate tax deduction is significantly broader than what was originally contemplated by Congress.”

Unless the loophole is closed, employee stock plans--called ESOPs--could be used as huge tax shelters by almost any wealthy individual to avoid estate taxes. The law contains practically no restrictions on using the provision, which would allow the trustees of an estate to deduct from the taxable value of the estate half the proceeds from any sale of stock to an ESOP.

Raised Cost Estimate

As originally estimated, tax writers thought the obscure provision would cost only about $300 million in revenue over five years. They estimated last month, however, that it could cost as much as $20 billion over the same period.

Last month, soon after the mistake was discovered, the Internal Revenue Service moved to narrow the preference. That would have limited the revenue loss to about $7 billion, but the IRS faced a possible court challenge on the grounds that its administrative ruling goes well beyond the law’s actual wording and the congressional committee report explaining the bill.

The Reagan Administration also encouraged lawmakers to introduce the emergency legislation dealing with the issue, sharing the worry that the provision would foster a massive, unexpected drain in tax revenue that would widen the federal deficit.