Year-End Tax Planning Webinars for Funds and GPs | Part II

JD Vance is also going to be leaving a seat open in Ohio and Marco Rubio was tapped to have a position in the new incoming administration, so there's going to be even two more unknowns coming in. So this is all just to give you some context about why it's going to be a little difficult this time around to necessarily know what we're going to see because there's a lot of new known unknowns coming to Congress in the next couple months. This is actually already out of date when I wrote this. Not all of the races have been called yet. We still have three outstanding races. Republicans have gotten control of the house. They are currently at 219 seats. The Democrats are currently at 213 seats. There's three uncalled races. I suspect that one of those is going to be called for the Democrats, so we're probably going to end up at about a two 14 to 2 21. Breakdown might be wrong on that, but what that means is it's a very, very slim majority, so Republicans are only going to be able to lose probably three votes in order to get anything passed, and that is very difficult to do. It's difficult to get 219 people to agree on something and not lose four or five of them.

Simcha David:

Sarah, do you think that's as big an issue in tax as it is in other types of legislation or do they generally tend to see eye to eye in tax? Have you seen?

Sarah Adkisson: I think it actually might be a bigger issue for tax than for some other parts. Right now with the Republican party, there's kind of more of the traditional deficit hawk Republicans and then there are some more Republicans who don't worry as much about the deficit like those traditional Republicans. So it is entirely possible that particularly with tax legislation, we may see those two factions clashing more. We may end up seeing more moderate proposals put forward, but well, I guess we'll see.

So I mostly put this in here because some people have asked me, do we think that we'll see any changes maybe that tax bill from earlier in the year? Do we think we'll see it as some kind of last ditch ever before the end of the session? We have I think 14 days, not even of both Congress chambers being in session. Nothing is going to happen. They have an appropriations bill that they have to pass before December 20th or a continuing resolution, otherwise the government is going to shut down. I suspect that we are not going to see anything tax related until the beginning of the new Congress.

Simcha David: Do you think someone's going to try to push something into the appropriations bill like they've used that in the past? Certain things passed?

Sarah Adkisson: I think people are going to try. There have certainly been a number of kind of standalone bills that have been introduced in kind of the last rush of the session and they may try to hang those on what is sometimes called a Christmas tree bill and sometimes appropriations bills are used for that. I don't think they'll be successful. I think when you've got such a slim majority on either side, they're going to want to try and pass something clean and get it done, but if there's something that's super bipartisan, who knows, it might work. All right, so the new Congress will begin on January 3rd, 2025. The house actually has elected Mike Johnson to be a speaker. They have to do another vote, but it seems to be that some of the contention has been smooth over. We'll see, when I wrote this, the Senate had not yet picked its leader. The Senate leader is going to be Thune, and that to me does indicate that taxable is going to be a priority in the next session because Thune has been around for a lot of the tax writing. He was a big part of the TCJA. I think at least as far as the Senate is concerned, tax may be a big priority with that pick.

The two main tax legislative priorities that they're going to have coming in is going to be the TCJA extending that or making it permanent if they find a way to pay for it, and probably repealing at least portions of the inflation reduction Act if only because it is a good way to pay for some of the extensions of the TCJA and it's been a pretty big priority for Republicans wanting to repeal the inflation reduction Act, particularly peeling back a lot of the funding for the IRS. All right. We have our first polling or second polling question.

Astrid Garcia: Polling Question #2.

Simcha David: Sir, I think it's safe to say that with one party in charge of both the House and the Senate, the possibility at least of passing something in tax, whether they'd have to agree, like you said, just to create the majority in the house, they'll probably have an easier time in the Senate, but just in the house they'll probably have something. It's just going to be, I think like you said, it's just a matter of what it's going to look like is how drastic is it going to be and obviously what the outcome of that.

