From: Nitti Gritty Tax By Tony Nitti @ Forbes - Wednesday Mar 31, 2021 02:33 pm
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Nitti Gritty Tax
Tony Nitti
Tony Nitti
Senior Contributor
If you're one of those folks who tends to pack on a few extra pounds each tax season, I can help.

Mind you, I'm no weight loss guru; I just happened to stumble upon the solution last week when my refrigerator broke. Making matters worse, there are apparently only three models on the planet that fit into the dedicated space in my kitchen, and judging by their estimated delivery dates, they are all currently in the cargo hold of that ship that was clogging up the Suez canal.

Don't get me wrong; I'm not going hungry. While we wait for the replacement, we've moved some food into a second-hand fridge in our garage. But that fridge is 50 feet from my couch. Do you have any idea how far 50 feet is? I'll tell you; it's just far enough that after about 15 trips, you start to realize you don't really want that ice cream as much as you thought you did.

It's all about using human nature to our advantage. If there's one thing that can overpower our inherent tendency towards overindulgence, it's our inherent tendency towards laziness. Put everyone's fridge in the garage, and we'll all be sporting six-pack abs by summer.

On to the updates...
IRS Clarifies Limited Extension of Tax Deadline
On Monday, the IRS issued Notice 2021-21, which elaborated on last week's decision by the Service to provide a limited extension of the tax deadline. The headline, however, remains the same: while the due date for 2020 individual returns has been extended from April 15 to May 17, 1st quarter estimated payments for 2021 remain due on April 15, meaning for individuals with large estimates that will be based on their 2020 final liability, the extension is less of a relief measure and more of a meaningless gesture.

In the Notice, the IRS clarified a few items that last week's announcement had failed to address:
  • The extension of the individual deadline applies to all forms in the "Form 1040 series," including Form 1040-SR, 1040-NR, 1040-PR, and 1040-SS. As an aside, it's more than a little concerning that I've been entrusted by Forbes with authoring a tax newsletter, yet I don't recognize half of those forms.

    The relief also includes the filing of all schedules, returns, and other forms that are filed as attachments to the Form 1040 series or are required to be filed by the due date of the Form 1040 series, including, Schedule H and Schedule SE, as well as Forms 965-A, 3520, 5329, 5471, 8621, 8858, 8865, 8915-E, and 8938. Finally, any elections that are required to be made on a timely filed Form 1040 series (or attachment to the form) will be timely made if filed before May 17.
  • Taxpayers now have until May 17 to contribute to an IRA, Roth IRA, HSA, Archer MSA, or Coverdell ESA. As a result, the 5498 series of forms -- including Form 5498- IRA Contribution Information, Form 5498-SA- HSA, Archer MSA, or Medicare Advantage MSA Information, and Form 5498-ESA- Coverdell ESA Contribution Information -- are now due on June 30 instead of June 1.
  • Any individual whose statute of limitations to file a claim for refund was set to expire on April 15 (i.e., 2017 returns) will now have until May 17 to get the job done.
  • Individuals have until May 17 to apply for the IRS's Annual Filing Season Program.
The guidance was silent as to the deadline for Form 709, Gift (and Generation-Skipping Transfer) Tax Return, so it's prudent to assume it remains April 15. Remember, however, that the filing of a federal extension automatically extends the due date for the Form 709 under Section 6075(b)(2), so if you're worried about getting that gift tax return done on time, you may want to play it safe and extend the Form 1040.

One final thing to we discussed in our first newsletter, the 2021 stimulus payments of $1,400 per head are currently being determined based on your 2019 tax return data. There is a provision in the American Rescue Plan Act, however, that provides that if your 2020 return is filed and processed within 90 days of the 2020 calendar year filing deadline, an additional payment will be made if the 2020 data yields a larger payment than the 2019 data. The law goes on to to explain that the "2020 filing deadline" for these purposes takes into account any extension of the filing deadline pursuant to Section 7508A. Because Notice 2021-21 makes clear that the one-month delay of the due date is being done via Section 7508A, individuals should now have an extra month -- until August 16, 2021 -- to get their 2020 returns filed and processed, potentially giving rise to an additional stimulus payment.
White House Provides Sneak Preview of Biden's Build Back Better Agenda
In just a few short hours, President Biden will formally unveil his next legislative priority, the "Build Back Better agenda," a massive $3 trillion effort to address infrastructure, climate change, and other domestic goals.

