Accounting Today, August 14, 2018
Jerry August discusses the long-awaited proposed regulations recently issued for Section 199A of the Tax Cuts and Jobs Act. Section 199A provides a 20 percent deduction on “qualified business income” of pass-through entities.
“The government did a good job of responding to practitioner concerns during the comment
period,” said August, “The regulations cover important definitional, computational and
anti-avoidance guidance. There are still open issues, and the government has requested
comments and scheduled a public hearing for Oct. 18, 2018.”
Jerald David August quoted in “New Corporate Tax Rate Has Hidden Catches”, The Trusted Professional
Posted on January 31, 2018
“The new tax law enacted in December swapped out a graduated corporate tax rate topping out at 35 percent with a flat 21 percent rate across the board. While this provision, combined with the elimination of the corporate alternative minimum tax (AMT), might seem to have simplified matters considerably, attorney Jerald David August, a tax partner at Kostelanetz & Fink, LLP, who spoke at the Foundation for Accounting Education’s conference “Impact of the New Tax Law: a Sid Kess Workshop” today, pointed out some complicating factors.
Speaking at the NYSSCPA’s Manhattan headquarters, August said that while the new corporate tax rate is, on paper, 21 percent, other taxes from before the bill’s passage and new limits imposed afterward can erode the benefits for certain companies. He conceded that it is tempting to suddenly turn into a C corporation, and that the potential tax savings “does invite, in fact requires, an assessment of whether C is better.” However, he said clients need to go into the process with both eyes open.
So for example, while the corporate AMT was eliminated, there’s a new Base Erosion and Anti-abuse Tax (BEAT) that, he said, effectively acts like an AMT for large corporations with over $500 million in gross receipts, based on global income. A company subject to the BEAT tax would need to add back to taxable income their current year deductions involving payments to related foreign persons (such as someone who owns at least 25 percent of the company’s stock), and then pay 10 percent of the resultant figure.
“So, we got rid of the corporate AMT, but for the real large companies, there is still a global minimum tax,” he said.
August also noted that corporate clients, even with a lowered income tax rate, will still need to contend with other taxes, such as the accumulated earnings tax. The accumulated earnings tax is a 20 percent levy on accumulated taxable income. Accumulated taxable income is taxable income (adjusted for things like charitable contributions and capital gains and losses) minus the sum of dividends paid in deduction and the accumulated earnings credit. It was developed to encourage corporations to distribute dividends versus sitting on cash.
“So the point here is if you go to the C corp. world, or if you’re already there, and clients love the idea of 21 percent, … you’re going to have to prime them about the accumulation of earnings in the C corporation and whether or not you have a reasonable needs of business defense once the accumulated earnings tax credit of $250,000 or $150,000 for personal service corporations, is exceeded based on prior taxable years,” he said.
The tax is targeted at earnings accumulated beyond the reasonable needs of the corporation’s business, as the law states that it applies to companies “formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.” Therefore, said August, if a company wants to switch to a C corporation, it will need to prove that its accumulated earnings are a response to a reasonable need.
Another tax he mentioned was the personal holding company tax. He noted that if a company is subject to the accumulated earnings tax, it is not subject to the personal holding company tax, and vice versa. The personal holding company tax applies to C corporations in which more than 50 percent of the outstanding stock is owned, directly or indirectly, by no more than five individuals, and which receive at least 60 percent of their adjusted ordinary gross income from passive sources. The tax rate on undistributed personal holding company income is 20 percent.
He said, however, that this tax might actually be one “you’d want to intentionally run into” because entities could claim deductions if they invest in preferred stocks, which require dividend payments.
He lamented what he said was a dearth of attention to these two taxes when everyone is excited about the new 21 percent corporate income tax rate. But he said there’s a lot that people don’t know just yet, adding that we are likely to see a boatload of guidance and technical corrections down the road.
“We really don’t know what we have yet. We think we know a lot. We have a lot of speculation of what was intended and not intended, what the conference report says and what it omitted to say, but we have this massive piece of clay, if you will, that hasn’t been carved down,” he said.”
Jerald David August quoted in the Tax Notes Article “Partnership Audit Transition Potentially Is ‘Tax Procedure Hell’”
Posted on June 21, 2017
By Nathan J. Richman & Andrew Velarde
The potential for court cases involving new and old partnership audit rules along with early opt-ins to the new rules and partnerships opting out “is my idea of tax procedure hell,” Tax Court Chief Judge L. Paige Marvel said June 16.
Speaking at the New York University School of Professional Studies Tax Controversy Forum in New York, Marvel said that for a long time after the new partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA) takes effect, the Tax Court will simultaneously have cases under the new rules, the old rules under the 1982 Tax Equity and Fiscal Responsibility Act, early opt-ins to the BBA, and partnership cases not subject to either the new or the old rules which must be tried at the partner level. She said that after 35 years, the Tax Court is still finding issues of first impression within TEFRA.
On June 13 the IRS and Treasury reproposed (REG-136118-15) the highly anticipated rules for implementing the BBA rules, which take effect on January 1, 2018. Those proposed rules are little changed from the rules originally proposed early this year and have reserved on a couple of key questions.
Marvel said that the BBA is “riddled” with issues that courts will have to address. The BBA is much less detailed than TEFRA, so “gaps in those procedures will either be filled by regulations or will end up coming before the court for the court to try and deal with a solution,” she said.
