Family business owners haven't quit dying just because Congress has failed to resolve the estate tax dilemma. And that has Midwest CPAs and tax attorneys who handle farm estates anxiety ridden and pleading for lawmakers to clarify how it plans to tax estates in 2010 and beyond.

"We're frustrated, indecisive and worried about malpractice," says Gary Streit, a CPA and estate tax attorney who heads the firm of Shuttleworth and Ingersoll in Cedar Rapids, Iowa. With political deadlocks on major controversies like health care and climate bills, Streit is losing faith that a quick resolution on what most considered a mildly controversial estate tax issue is even possible.

"I've given up thinking I can guess what Congress is going to do," he says.

Since the $3.5 million federal tax exemption on estates expired Jan. 1, estates have been hanging in a type of tax-free Twilight Zone. Congress might do something retroactively, then again, who knows. Theoretically, there's no federal estate tax on deaths in 2010, but a $1 million limit is scheduled to reappear in 2011--along with a higher tax rates on big estates--unless Congress acts. More important, inherited property no longer receives a "step up" in tax basis, essentially forgiving all the capital gains that occurred during the decedent's lifetime.

"Getting a new tax basis at death is vastly more important than action on federal estate taxes," tax attorney and Iowa State University professor emeritus Neil Harl told an ag audience last month. That provision "affects everyone up and down the income scale," he adds, while estate taxes have largely affected only a handful of wealthy individuals up to now. But the new carryover basis treatment "has not gotten the attention it deserved. When Congress passed this provision in 2001, there probably weren't five people in Congress who understood how important tax basis was," Harl says.

Take the predicament of an Indiana farm family: Their grandfather purchased farmland after World War II at a mere $116 per acre, and it's been in production ever since. Today they estimate it would sell at auction at around $4,500 per acre. Under current tax rules, they would owe capital gains based on the difference between the sales prices and the $116 basis, if they later sold the inherited property.

As a stop gap measure, IRS will allow estates to exempt the first $1.3 million in potential capital gains and an additional $3 million for a spouse. But this solution poses complex side effects for larger estates, based on the unknowns of future tax rates. Planners don't want to transfer $3 million to a surviving spouse now to temporarily solve the basis problem, only to expose the estate to a $1 million or higher estate tax obligation in 2011 or later, Streit says.

Documenting a decades-old tax basis also creates a paperwork nightmare for tax attorneys, Streit says. Stock and mutual fund splits are probably most cumbersome, but even land transactions pose issues. Generally title insurance policies or abstracts don't include purchase prices, so you'd need access to a deed to calculate sales prices based on the transfer tax at that time, Streit says.

If property was inherited through an estate, you'd need to get access to original court records. "We don't know what standard of care IRS will hold to taxpayers, but we'll reach a point of diminishing returns as legal fees increase," he says.

Until a few months ago, tax planners had been assured that Congress would simply extend the $3.5 million estate tax exemption and a maximum 45 percent tax rate past 2009. Now Streit says many Iowa farmers could find themselves in tax shock territory in 2011, should the $1 million tax exemption come to pass.

With Iowa farmland valued at $5,000 to $6,000 an acre, just average sized 600- to 700-acre farms could owe sizable federal estate taxes starting in 2011. Plus, another two dozen states still impose their own estate taxes. Family business owners and their advisers need tax clarification, Streit argues.

"If Congress would just tell us what they're going to do, we'll adjust," Streit says. "But holy moly, I don't know what to tell clients what to do at the moment. It's preposterous."

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