The President will attack his agenda in two parts, with the infrastructure proposal the immediate priority, and the remaining goals, which include providing free community college and pre-K care, to follow later this spring. Unlike the recently-enacted American Rescue Plan, which was entirely debt financed, the next two rounds will be paid for, at least in part, with additional tax revenue.

Early this morning, the White House
published a fact sheet on the first piece of the Build Back Better agenda -- the "American Jobs Plan" --detailing the President's approach to overhauling the nation's infrastructure and addressing climate change. The plan would cost nearly $2 trillion, to be paid for almost entirely by the "Made in America Tax Plan," which contains a series of significant tax increases. The plan would:
  • Increase the corporate rate from 21% to 28%.
  • Impose a global minimum tax of 21%, to be determined on a country-by-country basis.
  • Deny deductions to foreign corporations attempting to strip earnings out of the U.S. if their home countries have not also adopted a worldwide minimum tax.
  • Repeal the foreign-derived intangible income (FDII) deduction.
  • Eliminate deductible expenses from offshoring jobs.
  • Force large corporations to pay a minimum tax of 15% of their financial statement income. For more on what this would like like, check out Senator Elizabeth Warren's proposal below.
  • Eliminate subsidies and foreign tax credits for the fossil fuel industry, and
  • Fund the IRS in a manner necessary to enforce the above changes, to be paired with a broader enforcement initiative.
With the release of the American Jobs Plan and American Tax Plan, the President has confirmed what we've long suspected: he intends to cover the price tag of his proposals with targeted tax increases. Corporations bear the cost of the first piece of his legislative agenda, but high-earning individuals will be called upon to fund his remaining priorities via the income, estate, and perhaps even payroll tax.

The plans released today are sure to be met with near-universal opposition from industry groups and, more importantly, Republican Senators. All indications, however, are that the President will at least attempt to garner bipartisan support for the American Jobs Plan, if for no other reason than to placate those within his own party who insist that a proposal of this size should not be passed on partisan lines.

It's a fruitless pursuit, however, which leads one to wonder whether the bill is destined to ultimately be combined with the President's forthcoming second proposal, forming one $3 trillion package that can be passed using the streamlined budget reconciliation process. This would allow the bill to become law with only a simple majority in the Senate, where Democrats currently possess 51 votes.

While the fact sheet released today provides insight into the President's goals, his administration has made clear that his agenda is not set in stone. In a statement made yesterday, Press Secretary Jen Psaki solicited input from others in Congress stating, "People may have different ideas about how to pay for it. We're open to hearing them. So hopefully people will bring forward ideas."
WASHINGTON, DC - FEBRUARY 25: Senator Bernie Sanders (I-V.T.), Chairman of the Budget Committee, arrives to a U.S. Senate Budget Committee hearing regarding wages at large corporations on Capitol Hill, February 25, 2021 in Washington, DC. GETTY IMAGES
Other Democratic Leaders Have Their Say
Senator Sanders Sets Sights on Estate, Corporate Tax
Leading Democrats weren't waiting around for Psaki's invitation to collaborate. A number of Senators opted to get a head start, spending the past week publishing detailed proposals laying out how they would like to see the President raise taxes on corporations and the wealthy.

As you might expect, Vermont Senator Bernie Sanders was eager to fire the opening salvo, using a budget committee meeting on the progressivity of the tax code to release two pieces of proposed legislation.

