White House drops capital gains indexing

Tax Hot Topics newsletterThe White House stated last week that the Trump administration will not seek to take executive action to index capital gains to inflation, but President Donald Trump’s history of flip-flopping on the issue means it could always be resurrected.

The White House announcement comes after Trump praised the idea in August, then seemed to completely dismiss it a day later, only to reopen the debate in a tweet a week later. The announcement followed a White House meeting meant to finally resolve the question.

The idea first surfaced last fall, but quickly faded after questions emerged over Treasury’s authority to enact such a policy through rulemaking. With the 2020 election drawing closer, the opportunity to deliver another tax break without having to go through Congress appeared to rekindle Trump’s interest. His administration was split on the issue, which may explain Trump’s wavering. Although the White House announcement appears to put the idea to bed, enough supporters remain that is seems possible Trump could consider it again in the future.

Twenty-one Republican senators have sought to give Trump cover on the issue, urging Treasury Secretary Steven Mnuchin to move forward with the proposal in a letter sent on July 29. Democrats have been just as vocal in opposition. Forty-two Democratic senators also signed a letter to Mnuchin in August expressing disapproval for the idea. They argued it would be a $100 billion handout to wealthy taxpayers. They also asserted that Treasury does not have the authority to index capital gains to inflation through regulation, citing the conclusion on the issue by the George H.W. Bush administration in 1992.

Under the Bush proposal, Treasury would have issued regulations interpreting “cost” under Section 1012 to mean the price paid adjusted for inflation. The administration analyzed whether the definition of the term “cost” in the statute was ambiguous enough to grant judicial deference to regulations on the issue. Treasury and the Department of Justice ultimately agreed that it was not and Treasury did not have the authority to make the ruling.

Proponents of indexing capital gains to inflation argue that legal developments in the years since, including Supreme Court decisions on the deference for tax regulations, would now allow Treasury to implement the policy.

It’s uncertain whether the regulations could be drafted and finalized through the formal rulemaking process in time to take effect before the election, especially if there are legal challenges to Treasury’s authority to write them. Using the rulemaking process also raises the possibility that a new administration could repeal the regulations just as easily as they were implemented.

Dustin Stamper
Managing Director
Washington National Tax Office
T +1 202 861 4144

Omair Taher
Senior Associate
Washington National Tax Office
T +1 202 861 4143

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.