One of those gaps is the designation and powers of the partnership representative, Marvel said. For example, what would happen if a partnership representative files a partnership case and then disappears, perhaps because of a conflict of interest? she asked. “The statute doesn’t address those kinds of problems,” she said.
“It will be up to the court and the litigants to help fill in those holes,” Marvel said, “and we are not entirely sure how that is going to play out. We don’t know what the answers are.”
Marvel said that another issue with any statute giving the Tax Court new jurisdiction is the question of the standard of review. “We are all struggling with the issue of how to fit administrative law concepts into what we do as litigants and the court,” she said.
Kathryn Keneally of DLA Piper, a former assistant attorney general for the Justice Department Tax Division, asked Marvel what would happen if a Tax Court case has one year subject to TEFRA and one year subject to the BBA. “At that point in time, I think the judge who has that case is going to say ‘I am retiring,’” Marvel quipped.
A Bit More on Push Out Comments
Speaking on a later panel, Gregory Armstrong, branch 7 senior technician reviewer, IRS Office of Associate Chief Counsel (Procedure and Administration), echoed and expanded upon IRS remarks made on June 15 regarding seeking comments on pushing out through tiered partnerships under the new rules, an issue the proposed regs reserved on.
“I know there are a lot of ideas out there of how it would work. This is an area we would like to see comments; the more specific the better,” Armstrong said, noting that tax administration issues would have to be considered in drafting any rule. Armstrong cited comments made May 31 by the Texas Society of Certified Public Accountants as a good example of the type of specificity the IRS is looking for on the tiered issue.
“We strongly believe a pass-through partner who receives a statement described in proposed section 301.6226-2 should also have the option to flow the adjustment through to its owners instead of paying tax on the adjustment,” the comments state. “We could support a limit in the number of ultimate owners to 100 Schedule K-1 recipients for each intervening partnership to keep the process manageable, consistent with the elect-out part of the proposed regulations. We might also agree that the adjustment that flows through should be not less than a certain amount, say $10,000, so the IRS is assured someone pays the tax and it is not diluted away through tiers of partnerships to an insignificant amount.”
Jerald David August of Kostelanetz and Fink LLP said one of the main areas drafters of partnership agreements are grappling with under the new regime is the alternative methods of payments under the new regime and how those methods affect partners’ economics, their capital accounts, their outside basis, and the basis of partnership assets.
“When the partnership itself pays tax, how do we economically adjust the interest of the former partners who may no longer be partners for taxes that they are relieved of having to pay without committing a Commissioner v. Glenshaw Glass [Co., 348 U.S. 426 (1955)] realization event to them?” August asked.
August added that fiduciary duty of a non-partner partnership representative should also be covered in a partnership agreement.
“I do think if you have any leverage in your partnership agreement, you’re going to want the partnership representative to act as a fiduciary. If that person is exculpated or indemnified even for acts of gross negligence, et cetera, you’ve got to wonder what you have under this system. You have the czar of the partnership deciding what everybody else will eat, when everybody else will sleep, and when everyone else will exercise,” August said. He contrasted the new regime to TEFRA, which has rights to notice, participation, and intervention. “Here, due process is thrown to the wind,” he said.
Tax Court Case Numbers
On the earlier panel, Marvel said that while the Tax Court is seeing the normally varied influx of cases, there “seems to be a not insignificant downturn in the number of filings in the court.” In the last few years, the Tax Court has closed approximately 2,000 to 3,000 more cases than were filed each year, she said.
The Tax Court is currently seeing 3,000 to 4,000 fewer filings annually than in the recent past, Marvel said, adding that she has not seen a corresponding uptick in tax cases filed in the district courts or the Court of Federal Claims. “That means that as a general proposition, at least it means to me, that the number of cases coming out of the enforcement mechanism are lower than they have been historically,” she said. The result is not surprising, because of the “fairly amazing” cuts to the IRS budget in recent years, reducing its enforcement footprint, she said.
Keneally said, “The tax system is vital to this country, and the under-funding of the IRS is a problem for both sides — for both government enforcement and for practitioners — because we need to have clients’ issues addressed. And it is frustrating.”
JERALD DAVID AUGUST QUOTED IN BLOOMBERG ARTICLE, “AMID INVERSION CRACKDOWN, IRS BLESSES DELPHI’S BRITISH DOMICILE”
By Zachary Mider
On August 13th, 2016, Jerald David August, Partner at Kostelanetz & Fink LLP, was quoted in a Bloomberg News article that is now published online.
Excerpt from the “Unique Obstacles” section of the article:
The Delphi case may have presented unique obstacles, said Jerald David August, a partner at Kostelanetz & Fink LLP, a New York tax firm. The IRS may have worried that a loss in court would force it to revise a round of anti-inversion regulations from 2009, he said — or that the case would bring unwelcome attention to the administration’s own role in Delphi’s expatriation. The company shifted its tax address as part of the fallout from General Motors Co.’s 2009 bankruptcy and bailout, which were overseen by Obama’s administration.
“The government threw in the towel when it may have had a strong case to present to a court to review,” said August, who wasn’t involved in the case. “The stakes involved in presenting this issue for full review may have had other, non-tax repercussions.”
For their part, Delphi officials had always insisted their case was strong and pledged in securities filings to “vigorously” defend their position. On Wednesday, the company declined to comment beyond saying it’s “satisfied” with the IRS’s decision. The IRS also declined to comment.