"For the 99.5% Act" would dramatically alter the current estate tax regime. The exemption would drop from $11.7 million to $3.5 million and the top federal rate would rise from 40% to 65%. More specifically, new rates would apply as follows:
  • Asset value of $3.5 million to $10 million: 45%
  • Asset value of $10 million to $50 million: 50%
  • Asset value of $50 million to $1 billion: 55%
  • Asset value in excess of $1 billion: 65%
Sanders' bill would also limit the ability to claim certain minority discounts, strengthen the generation skipping tax, and change the treatment of some grantor retained annuity trusts. Family farms would be permitted to reduce their value for estate tax purposes by up to $3 million. The bill does not put an end to the "tax-free step-up" beneficiaries receive upon inheriting property at death under Section 1014, but lest you think the Senator is softening his stance on the estate tax, we'll see below that he addresses this issue in another bill he co-sponsored along with a few others.

The subtly titled "
Corporate Tax Dodging Prevention Act" would, uh...prevent corporate tax dodging, in part by increasing the corporate rate from 21% to 35%. The bill would then make sweeping changes to the tax treatment of multinational businesses by imposing a rate of 21% on their offshore income, repealing the "check-the-box" and "CFC look-through" rules as they apply to foreign entities, and increasing the Base Erosion and Anti-Abuse Tax (BEAT) from 10% to 12.5% in 2022.

According to the Joint Committee of Taxation, the "For the 99.5% Act" would raise $430 billion over the ten-year budget window. The international changes of the "Corporate Tax Dodging Prevent Act" would generate another $1.1 trillion, and while the JCT did not score the increase in the corporate rate from 21% to 35%, I would expect that it would raise in the neighborhood of $1.3 trillion to $1.5 trillion, bringing the total revenue raised from the three bills very close to the rumored $3 trillion price tag of the next round of legislation.

It's unlikely that Sanders' proposals make it into President Biden's Build Back Better agenda. The President has pushed for more moderate tax increases -- for example, a 28% corporate rate and 45% top estate tax rate -- which are far more likely to garner support from centrist Democrats than Sanders' dramatic changes.

Of course, Bernie Sanders has never worried much about appealing to moderate Democrats. If nothing else, his two bills allow him to throw down the proverbial gauntlet and clearly establish the tax priorities of the progressive portion of the party.
Senator Warren Takes Aim at Big Business
Senator Elizabeth Warren also threw her hat into the tax reform ring last week, announcing her intention to tax certain large corporations not on their taxable income, but rather the financial statement income they report to shareholders. Warren initially floated the idea during her candidacy for the Democratic nomination for President, but is now ready to pursue it formally.

The motivation behind such a proposal is obvious: How many articles have you read in the past few years about Apple or Google or Wolf Cola reporting billions in profits but paying zero in income tax due to various special interest deductions and preferences? None? OK, fine, but other people have read a lot, and they're not pleased about the whole thing.

Warren knows this, so her plan -- if it's anything like her campaign trail promise -- will identify those corporations that report more than $100 million in "profits" on their financial statements and require them to pay 7% for every dollar of financial statement profit above $100 million. The new regime would presumably replace the previous corporate alternative minimum tax, which was repealed as part of the Tax Cuts and Jobs Act.

While Warren's plan may be popular among voters, tax policy wonks will never be included among its advocates, for the simple reason that we have corporate tax laws intended to tax corporate income. If you want to make sure big corporations pay tax, it probably makes sense to do so via the Internal Revenue Code, rather than by creating a new tax imposed on financial statement income, the computation of which is not the least big governed by tax policy considerations.

Nevertheless, with the President announcing this morning that he intends to implement just such a corporate minimum tax, we have to take Warren's proposal seriously.
Several Senators are Poised to Tax Your Demise
Lastly, Senator Chris Van Hollen, along with Senators Sanders, Warren, and a few others, released a 32-page discussion draft that would add insult to the ultimate injury by making death a taxable event.

As a reminder, under current law, if you die holding appreciated property that is passed on to your heirs, you recognize no gain on the transfer because there has been no "sale or exchange." Even better, whoever inherits the property takes a "stepped-up" basis equal to the property's fair market value under Section 1014. Everyone wins; well...except for whoever it was that died, I guess.

