It Is Time To First Reconsider And Then Enact Into Law Senator Wyden’s Partnership Tax Reforms
January 13, 2023
by Monte A. Jackel
The taxation of partnerships and partners, or more appropriately, the lack thereof, has been in the news lately. (See “Wyden Statement on Ways & Means Investigation of Presidential Audit Program,” Dec. 21, 2022.) As Senator Wyden recently stated in his reported comments on the House report on presidential audits:
“Donald Trump’s tax returns exemplify the shortcomings of our tax code and consequences of Republicans’ decades-long fight to gut the IRS….These are issues much bigger than Donald Trump. Trump’s returns likely look similar to those of many other wealthy tax cheats — hundreds of partnership interests, highly-questionable deductions, and debts that can be shifted around to wipe out tax liabilities….All of this goes completely unchecked when you’re more likely to get struck by lightning than have your hundreds of partnerships audited. This is why we’ve fought to give the IRS the resources it needs. It takes skilled examiners to review these types of returns, and the agency needs the staff to go up against the armies of accountants and lawyers the wealthy have at their disposal….Additional IRS resources are only one piece of the puzzle. We need legislation to simplify the tax code, particularly in the area of partnerships. [The Wyden partnership proposals]. Former Commissioner Rettig testified that the IRS is completely outgunned in this area. Putting an end to the games wealthy tax cheats play with their partnerships is going to be a priority going forward.”
I have written about this subject in Tax Notes Federal (behind the Tax Analysts’ paywall) several times, both before and after the introduction of the Wyden partnership proposals in the fall of 2021. (See “Wyden Unveils Proposal To Close Loopholes Allowing Wealthy Investors, Mega-Corporations To Use Partnerships To Avoid Paying Tax”, Sept. 10, 2021.) I first broached the topic of necessary partnership reform in an article published there on March 29, 2021. (See “Is It (Finally) Time? Reforming Subchapter K”, Tax Notes Federal, Mar. 29, 2021, p.2031.) This article preceded the Wyden partnership proposals and argued, based on a long public record of debates by many academics on the subject over a number of decades, that partnership reform was desperately needed.
There was then published a letter to the editor of Tax Notes Federal on October 25, 2021, responding to the introduction of the Wyden partnership proposals. (See “Wyden Partnership Proposals Should Become Law”, Tax Notes Federal, Oct. 25, 2021, p. 527.) After it became clear that the Wyden partnership proposals in their detailed form would not make it into law at that time, I suggested in a follow-up letter to the editor of Tax Notes Federal that a shortened version of those proposals could still be enacted. (See “Proposals for Limited Subchapter K Reform in Reconciliation Bill”, Tax Notes Federal, Nov. 1, 2021, p.681.) No legislative action followed up on those suggestions at that time.
There was then a year-end follow up article in Tax Notes Federal once again advocating for the Wyden partnership proposals to become law. (See “New Wyden Partnership Tax Proposals Deserve Consideration”, Tax Notes Federal, Dec. 20, 2021, p. 1709. This article contained an extensive commentary and analysis of the proposals and advocated for their enactment into law after some refinements and related matters were added to the proposals.
Entering 2022, there were some indications from the IRS that more targeted partnership tax reform was desperately needed. This targeted reform was to be directed to both basis shifting (and related basis strips), and to the use of high-tax low value partnership interests to create very large uneconomic basis step-ups on the non-recognition transfer of those partnership interests to related parties. In response, there followed two separate articles in Tax Notes Federal on those specific targeted reform proposals. (On basis shifting and basis strips, see “Partnership Basis Shifting: A Desperate Need for Immediate Reform”, Tax Notes Federal, Feb. 14, 2022, p. 961; and on uneconomic basis step-ups, see “Disallow Uneconomic Partnership Special Basis”, Nov. 7, 2022, p. 831.)
It has been argued by some that one key takeaway from the public exposure of certain of the Trump tax returns is to establish the need to both fund and increase the IRS auditing of complex partnership tax returns. (See Washington Post guest op-ed by Steven M. Rosenthal of the Urban Institute entitled “Trump’s taxes are Exhibit A in the case for why the IRS needs a big upgrade”, Jan. 3. 2023.) Another takeaway, some have also argued, is the need for partnership tax reform to be enacted into law. ( Id. See, also, “The Key Lesson To Be Learned From Trump’s Tax Returns: A Response To The NY Times”, Jan. 2. 2023, at jackeltaxlaw.medium.com; Lee A. Sheppard, “Analyzing Trump’s Tax Returns”, Tax Notes Federal, Jan. 9, 2023, p. 181.)
When the public sees a very wealthy man pay little to no taxes in a particular year, then thoughts of unfairness of the tax code toward labor and the code’s very pronounced bias in favor of capital rear its ugly head once again. The public starts to lose confidence in the tax system as a result and noncompliance likely results.
Partnership tax reform would go a long way in helping to restore public confidence in the fairness of the tax code. And it is long overdue regardless of Mr. Trump but it is even more overdue because of Mr. Trump. There is no other way to say it.
The first time the Wyden partnership proposals were introduced, they were immediately attacked and vilified by most of those in either private practice, the bar and accounting associations and multiple business groups. Constructive comments were very much lacking; destructive comments were the order of the day. I realize that gain only comes with pain. And so, a re-introduction of those proposals is very likely to generate more negative commentary from those with vested interests in the status quo.
I truly hope that the proposals are re-introduced in short order and despite the blowback I expect, they should be enacted into law after public comment is taken into account.
I stand ready to help achieve that goal.