Removing 2057 from the Code

Kelly A. Moore (Assistant Professor of Law, University of Toledo College of Law) recently published his essay entitled Will the Applicable Exclusion Amount Tame Section 2057, Again?, 3 Est. Plan. & Community Prop. L.J. 13 (2010). An excerpt from the introduction is below:

In 1998, Congress enacted section 2057 of the Internal Revenue Code, providing certain owners of qualified family-owned business interests with a tailored estate tax deduction. The section 2057 deduction replaced the similarly focused 2033A exclusion, which had been added to the Code by the Taxpayer Relief Act of 1997 (TRA). The section 2033A exclusion was criticized as too complex and suffering from structural flaws. Section 2057 not only replaced the section 2033A exclusion with a deduction, but it better defined the limits of the deduction as compared to the exclusion-including the computational relationship of the deduction with the applicable exclusion amount.

At the time of enactment, the maximum potential benefit to an estate from a section 2057 deduction resulted in $675,000 of a decedent’s gross estate passing free of federal estate taxes, regardless of the applicable exclusion amount otherwise available to the estate under the estate tax. In 1998, if an estate could use the full section 2057 deduction and the applicable exclusion amount of $625,000, the estate shielded $1.3 million from the estate tax. The combined total benefit provided was possibly reduced by the interplay of the deduction limit and a special applicable exclusion amount calculation provided in section 2057. As a result of this interplay, the utility of the deduction diminished as the applicable exclusion amount available-absent a claim of a section 2057 deduction-increased.