A dies holding stock with a basis of $1 million and a fair market value of $3 million. B inherits the stock. A does not recognize the $2 million of gain, and B takes a basis in the stock of $3 million. If B sells the stock the next day for $3 million, no gain arises. Thus, the $2 million of appreciation escapes tax forever.

Democrats have long had this "tax-free step-up" in their crosshairs. President Obama hated it. President Biden hates it. And apparently, Senators Van Hollen, Sanders and Warren really hate it.

To remedy the situation, the Senators would add Section 1261 to the Code. This new provision would treat a transfer of property upon death as a sale of the property for its fair market value. This treatment would apply to transfers of any personal property used in a business or held for investment and all real property. Exceptions would apply to transfers to a surviving spouse or a qualified charity.

But the bill doesn't stop there. It would also make a gift of appreciated property during one's life a taxable event. As with a transfer of property upon death, under current law, a gift of appreciated property does not trigger gain because there has been no sale or exchange. In the gift context, however, any gain is merely deferred and passed on to the donee by virtue of Section 1015, which gives the donee a basis in the gifted property equal to the donor's basis. Thus, any appreciation will be triggered when the donee sells the property.

Example. A gifts stock with a basis of $100,000 and a fair market value of $500,000 to B, his son. Because there has been no sale or exchange, A does not recognize the $400,000 of gain inherent in the property. Instead, B will take a basis in the stock of $100,000, so that if A sells the stock for $500,000 the next day, B, rather than A, will recognize the $400,000 of gain.

With gifts and death becoming taxable events, the Democratic Senators recognize that something would need to be done to protect smaller transfers. Their proposed solution is to provide two exemptions; one for gifts and one upon death. When making a gift, taxpayers would receive a lifetime exemption from gain recognition of $100,000.

Example. A gifts stock with a basis of $100,000 and a fair market value of $500,000 to B, his son. A will exempt the first $100,000 of appreciation from gain, and recognize capital gain of $300,000 for the remaining amount.

Then, upon death, the exemption would rise to $1 million, reduced by any portion of the $100,000 gift exemption the taxpayer used during their life.

Example. A later dies holding stock with a basis of $1 million and a fair market value of $3 million. B inherits the stock. A may exclude $900,000 of the gain, $1 million less the $100,000 exclusion used when A earlier made the gift to B. The remaining $1.1 million will be recognized upon death.

While it's not stated in the discussion draft, as is the case under current law, any tax paid by the decedent on appreciated assets upon death should reduce the value of the taxable estate, preventing double taxation to a small degree.

As you can see, these proposed changes are not small tweaks to the existing law. Rather, the Senators are looking to effectively take a flamethrower to the current gift and estate tax regime. With an exemption of only $1 million for property transferred upon death, taxpayers who have previously never had to concern themselves with the estate tax would suddenly bear a tax burden upon death. To illustrate, take the immediately preceding example above and replace "stock" with a farm. Even if the estate tax exemption is reduced to $3.5 million as Senator Sanders proposed, if the $3 million farm is A's only asset, A would not be subject to the estate tax. A would, however, face a tax bill on a $1.1 million capital gain upon death, potentially forcing A's heirs to sell the farm to pay the tax.
It's worth noting that the Senators are not alone in their approach. On Monday, Bill Pascrell, a Democratic member of the House Ways and Means Committee, released his own bill that would tax gains upon death, also with a $1 million exemption.

Most importantly, the two bills should find at least some common ground with the goals of President Biden. During his campaign, the President promised to do away with stepped-up basis upon death, and as previously discussed, it's expected that later today he'll make the change one of the foundations of his Build Back Better agenda. To what degree he embraces the methodology found in the Van Hollen/Pascrell proposals -- and to what degree those methodologies are embraced by the remaining Democratic Senators, as will be necessary to pass the bill using budget reconciliation-- remains to be seen.
News You Need to Know About News You Need to Know
Masks, Wipes Now Qualified Medical Expenses
You knew this was coming. It would have been helpful to have known it earlier, but hey, better late than never and all that. In Announcement 2021-7, the IRS stated that amounts paid for masks, hand sanitizer, and sanitizing wipes are qualified medical expenses, deductible as itemized deductions under Section 213 to the extent they exceed 7.5% of adjusted gross income. Because the expenses are qualifying Section 213 expenses, they can be paid or reimbursed through a health FSA or an HSA.

