Please join me on June 29, 2017 in Portland, Oregon, for what will be a dynamic presentation on the new partnership audit rules by Jerald August. Jerry is a Partner in the preeminent New York City-based boutique tax firm Kostelanetz & Fink, LLP. He has served as a chair of NYU's Institute on Federal Taxation for a number of years and specializes in federal and state income taxation, including taxation of pass-thru entities and tax controversy. Jerry is not only one of the brightest tax lawyers you will ever meet, he is an outstanding speaker. We are very fortunate to have him present at the Portland Tax Forum on this important topic. We all need to learn about the new partnership audit rules – they come into play on January 1, 2018.
Please join me at the NYU Summer Institute in Taxation this July in New York City. This year, I will be presenting "Entity Classification – Another Look at the Check-the-Box Regulations" on Day 2 (July 27) of the Institute’s Advanced Income Tax and Wealth Planning Conference, where I will discuss recent developments, flexibility and planning opportunities created by the regulations, traps that exist for the unwary, and practical tax practitioner guidance.
As reported in my January 20, 2015 blog post, the IRS continues to take strong blows to its body in terms of budget setbacks. President Obama, however, as part of his administration’s 2016 budget proposal issued on February 2, 2015, plans to end some of the pain being imposed on the Service. His budget proposal, if enacted, would infuse over $12.9 billion into the Service’s coffers during fiscal year 2016. This represents an increase of approximately $2 billion over the fiscal year 2015 IRS budget.
The budget enhancement proposed by President Obama is targeted to be used for many worthy efforts, including enhancing taxpayer service, enhancing information technology (e.g., creating and implementing a new online tax filing system and taxpayer payment options), and improving the Service’s tax compliance/enforcement capabilities.
These budget expenses are clearly worthy. Consequently, it is difficult to debate enhancing the IRS budget in this manner. The $2 billion query that follows, however, is where our government will get the additional revenue to fund this cause. Unless other government agency budgets get slashed, the answer to this question most certainly has to be tax increases. This is not an acceptable answer for most taxpayers and lawmakers. It will be interesting to see what lawmakers do with this portion of the President’s budget proposal.
Stay tuned for further commentary on the President’s 2016 fiscal year budget proposal.
President Obama’s 2016 budget proposal includes provisions which, in the aggregate, increase income tax revenues by approximately $650 billion over 10 years. At least three of the proposed tax increases will be of concern to a broad spectrum of taxpayers:
1. President Obama proposes to increase both capital gains and dividend tax rates to 28%. This rate hike will apply to many taxpayers. It represents an increase of approximately 40% over the previous rate of 20% that came into play in 2013, and an increase of approximately 87% over the previous rate of 15% that we enjoyed from 2003 to 2013.
2. President Obama proposes to abolish a taxpayer’s ability to obtain a basis step-up upon receipt of an asset from a bequest. Also, he proposes that bequests and gifts be treated as realization events, triggering a capital gains tax. His proposal also provides that decedents would be allowed a $200,000 per couple ($100,000 per individual) exclusion for capital gains. There would be a separate exclusion of $500,000 per couple ($250,000 per individual) for personal residences. The President proposes to exclude tangible personal property and family-owned and operated businesses from this tax change.
3. President Obama proposes to return the estate tax rules to the 2009 laws. This would result in the unified credit being reduced from the current $5.43 million level (indexed for inflation) to a $3.5 million level (without an inflation index).
These three changes to the income tax code alone would raise $208 billion over 10 years. Time will tell whether lawmakers will enact this part of the President’s budget proposal. While these provisions will certainly raise tax revenues, they appear to be counter to the administration’s goal of creating a “simpler, fairer and more efficient tax system.” If these proposals are pushed forward, the President’s budget proposal will likely face significant turbulence.
On February 2, 2015, President Obama published his 2016 budget proposal. It proclaims that “[a] simpler, fairer, and more efficient tax system is critical to achieving many of the President’s fiscal and economic goals.” While some tax practitioners may debate the claim that the tax provisions embedded in the President’s budget proposal make the tax system simpler, it is a certainty that a significant number of tax practitioners will question the fairness of these provisions.
As in the past, the President’s budget proposes that “wealthy millionaires” pay no less than 30% of their income in federal income taxes. To facilitate accomplishing that goal, President Obama suggests these taxpayers be prevented from making charitable contributions to reduce their tax liability. He states: “…this proposal will act as a backstop to prevent high-income households from using tax preferences to reduce their total tax bills to less than what many middle class families pay.”
This provision of the budget proposal will definitely not receive broad support from the charitable organization community. Taking away the tax deduction resulting from charitable contributions certainly does not motivate taxpayers to transfer their wealth to charities.
Whether a charitable contribution deduction is a tax preference item is open to debate. A charitable contribution certainly does not seem to be “a tax preference” item. All taxpayers generally benefit in the same manner by this deduction. Shouldn’t taxpayers receive a tax deduction for wealth transfers to charities? Don’t we want to incentivize taxpayers to fund charitable needs through contributions? Eliminating this deduction for certain taxpayers may generate billions of dollars of tax revenues, but it will definitely impair charitable organizations from obtaining much needed funding. For this reason alone, hopefully lawmakers will resist removing the charitable contribution deduction from the tax code.
Contributions To College Athletic Programs
College sports fans—whether you are wealthy or not—buried in the President’s budget proposal is a provision that eliminates the deductibility of the charitable contribution you are required to make as a pre-requisite to purchasing tickets for college sporting events. Most colleges will not be pleased with this proposal! While President Obama has talked about this type of tax reform in the past, this is the first time we have seen it in one of his budget proposals. The provision, if enacted into law, is estimated to generate over $2.546 billion in tax revenues during the period of 2016-2025. Like the elimination of the charitable deduction for “wealthy” taxpayers, this provision will result in charities being the biggest losers.
Stay tuned! Time will tell whether lawmakers will adopt these proposals.
Larry J. Brant is a Shareholder in Garvey Schubert Barer, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; New York, New York; Washington, D.C.; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- "Evaluating the Built-in Gains Tax for C to S Conversions After TCJA," New York University Summer Institute in Taxation – Advanced Conference on Subchapter SNew York, NY, 7.26.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationNew York, NY, 10.21.18-10.26.18
- "The Tax Cuts and Jobs Act – What It May Mean to Your Clients," Estate Planning Council of Portland Mini-SeminarPortland, OR, 11.7.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationSan Diego, CA, 11.11.18-11.16.18