Sarah Adkisson: Absolutely. I actually wonder if it's going to use almost a very similar model as what happened with Build Back better. It was so long ago, three years ago, it seems like a lifetime almost in tax now. The build back better was very, very big. It was expansive, and what ultimately passed was what was kind of affectionately referred to as either Build Back Mansion or the Skinny build back better, which was nowhere. It was expansive and it became the Inflation Reduction Act, but it was not anywhere near as sweeping as the build back Better was, if you remember the build back better would've repealed Section 1202 would've lifted the salt cap but made it permanent to I think $80,000 a year. There were a lot more changes and I think people have kind of forgotten about what it was going to be

Simcha David: And this time around I tell my clients when a bill is introduced, we will talk about it pretty much right away because in the past they could introduce bills and it would change a thousand times before it got passed because there was the different parties control, different part of the process. But anyways, let's move on to the

Astrid Garcia: Question now. Please make sure you've submitted your answer back to you guys.

Sarah Adkisson: All right, so like I said, I think the future of the Tax Cuts and Jobs Act is going to be a very big focus for Republicans in 2017. It was really considered one of their biggest wins even though it wasn't particularly popular when it actually passed. I think now people have gotten very used to it and I think changes would be very unpopular because people just don't like change. They don't want to learn how to redo their taxes all over again. They've gotten used to having a double standard deduction, so it's going to be a pretty big part. So just as a refresher, the TCGA actually has some parts that have already gone into effect some permanent changes, and they were some pretty big permanent changes, particularly for businesses beginning in 2022. Businesses are required to capitalize and amortize qualified research expenses. They're not allowed to fully deduct them in the year that they're incurred anymore. That's under section 1 74. That was a massive change, I think that you'd been allowed to expense since the 1954 code.

It has been around for forever. So that is a huge, huge change that was made. There was a bill earlier this year that would've really revoked all of these provisions, but that was really one of the biggest ones that people wanted to see. Despite the fact that this change we've known it's been coming since 2017, we still don't have regulations for the new section 1 74. The IRS has released a notice for proposed rulemaking, but they haven't actually made those rules. They're supposedly going to be releasing them before the end of the year. Sorry, that should say year, not the year.

So I suspect we'll probably see it on December 22nd right before they all go for Christmas break. They'll drop it on us a hundred percent. Bonus depreciation that began also phasing out in 2022. So every year you get a 20% reduction in what you would have had beginning in 2027. There'll be no bonus left, and this was also a pretty big change. The change of the calculation for the 1 63 J limitation was previously you were able to use earnings before taxes, interest amortization and depreciation. Now you can only use earnings before taxes in interest, so effectively reducing your limit again, there was a bill early this year. It went back and forth. It has failed every single vote. I don't think we'll see it go through the end of this year, but it's possible that it could be attached to a different TCJA bill in the future.

So as a reminder, these all at the end of 2025, so the double estate tax exemption that is currently 13.61 million per taxpayer for 2024, it's going to increase to 13.99 million per taxpayer in 2025, but then in 2026 it's going to go back down to probably estimated about a $7 million per taxpayer, so it's going to be cut in half and that's a pretty big jump. Also, the lower marginal tax rates currently we have lower tax rates and also compressed brackets. Those are going to go back up and the highest rate is going to go back up to 39.6%.

The state and local tax deduction, everyone's favorite topic right now, I swear that is currently capped at 10,000 for joint filers. It's actually it's 5,000 for married filing separately, sorry, the increased alternative minimum tax exemption and the income levels. When that phase is out, that's going to go back down. The phase out level is going to go back down the 20% qualified business income deduction, QBI under section 1 99 A that's gone. And then this one's actually kind of interesting. The section 4 61 L disallowance of excess business losses for individuals was set to expire in 2025 and they extended it and I believe either the CARES Act or the American Rescue Plan in order to pay for some of those provisions. So that actually was now going to expire in 2028. So that one unfortunately is going to stick around a little longer for people.

Simcha David: So that state and local tax exemption, like you said, everybody's thinking about it, looking at it, PTET came in and in some ways I think you get a better result. Again, you need a partnership involved in order to get to the PTET deduction. So I think some of the states have already said that when this provision expires and the limit's no longer there, their PTs are going to go away automatically.

Sarah Adkisson: Yeah, there's a whole list. I think California is one of 'em. California

Simcha David: I think is the biggest.

Sarah Adkisson: I have a list somewhere, actually I should have brought it up if I'd known you were going to ask that, I would've.