As a reminder, Reg. 1.213-1(h) requires a taxpayer to substantiate the amount paid of any medical expense deductions, so I hope you, like my wife, are a weirdo who ritualistically retains every receipt you've ever been handed.
Musk Says People Can Buy Teslas with Bitcoin
As a kid growing up in New Jersey, my old man was a used car salesman named Angelo, which is every bit as awesome as it sounds. And deep down, I've always wondered how I'd have fared if I had resisted the allure of the IRC and opted instead to pursue the family business. Let's give this a try, shall we?

[unbuttons top two buttons of garish shirt, revealing even more garish gold chain. Approaches you while pointing double trigger fingers]

Me: Hey there, boss. You look like a guy who knows what he wants, so I'll cut right to the chase...what's it gonna' take to put you into one of these beauties?

Sucker: I'm a little worried about spending so much on a car. Will it hold its value?

Me: Well, no, won't hold value; in fact, its value will plummet at a terrifying rate, but hey, who cares about that when all the ladies are asking you to take them for a spin, amirite?

Sucker: I don't's a lot of money...

Me: Ok, ok...I see you're no pushover. Well, what if I told you you that TODAY ONLY, you can buy this rapidly depreciating asset with a rapidly appreciating asset, resulting in a hefty tax bill?

Sucker: SOLD!

/blows on tips of trigger fingers before sticking them into imaginary holsters

If that exchange sounds ridiculous, understand that it will soon become a reality after Tesla CEO and modern-day Willie Wonka Elon Musk announced that you can now purchase one of his company's electric cars with bitcoin.

As a reminder, in Notice 2014-41, the IRS clarified that for federal tax purposes, cryptocurrency like bitcoin is property rather than currency. As a result, under Section 1001 principles, if a taxpayer exchanges bitcoin for property, any excess of the value of the bitcoin over the taxpayer's basis in the virtual currency is recognized as taxable gain. The gain could be capital or ordinary, depending on the holder's relationship to the bitcoin and it's holding period.

To illustrate, if you buy a $110,000 Tesla with bitcoin you acquired for $60,000, you've just triggered $50,000 of gain. Presuming you're not a dealer in bitcoin and have held it for longer than one year, you'd recognize capital gain, taxed at a top rate of 23.8%, resulting in a bill of $11,900. If you held it for less than one year, you could get drilled with a tax bill in excess of $19,000.

Me: Now let's talk undercoating. You're going to want to protect this baby...
Will 2020 Be the Year for Married Filing Separately?
In all but rare occasions, it behooves a couple that is eligible to do so to file jointly. The only alternative is to file separately, and typically, any benefit from segregating income and deductions is more than lost by the higher rates, lower deductions, and lower thresholds imposed upon those who file separately. As a result, we typically only recommend MFS status in extreme situations, like when one spouse is running a casino out of their car hole.

For married taxpayers, however, 2020 may be a different story. Between maximizing stimulus payments in 2021 and taking advantage of the retroactive $10,200 unemployment exclusion, there may be advantages to filing separately.

Adam Markowitz, a Florida EA and person of interest in numerous Tampa-area cold cases, shares one of several instances where he's been able to save clients real money by filing separately:

Facts: A and B are Florida residents. They have no children, and adjusted gross income was too high in 2018 and 2019 to earn a first or second round stimulus payment.

  • A regularly earns $200k/yr but was laid off for 12 weeks last year which, here in Florida, means A had $10,500 in unemployment benefits. A also had $120,000 in W-2 wages in 2020.
  • B regularly earns $70k/yr and never missed a day of work due to COVID. B had W-2 wages of $70,000.
Filing Married Filing Jointly: A and B have $190,000 in wages plus $10,500 in taxable unemployment. The exclusion is not available because adjusted gross income exceeds $150,000. They take $24,800 in a standard deduction, leaving them with $175,700 in taxable income and total tax of $30,327.

