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Tax Panel Releases Long-Awaited Partnership Study, Includes Legislative Suggestions

Tuesday, April 8, 1997

Deloitte & Touche OnLine

The Joint Committee on Taxation staff April 8 issued 14 recommendations to update partnership tax law to reflect changes that have taken place in the business world over the last several years.

The study conducted by the congressional panel is the first part of a review of various business issues announced late last year by Committee Chief of Staff Ken Kies. The second part of the review, which covers tax-free spin-offs, will be available shortly.

Some partnership provisions "may be out of date, might give anomalous results, or may have unforeseen problems in application," said the pamphlet Review Of Selected Entity Classification and Partnership Tax Issues (JCS-6-97).

The entity classification procedures recently issued also will increase reliance on partnership structures, thus enhancing the need for up-to-date partnership rules, the pamphlet said.

"The tax rules applicable to partners and partnerships merit scrutiny in light of the possibility that they will be more widely used, given the simple electivity of partnership status under the check-the-box regulations," the pamphlet’s executive summary said.

Specific recommendations

The recommendations identified by the congressional panel are as follows:

1. Provide legislative authorization of the check-the-box regulations.
2. Modify basis rules to minimize basis shifting among assets in the event of a distribution.
3. Require basis adjustments to assets when a partnership distributes certain stock to a corporate partner.
4. Limit partnership terminations.
5. Modify the rules taxing pre-contribution gain.
6. Eliminate the substantial appreciation requirement for inventory of a partnership in certain transfers and distributions.
7. Require closing of the partnership taxable year with respect to a deceased partner to avoid the bunching of income or deductions upon a partner’s death.
8. Limit partnership allocations made after the end of a taxable year to allocations of service income of a service partnership.
9. Modify the treatment of guaranteed payments made by a partnership.
10. Modify the employment and self-employment tax and income withholding treatment of partners of a partnership.
11. Require partial recognition of gain on the transfer of marketable securities to a partnership or corporation.
12. Deny installment sale treatment for all readily tradable debt.
13. Realize cancellation of indebtedness income on satisfaction of debt with partnership interest.
14. Apply earnings-stripping rules to partnerships and S corporations.

Tax Reform Hearing Announced: House Ways and Means Committee Chairman Bill Archer, R-Texas, announced the panel will hold a hearing April 15 on the potential impact fundamental tax reform would have on individuals and families.

"Two years ago, this Committee began a careful examination of how we could replace, in its entirety, our current income tax system. Now the committee picks up on where it left off last year," Archer said.

Additional hearings will be held on the effects reform would have on: employee benefits and savings incentives, home ownership and real estate, agriculture, retail sales, financial services, and health care.

The tax reform issue has not launched off the starting block mainly due to the lack of leadership or interest on the part of the President. A major policy change, such as fundamental tax reform, can move ahead only with the full weight of the White House behind it, congressional sources say.

Budget Talks: President Clinton’s budget team met with congressional budget leaders and reviewed their positions on the status of talks on the fiscal 1998 budget.

"The preferable approach is to make a compromise for a five-year balanced budget with the President that includes our priorities and some of the president’s," Senate Budget Committee Chairman Pete Domenici, R-N.M., told reporters.

Domenici and GOP leaders indicated they would move ahead without the help of the White House, if administration officials are not willing to compromise. Domenici also is talking with moderate Democrats about a possible compromise on a budget.

House Majority Leader Dick Armey, R-Texas, said separately he is not getting impatient about the progress of the budget talks. "We want to be as encouraging as we can be," he said.

Estate Tax Hearing Announced: The Senate Finance Committee announced it will hold a hearing April 10 on proposals to simplify the estate and gift tax.

Rep. Christopher Cox, R-Calif.; Sen. Jon Kyl, R-Ariz.; and Sen. Richard Lugar, R-Ind., will testify about their simplification proposals.

Small business leaders are pressuring Congress to simplify or curtail the estate and gift tax. Many observers believe the current system imposes a burden on small and family-owned businesses, said the Joint Committee on Taxation staff in a pamphlet, Description and Analysis of Proposals Relating to Estate and Gift Taxation, (JCS-7-97) on the proposals. The current system often forces families to sell small businesses to pay estate taxes upon the proprietor’s death, they argue.

Others note that "potential deleterious effects on investments by small or family-owned businesses is limited," especially when the proprietor employs simple tax-planning techniques, the pamphlet said.

Ways and Means To Markup Snooping Bill: The House Ways and Means Committee April 9 is scheduled to markup legislation designed to criminalize unauthorized browsing in taxpayer files by Internal Revenue Service officials.

The bill to be considered would impose a penalty for willful inspection of any tax return or return information by any federal employee or IRS contractor that is not authorized by the tax code, according to a JCT pamphlet, Unauthorized Inspection of Tax Returns or Tax Return Information (JCX-11-97).

Separately, Rep. Jennifer Dunn, R-Wash., and Sen. Paul Coverdell, R-Ga., announced at a press conference the introduction of legislation to criminalize improper snooping as well as other steps to provide citizens with greater tax fairness and protection from IRS abuses.

"The IRS does deserve closer scrutiny when a few bad apples go beyond acceptable enforcement procedures and commit outright intimidation or when agents are unable to operate using ‘common sense’ as a yardstick," said Dunn.

The proposed IRS Accountability Act would:

• Criminalize extortion tactics by any IRS agent;
• Make IRS agents personally accountable and liable for their actions;
• Limit the IRS’s audit authority;
• Extend the time period to pay a tax without penalty;
• Limit the IRS’s seizure and levy authority;
• Limit the IRS’s authority to accrue interest on a tax owed;
• Equalize the interest rate charged by the IRS so that it is the same as the interest rate charged against the IRS in cases of IRS error or delay;
• Provide fairness for mathematical and clerical errors.

Sen. John Glenn, D-Ohio, released a General Accounting Office report stating the IRS has not sufficiently beefed up its scrutiny and punishment for browsing.

"IRS is still not effectively addressing the problem through employee monitoring, accurate recording of browsing violations, or consistent application and punishment of enforcement actions," the GAO said.