Simcha David: No, it's not. I just want to point it out to everybody, but again, the question is if they do again, allow this one to expire so to speak, and we get the state local tax deduction back then you have to look by state to see, well, which one works better for you? Is it state local tax deduction is the PTET? People don't realize that together with some of the A MT limitations from the past, the itemized deductions didn't always work for high net worth individuals, so they didn't lose that much when the state and local deduction came in, but they did get PTET, which is working fabulously for some people. So obviously each person's an individual. You'll have to look at each one. I was just the 4 61 L. We never understood how that actually raises money. Apparently it does. It kind of kicks the bucket down the road.

So I guess if they feel that it was giving them something and gave them some income that to go to 2028, I guess that's okay. I think the tax periods is just more pain than anything else on the 4 61. Oh, but I think really big is the QB. I mean that's was supposed to bring parity to the corporate tax rate of 21%. I think it was supposed to kind of bring a little bit of parity to the world when you got that QBI deduction. So I hope that kind of remains to key parody because changing in the corporate right, the 21% tax

Sarah Adkisson: Rate, no, there's the only, so I believe I have it later, but we can talk about it a little bit now. Some of the proposals have been to reduce the corporate rate to maybe like 20%. That's not very big. There was also discussion during the campaign trail of lowering the corporate rate to 15% for American manufacturers. So if they manufacturers think in America, then they would have a lower corporate rate. It is kind of interesting. There are some Republicans and JD Vance is one of 'em who have expressed some feelings that maybe Republicans have given too much to corporations. So I don't know how that's going to ultimately kind of shake out.

Simcha David: Right. I guess we'll see.

Sarah Adkisson: Yeah, we have our next polling question.

Astrid Garcia: Polling Question #3.

Simcha David: I think bonus depreciation and the 1 63 J limitations, really if you're talking about something that would hit, really hit the business community and the r and d, that kind of stuff. Those are really big. And think about it, you're a small business and you're paying interest on a loan and the cash is going out the door, but you don't get a deduction for it. So I think adding back in, it's not going to go away, but adding back into depreciation would make a big difference for a lot of businesses. So I think they're probably focused on, again, I don't know, but maybe they'll focus. I hope they'll focus on all of them, but they might not. Just curious. The TCJA, how did they get that through? I know they controlled the house, the Senate and the executive branch, but did they also, was it a large majority in Congress at the time or was it small? I don't know off the top.

Sarah Adkisson: It was pretty small and you just gave me an excuse to talk about to say my very favorite word, which is reconciliation.

So reconciliation is a process they can use, but the reason that the TCGA was only 10 years reconciliation, you have to can't have anything that impacts the deficit after 10 years. So that's why the TCGA expired is because they did it through reconciliation and that means that they're likely going to use that again because I think they had a bigger majority in the house in 2017. They knew they were going to lose some of the majority in 2018, but in 2017 they had a bigger majority and they still needed to use reconciliation. Pretty much every budget bill, any tax bill recently has pretty much passed through reconciliation. The IRA was reconciliation. That's why everything starts expiring. The credit start expiring after year nine or 10. So it basically requires a simple majority. There's a lot less back and forth. There's a lot less debate, and that's probably what we're going to see with any tax bill coming up as well because you otherwise would have to pick up a two thirds majority and that's not going to happen or a 60 vote majority in the Senate.

Simcha David: Understood.

Sarah Adkisson: Yeah.

Astrid Garcia: I will be closing the polling question now. You haven't submitted your answer. Please make sure you hit submit.

Sarah Adkisson: All right. So there are also some provisions that are changing that are international. I will just caveat this with I don't do international tax. I know this on a very high level, so if you do have any questions about this, we do have an international tax group. They're very knowledgeable. Mostly this is just to mention because there really hasn't been a whole lot of conversation about this. I think a lot of people forget that these are also changing at the end of 2025. So it seems like a good idea to mention these because they were pretty big changes with the TCJA. TCJA created the global intangible low tax income deduction that is going to be reduced to 37.5% beginning after 2025, as well as the foreign derived intangible income deduction, AKA fitty. Both of these are very fun to say, guilty and fitty that's also going to be reduced to 21.875% after 2025.