Filing Married Filing Separately (A): A has $120,000 in wages + $300 of unemployment income (because A is now able to exclude $10,200 of unemployment income). A takes $12,400 in a standard deduction, leaving A with $107,900 in taxable income and total tax of $19,976.

Filing Married Filing Separately (B): B has $70,000 in wages. B takes $12,400 in a standard deduction, leaving B with $57,600 in taxable income and total tax of $8,468. Even better, because B's adjusted gross income is less than $75,000, B is entitled to a stimulus credit of $1,800 on her 2020 return under Section 6428. This reduces her total tax to $6,668,

Total Results

MFJ: $30,327 in total tax.
MFS: $26,644. Then, because B's 2020 adjusted gross income will be less than $75,000, she will be entitled to a 2021 stimulus payment of $1,400. This payment would not have been available if A and B filed jointly in 2020 because combined adjusted gross income would exceed $160,000.

Total MFS Savings: $5,083.
Total Adam will bill his client to do the extra work: $14,250.

Be aware that if the couple lives in a community property state, income and deductions should be split evenly regardless of who earned the income or paid the expenses. There is a limited exception for a couple that does not live together. And if the couple has kids, be aware of the tiebreaker rules of Section 152(c)(4), which govern which parent gets to claim a child as a dependent.

SBA Updates
  • Congress passed the PPP Extension Bill of 2021, extending the deadline for Round 1 and Round 2 PPP loans from March 31 until May 31, 2021. Businesses can receive loans as late as June 30, however, because the bill grants the SBA 30 days to process any loan applications received prior to the May 31 deadline.

    Of course, there's always the whole matter of the $79 billion of remaining money potentially running out, so if anyone is still looking for a PPP loan, you might want to get moving.
  • Beginning April 6, 2021, the SBA is increasing the maximum amount small businesses and non-profit organizations can borrow through its Economic Injury Disaster Loan (EIDL) program from $150,000 to $500,000.

    Businesses that received a loan subject to the current limits do not need to submit a request for an increase.  Rather, the SBA will reach out directly via email and provide more details about how the business can access more funds as April 6 approaches.  Any new loan applications and any loans in process when the new loan limits are implemented will automatically be considered for loans covering 24 months of economic injury up to a maximum of $500,000.
RubinBrown's Amie Kuntz contributed to this article.
IRS Reminds Taxpayers About Valuable Election to Avoid Tax Shelter Status
The IRS recently reminded taxpayers of a new election that can prevent a business from meeting the definition of a "tax shelter."

Being deemed a "tax shelter" has never been a
good thing, but after passage of the Tax Cuts and Jobs Act, you really don't want to fall victim to that designation. A tax shelter can't use the cash method. A tax shelter can't ignore Section 263A or treat inventory as non-incidental materials and supplies under Section 471. And a tax shelter can't use the small-taxpayer exception to bail out of the interest limitation rules of Section 163(j)(3). That's a lot of inconvenience stemming from two small words.

So who is a "tax shelter?" There's a wide range of different definitions that originate in the Code in Section 448(a)(3), but the most expansive definition is that of a "syndicate" under the meaning of Section 1256. Section 1256(e)(3)(B) defines a syndicate as “any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of Section 461(k)(4))." Recently issued regulations under Section 448 replace the word “allocable” with “allocated,” making it clear that a business must have a loss for a tax year before it can possibly meet the definition of a syndicate.

That's a lot to unpack, so it's prudent to take the syndicate designation in two steps. First, as we just established, the business must have a taxable loss in order to be a syndicate. For these purposes, gains or losses from the sale of capital assets or Section 1231 assets are
not taken into account.

