ENTITY LEVEL SALT TAXES ONCE AGAIN
November 12, 2020
by Monte A. Jackel
Notice 2020-75, issued a few days ago, held that the so-called SALT workarounds using state laws that allow the partners to cause the partnership entity to incur an entity level income tax with a credit at the partner level, are true entity level taxes and that the SALT limitation of section 164 as amended by the TCJA, does not apply. This notice is undoubtedly incorrect without it first containing an analysis as to why these types of taxes are, or are not, withholding taxes. See https://www.taxnotes.com/tax-notes-today-federal/exemptions-and-deductions/danger-ahead-irs-greenlights-passthrough-workaround-salt-cap/2020/11/12/2d664. If they are withholding taxes then, under the U.S. Supreme Court precedent of Old Colony, 279 U.S. 716 (1929), the entity is paying its partners’ shares of an obligation, in that case personal income taxes paid by an employer, and there is a deemed distribution to the partners which renders irrelevant the distributive share analysis of both the notice, the revenue rulings, and the 2019 paper referenced in the Tax Notes story. See https://www.linkedin.com/feed/update/urn:li:activity:6732628303112486912/. As U.S. Supreme Court precedent, which has been applied to many other obligations other than taxes, if these SALT entity taxes are indeed advance payments of the partner level income tax then those payments are a distribution and the partners are treated as paying the tax-not the partnership or S corporation.
No matter how “noble” providing the notice 2020-75 guidance is or may be perceived to be, it is just not good practice in my view, to say it nicely, to “sidestep” U.S. Supreme Court precedent. Tax policy honestly applied must surely take U.S. Supreme Court precedent into account when it can be relevant. Now, one can possibly argue that the entity level SALT tax is not in satisfaction of the partners’ legal obligations but the structure of these state SALT taxes are that no credit or exemption or exclusion would be allowed at the partner level for the entity tax if it was not paid by the entity. The same may or may not have been true in the revenue rulings that are favorably cited dealing with various state taxes “imposed” on the entity where separate statement treatment was not required, such as Rev. Rul. 58-25, which does not discuss what would happen if the partnership did not pay the tax. Each SALT entity state tax would have a non-tax law dealing with transferee liability-where the obligation to pay a true entity level tax, where the partners would not otherwise be liable if the entity did not pay the tax, follows to who receives partnership or S corporation actual money or property distributions. That is the hard question at the root of all of this. Why was it not analyzed?