And the base erosion and anti-abuse tax is going to increase to 12.5% beginning in 2026, and the look through rules for controlled foreign corporations will expire in 2026, beginning 2026. One of the other reasons that I mentioned this is because from some of the things that I've read and some of the things I've heard, these will not be a priority in any tax legislation. The general idea right now from what I've heard is that they are not particularly interested in extending anything that is helpful to foreign corporations. They are very focused on American businesses. So these I think have a potential to either stay with the reduced benefits or have the benefits taken away completely as a pay for.

There are some things that everyone agrees on. I know you wouldn't think it right now, but there are. So we've seen bipartisan support for several provisions and I would be surprised if some version of all of these things were not in any tax bill that passes, particularly if it ends up needing any kind of democratic support, the treatment of r and d expenses, at least to allow more favorable expenses for domestic companies, and that would actually be probably be domestic companies with domestic expenditures that has had bipartisan support. It was part of the bill that passed the house. I mean it sailed through the house. It ran into a bus all in the Senate, but it had extremely high bipartisan support in the house and it had a lot of democratic support in the Senate. So I believe that we might be able to see something come back, at least for domestic companies with r and d expenses, some form of bonus depreciation.

50I've heard possibly capping it at 50%, so maybe not a hundred percent is going to come back, but probably maybe % might some form of lowered individual income tax rates for those at least in the lower four or five brackets that has a lot of bipartisan support. The qualified business income deduction has a lot of bipartisan support. There's been some floated changes to the low income housing tax credit that has been a bill that has actually had bipartisan support for a really long time and just hasn't been able to attached to something that passed. And then the child tax credit, that was such a huge, huge thing on the campaign trail. The reason I'm bringing this up is because it is very, very, very, very expensive and if they prioritize the child tax credit over anything else that is going to cut into other priorities that maybe would be more favorable for some of the people on this call. And speaking of which, we're going to talk about the cost of all of this before we have our final poll question.

Astrid Garcia: Polling Question #4.

Simcha David: So Sarah, somebody was asking Sarah, somebody was asking, I don't know if you've got thoughts on this, but this BOI filing all that information that they have already that they're asking us to give them that they've got huge penalties if you don't file anything from, I did see that question. Whether they're happy or not happy about that or it's just an extra burden of businesses for no reason. Any thoughts on that? I mean,

Sarah Adkisson: They passed it. That's kind of how it feels like anytime people are like, do you think Congress is going to say it? I'm like, they passed it. They

They did. I think the time has passed. There was a bill last year. They passed it right before the Christmas recess, the whole winter recess. It passed the house and then they sent it to the Senate and the Senate was like, that's nice. They did not do anything with it. I think if they were going to walk it back, they would've done it in 2023 before the requirements actually went into effect. At this point, it's already impacting any new business already, something like 7 million businesses have filed, and that number's got to be up. Given the number of questions the day I get about this, they wouldn't be able to do anything until after the deadline for almost 35 million companies. So I don't see them extending it or I think at that point, it's almost like a sunk cost fallacy. We've already got 35, 39, however many millions of companies that have filed it, and the harm has been done. Now, that's not to say there have been constitutional challenges to it,

That's not to say if there's a constitutional challenge that is upheld broadly and nationwide, I think that is the most likely thing to stop the CTA not Congress.

Simcha David: Understood, understood. I mean, they could say they'll push all penalties for another year, but I doubt they'll do that at this

Sarah Adkisson: Point. Yeah, yeah. They could do something like that or introduce a bill that says, Hey, actually what we meant to say was you had 90 days to file this, but I mean, they set the penalties and they set it to be chain to inflation. Yeah, it is very hefty. It's 591 days and that's going to go up in 2025.

Simcha David: Okay.

Astrid Garcia: All right. We'll be closing the polls now. There

Simcha David: Is one more polling question in case anybody wants to wait for the last question.

Sarah Adkisson: All right. I think most people want the TCGA extended, all right. This is how much it will cost to do that. So this is the committee for a responsible federal budget. If you are a huge tax nerd or budget nerd, they have this amazing tool where you can build your own TCJA extension and see how much it will cost. This is how much it will cost to completely extend the TCJA and bring back the research expensing the higher EBITDA limit and bonus depreciation. It will be at least $5.2 trillion

Simcha David: And allow the salt cap to expire. I think you had that.

