26 February 2016 Partnership provisions in FY 2017 Budget come from prior budget proposals President Obama's FY 2017 Budget, released on February 9, 2016, includes many of the same partnership-related provisions included in prior Budget proposals. The partnership-related proposals of interest are below. The Administration proposes applying the SECA regime to individual owners of an S corporation, limited partnership, general partnership or a limited liability company classified as a partnership in the same manner and to the same degree. The proposal would subject owners of a service business that materially participate in a partnership or S corporation to SECA taxes on their distributive share of income, regardless of the legal form of organization. The proposal would be effective for tax years beginning after December 31, 2016, and is expected to raise $272 billion in revenue over the next 10 years. The Administration proposes taxing publicly traded partnerships with qualifying income and gains from activities related to fossil fuels as C corporations. The proposal would be effective beginning in 2022, and is expected to raise $1.4 billion in revenue over the next 10 years. The Administration proposes to combine and increase the limitations for deductible "start-up expenditures" and "organizational expenses" to $20,000 in the tax year in which a trade or business begins. The amount deductible would be reduced by the amount by which such new business expenditures exceed $120,000. The remaining amount would be amortizable ratably over 180 months. In general, the current limitation for deductible start-up expenditures in the tax year in which a trade or business begins is $5,000, and the current limitation for organization expenses in the tax year in which a partnership (or corporation) begins business is $5,000. The proposal would be effective for tax years beginning after December 31, 2016, and is expected to cost $4.7 billion over the next 10 years. Under Section 708(b)(1)(B), a partnership terminates for federal tax purposes if a 50% or greater interest in its capital and profits is sold or exchanged within any 12-month period. The termination occurs even though the partnership still exists under local law and its business operations continue. Citing these terminations as "a trap for the unwary taxpayer," the Administration proposes repealing Section 708(b)(1)(B)'s technical termination rule. The repeal would be effective for transfers after December 31, 2016, and is estimated to raise approximately $252 million over 10 years. The Administration proposes repealing Section 197's anti-churning rules, which currently prohibit the amortization of the cost of certain intangibles, even if acquired after Section 197's effective date. In support of its proposal, the Administration claims that the passage of the time has rendered the anti-churning rules no longer necessary. The repeal would be effective for acquisitions after December 31, 2016, and is expected to save taxpayers approximately $2.8 billion over the next 10 years. The Administration proposes taxing as ordinary income a partner's share of income from an "investment services partnership interest" (an ISPI), unless attributable to invested capital. As with prior Budget proposals, the latest proposal would tax as ordinary income a partner's share of income on (and gain from the sale of) an ISPI, regardless of the character of the income at the partnership level. Also, consistent with prior proposals, that income would be subject to the self-employment tax. The Treasury's explanation of the proposal states that the proposal is not intended to adversely affect the qualification of a real estate investment trust (a REIT) owning a carried interest in a real estate partnership. The provision would be effective for tax years ending after 2016, and is estimated to raise nearly $19.3 billion in revenue over the next 10 years. To prevent the possible duplication of losses, the Administration proposes expanding the definition of substantial built-in loss for purposes of partnership interest transfers. The proposal would amend Section 743(d) to measure a substantial built-in loss by reference to whether the transferee would be allocated a net loss over $250,000 upon a hypothetical sale by the partnership of all of its assets at fair market value. The provision would be effective for sales or exchanges after the date of enactment, and is estimated to raise $89 million in revenue over the next 10 years. Under Section 704(d), a partner may deduct its distributive share of a partnership loss only to the extent of its adjusted basis in the partnership interest. Section 704(d) does not, however, apply to nondeductible expenditures (such as charitable contributions) that are not deductible in computing partnership taxable income and are not properly chargeable to a capital account. The Administration proposes amending Section 704(d) to extend the loss-limiting rules to such expenditures. The provision would be effective for tax years beginning on or after the date of enactment, and is estimated to raise $1.3 billion in revenue over the next 10 years. Under current law, a recipient of a death benefit under a life insurance contract that had been transferred for valuable consideration is generally subject to tax on the excess of those benefits over the amounts paid for the contract, plus any subsequent premiums paid, unless an exception to the "transfer-for-value" rule applies. Among the exceptions are transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner or to a corporation in which the insured is a shareholder or officer. The proposal would modify the transfer-for-value rule by eliminating this exception. Instead, under the proposal, the rule would not apply to a transfer to the insured, or to a partnership or a corporation of which the insured is at least a 20% owner. The proposal would apply to sales or assignments of interests in life insurance policies occurring after December 31, 2016, and is estimated to raise $506 million in revenue over the next 10 years. The Administration proposes to treat gain or loss from the sale of a partnership interest as effectively connected with the conduct of a trade or business in the United States and subject to US income taxation to the extent attributable to the partner's share of the partnership's unrealized gain or loss from property used in a trade or business in the United States. The proposal would essentially codify Revenue Ruling 91-32's holding. The provision would be effective for tax years ending after 2016, and is estimated to raise $2.9 billion in revenue over the next 10 years. Tax executives should be familiar with these partnership-related tax proposals and should evaluate how the proposals could shape their company's current and future operations. Many of these proposals are similar or identical to the proposals included in previous Obama Administration budgets and the partnership-related proposals may not come as a surprise. The proposal to modify the transfer-for-value rule that applies to sales of life insurance contracts is new. The FY 2017 Budget is President Obama's eighth and final budget, released during an election year featuring a heated presidential race and potential change in control of the Senate. Observers generally have low expectations for moving these proposals through the legislative process. The proposal to apply the SECA regime to individual owners of an S corporation, limited partnership, general partnership or a limited liability company classified as a partnership in the same manner and to the same degree has garnered bipartisan support, however, including from presidential candidates of both parties. It could become law in the coming year. Many Wall Street taxpayers oppose such a change. One of the proposals — repeal of the technical termination rule — would be welcomed by many taxpayers, as it functions as an administrative burden and slows depreciation or amortization deductions.
Document ID: 2016-0393 | |||||||