Next, more than 35% of the losses must be "allocated" to a limited partner or limited entrepreneur. It is important to understand that a “limited partner” is a true limited partner under the partnership law and the meaning of Section 1402(a)(13); i.e., a partner who is barred under state law from participating in the management of the partnership. This distinction is critical because you could make the mistake of believing that a member in an LLC defaults to being a “limited partner.” The courts have concluded, however, that because an LLC member can – and often does – participate in the management of the LLC under state law, an LLC member is not the same as a limited partner. (See
Garnett and Thompson)

While an LLC member is not a limited partner, it may fall victim to the "limited entrepreneur" designation, which Section 461(k)(4) defines as “a person who both 1) has an interest in an enterprise other than as a limited partner, and 2) does not actively participate in the management of such enterprise.”

Unfortunately, the Code does not provide a definition of "actively participating" in the management or operations of an enterprise; rather, it deems it to depend on the specific facts and circumstances. Section 1256(e)(3)(C) does, however, provide for attribution of a taxpayer’s active participation to a spouse or relative, or if the individual had actively participated in the management for at least five years in the past. 

So how do we know if our owner "actively participated" in a potential syndicate? The best we have to go on are withdrawn regulations under Reg. Section 1.464-2(a)(3), which give insight into how the Service originally envisioned “active participation” in the farming context when it applied the "limited entrepreneur" designation to certain farming syndicates:

“Factors which tend to indicate active participation include participating in the decisions involving the operation or management of the farm, actually working on the farm, living on the farm, or hiring and discharging employees (as compared to only the farm manager). Factors which tend to indicate a lack of active participation include lack of control of the management and operation of the farm, having authority only to discharge the farm manager, having a farm manager who is an independent contractor rather than an employee, and having limited liability for farm losses”

Most of these aspects can be applied to a non-farm business.  Clearly, working in the business and being involved in decisions of the operations or management of the business would qualify, but having authority only over a manager, especially one that is an independent contract, would not. The withdrawn regulations, of course, are not authoritative, and do us little favors by not clearly defining “participating in the decisions involving the operation or management of (a business)”. 

This syndicate issue is particularly problematic in 2020, a year in which even historically profitable businesses may produce a one-off loss owing to the impacts of COVID-19. Many of those same businesses will allocate more than 35% of the losses to partners who don't lift a finger. Does that mean they are required to switch to the accrual method, apply Section 163(j), and do all the other bad things that come with being a syndicate?"

That's exactly what it means, but don't panic, because at the end of 2020, the IRS granted relief that will prevent "one off" loss years from creating a syndicate and requiring a bunch of accounting method changes. But only if it truly was a "one-off" year, and the business will produce taxable income again in 2021.

Reg. 1.448-2(b)(2)(iii)(B) permits a business to make an ANNUAL election to determine syndicate status by looking at whether it allocated more than 35% of its losses to limited partners or entrepreneurs in the prior year. Because this is an annual election; in the event of a single, anomalous loss year, a business could elect in the lone year of loss to base the syndicate determination on the prior year – and thus avoid syndicate status – and then refrain from making the look-back election in the following year, avoiding syndicate status for both years.

Example. In 2019, LLC had $100 of taxable income. In 2020, LLC had a $100 loss; 50% of which was allocated to a limited entrepreneur. To avoid syndicate status, LLC may elect in 2020 to determine its status based on its 2019 income/loss, and because there was income in 2019, LLC is not a syndicate in 2020. In 2021, LLC again produces taxable income. In that year, LLC simply refrains from making the election, and is not a syndicate in 2021.

As you can see, this election can be incredibly valuable. Of course, if the business will have a tax loss for both 2020 AND 2021 -- and if more than 35% of that loss is allocated to a limited partner or entrepreneur in both years -- the election serves only to delay the inevitable, because by 2021, regardless of upon which year you base the syndicate determination, you're going to be deemed to be a tax shelter. In which case, you'd better start brushing up on your Forms 3115 and Section 163(j). Maybe
start here.

RubinBrown's Joey Reizman contributed to this article.
Ask Tony: Real Questions from Real Readers (Names Withheld to Protect the Innocent)
Redemption of One Partner in Two-Partner LLC
Q: I have a two-partner LLC, and in 2020 one of the two partners was redeemed by the LLC. They'll be receiving payments for the next five years. Do I file a final return?

