The Senate Finance Committee will take up a bill tomorrow to defer one of the major tax "reforms" that Congress proudly passed in 1976 - a provision that would increase sharply the capital gains tax on the sale of inherited assets.
Congressional experts once estimated that this change in the law could bring the Treasury an extra $500 million a year by the early 1980s. Most of that money would come from taxpayers in the highest income brackets.
But the Senate committee is now expected to delay the effective date of the new provision for at least two years.
Congressional aides and indignant Treasury officials attribute this reversal in large part to a letter-writing campaign orchestrated by the outgoing chairman of the American Bar Association's tax section. At his urging, tax lawyers in five states wrote letters to their senators - all Finance Committee members - asking that the revision be deferred.
The five targets of the campaign are all Democrats - Spark M. Matsunaga (Hawaii), Mike Gravel (Alaska), Abraham A. Ribicoff (Conn.), Gaylord Nelson (Wis.) and Danel P. Moynihan (N.Y.)
"It has been very effective," one administration tax expert said ruefully - yesterday "We had a number of senators pledged to us who have fallen off.
The organizer of the letter writing was Chicago tax lawyer John S. Penell, who sent a letter on tax section stationery to tax lawyers in the five states, urging them to write their senators.
He did so despite a resolution adopted by the policymaking council of the tax section at a meeting here last Nov. 11, and subsequently published in the winter edition of the ABA's tax journal, The Tax Lawyer.
That resolution put the tax section on record as favoring steps to patch up the 1976 legislation, which all sides agree has a number of technical defects. But it says the chairman of the section "shall not take a position that the tax section is adamantly in favor of either outright repeal or deferral of the effective date of the . . . provisions."
The provisions involve the starting point from which a taxpayer figures his capital gain or taxable profit on the sale of an inherited asset.
Under the old law, this starting point, or a basis, was the value of the asset at the time of inheritance, not the price for which it was originally purchased. The asset's rise in value during the lifetime of the original buyer thus excaped taxation altogether.
Thus a father could buy a stock for 15 and its value could rise to $10 by the time of the father's death. His son and heir could then sell the stock for $11 a year later. The son would have to pay capital gains tax on only $1, not $6.
To close this "loophole," the 1976 Tax Reform Act included a new "carryover basis" rule. Under this rule, when a person inherited a share of stock or other asset, he also inherited the original purchase price as his basis in computing capital gain.
To lessen the immediate impact of this change, Congress also approved a "grandfather" clause, exempting gains that occurred before 1977. Thus, if a father died in 1980 and left his son stock acquired in 1940, and if the son then sold the stock, he would owe capital gains tax only on the stock's rise in value after Dec. 31, 1976.
pennell sad his only purpose in seeking deferral of the 1976 law was to allow time for a "calm and deliverate" study to determine if the "perceived problem" in the old tax law actually required reform, and whether the adopted reform was the best solution.
He denied having gone beyond his authority as chairman of the ABA tax section.
Pennell told Tax Analysts and Advocates, a tax revision group, that a "highly responsible individual on the Hill" told him it was important to alert the five target Democrats on the Finance Committee about the problems in the new carryover basis rules. Congressional sources have speculated this "responsible individual" was Sen. Harry F. Byrd (Ind.-Va.), a Finance Committee conservative. Pennell said in an interview that it was not Byrd, but would not say who it was.