A: That would certainly be the temptation, wouldn't it? After all, the LLC is now down to one member, which makes it a single-member LLC (SMLLC). And we all know that SMLLCs don't file a Form 1065; rather, all the income and assets are reported on the tax return of the sole owner.'ve got a special situation. Your redeemed partner is being paid over a period of years, which means you'll want to check out Reg. Section 1.736-1(a)(ii), which provides that while a partner "retires" when he ceases to be a partner under local law, for purposes of the tax law, a
retired partner will be treated as a partner until his interest in the partnership has been completely liquidated.

As a result, you do NOT terminate the partnership and file a final Form 1065 until the partner receives their final payment. They won't get an allocation of income on the K-1, but they will get a K-1, and it's enough to keep the partnership alive.

It's also important to remember that unique to Section 736, a redeemed partner generally doesn't recognize gain until the proceeds received exceed their outside basis in the partnership pursuant to Reg. Section 1.731-1(b)(6). Effectively, we get to use the "open transaction" approach made popular in
Burnett v. Logan, rather than the installment sale treatment of Section 453.

But...the downside is that if the partnership makes an election to step up the basis of the partnership assets under Section 734, that step-up does not take place until the corresponding gain is recognized by the departing partner. The two have to move in lock-step.

There is a lot more to redemptions -- from hot assets to Section 736(a) payments to special elections under the regulations -- and I'd like to think I covered
most of it here.
Got a question about tax law, life in public accounting, or the 2008 Phillies? Shoot me an email at I can't promise I'll try to answer it, but I'll try to try.
Quick Reads
  • Are you aware of the "wash sale" rules? Well, if you are, then you've got a leg up on this unfortunate Robinhood day trader, who is apparently facing an $800,000 tax bill despite have a net capital gain for 2020 of $45,000 because he wasn't aware of good ol' Section 1091.

    Congress won't let you sell stock for a loss and then immediately re-secure your position in the investment by repurchasing the same stock. Instead, Section 1091 disallows any loss on the sale of stock or securities if substantially the same stock or securities are purchased within the 30 day period immediately before or after the sale. For day traders like the subject of the article, who routinely buy and sell the same stock in a year, the wash sale rules can be a major trap for the unwary.
  • Jim Tankersley has a great piece over at the New York Times on the challenges President Biden faces in coming to a consensus within his own party on how to best raise taxes from corporations and the rich. With Democrats owning just 50 seats in the Senate, each Senator yields effective veto power over any future legislation, and with some wanting bigger increases than Biden is proposing and others preferring smaller tweaks to the tax law, the path forward, even with the streamlined budget reconciliation process available, will not be a walk in the park.
Tomorrow is April 1st, which means I juuust missed feeling pressure to write one of those obligatory gag issues. But let's be honest, for those of us who ply our trade in the tax law, for the last year or so, every day has felt like April Fools' Day.

Until next week,


hello world
Tony Nitti
Partner-in-Charge of National Tax at RubinBrown

I am Partner-in-Charge of National Tax at RubinBrown, one of the nation’s leading accounting and professional consulting firms. I am a licensed CPA in Colorado and New Jersey, an adjunct professor at the graduate tax programs of the University of Denver (DU) and Golden Gate University, and hold a Masters in Taxation from DU. My specialties include corporate and partnership taxation, with an emphasis on complex mergers and acquisitions structuring.

Check out my latest Forbes articles. Follow me on Twitter.

The contents of this newsletter are the expressed views, statements and opinions of Tony Nitti and not those of Forbes or RubinBrown. Further, the information contained herein is for guidance and informational purposes only and is not intended nor should it be construed in any way as providing any accounting, tax, legal or other professional advice on any specific factual situation. As such advice must be tailored to the specific circumstance of each case, the general information provided herein is likewise not intended nor should it be construed as a substitute for the advice of a professional advisor. If accounting, tax, legal or other expert assistance or professional advice is needed, the reader is strongly encouraged to consult with or engage the services of a professional advisor.”

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