Sarah Adkisson:Yes. No,  no. Extend the salt cap. Oh no. If you let the salt cap expire, it goes up to 6.4 million.

Simcha David: Oh, okay.

Sarah Adkisson: Yeah, if you let, that is why the salt cap I think is going to stay in some form or another. It is a massive revenue razor limiting the salt. It reads like a massive revenue razor, like you said, with the A MT, with the PTA workarounds. I don't know how much it actually raises in revenue, but at least in traditional budgeting,

Simcha David: Accounting

Sarah Adkisson: Modeling,

Simcha David: Which we figure out, right?

Sarah Adkisson: Yeah. In that traditional congressional budget budget modeling, IT scores very, very high. So I think that some form of it's going to be included in any bill that passes because otherwise it adds so much more. Yeah. So we already talked about reconciliation. I was going to get that word in here anyway I could. So again, Congress is going to have to use reconciliation almost certainly to pass anything. We already kind of talked about this. I think unless they find some really, really creative ways to raise trillions of dollars, we're going to see a scaled back version or maybe another potential is to extend it for four years, five years, half the time.

That could be one option too. We talked about the repealing of the portions of the IRA. That would be a good way to pay for a lot of it, but those credits are actually very, very popular in some very, very Republican red areas. They have been very helpful to a lot of areas. Ohio, I believe is one of the states that has benefited very heavily from it. They've been able to get a lot of credits in new facilities, and that is a very now Republican stronghold. So that could add another wrinkle if there are some Republicans who represent some of those areas that have been able to benefit quite a lot from the IRA, those republicans may be resistant to repealing portions of it.

Other ideas being discussed, restricting corporate state and local tax deductions in as opposed to personal individual state and local tax deductions without allowing any form of a workaround around that. I don't know how exactly that would work or how much support it has, but I have heard that it's going to be very interesting to see what all ends up. The congressional budget office always puts out, I think it's every two years, they put out ways to reduce the federal deficit. So I highlighted a few of these that could have impacts more towards funds. Keeping the salt cap, as I said, it is a huge revenue raiser, increasing individual tax rates that always scores very high. Taxing purchases of securities is one that could be an option. Expending expanding what is subject to the net investment income tax. That is one that's on there. Increasing capital gains 2% actually is not. I love that. I'm about to say it's only 102 billion.

Simcha David: What's a couple?

Sarah Adkisson: It's just Yeah,

Simcha David: The government. Go ahead.

Sarah Adkisson: Yeah, requiring advertising deductions to be amortized. That one I also highlighted because in the original version of the TCJA, they actually repealed the deduction for advertising completely. It was one of the pay fors. So that is something that has had previous, it has had previous support, and then I really included taxing carried interest as ordinary income so everyone can see how little it would raise. It is constantly brought up as a potential. I can't see it being passed without it bringing in more money than that. I mean, obviously there's always the potential just for whatever political points, but it really is not something that would raise a lot of money

Simcha David: And I think it's always been that way. It's always been a very low raiser of funds as you pointed out. I mean that is a drop in the bucket, so to speak, and it's really more about political points and I think about the general understanding of industry. So to all the people on the phone here, make sure we're out there talking to people and telling them how in the industry these returns that we make are actually beneficial to all the people that are in unions that have pensions and all people need to understand that again, and maybe that messaging can get out somehow because again, the budgeted amount and that would hit the bottom line is really, really small. I agree.

Sarah Adkisson: Yeah, I believe after this we're going to move on to the cases. So actually there are a few questions in the chat that interesting. Somebody asked, how do I arrive at the 11.5 billion figure? I did not arrive at that. The congressional budget office arrived at that. You can go to the website. They have more information than you could ever possibly need about how they do the budget scoring. So that's where I got that information is from a government agency. It might be a little out of date. I think it was from the last one they did was in 2022, so it might not be accurate as of now, but that was the most recent one that I could find.

If they keep the salt limitation. Would you expect to keep the doubled standard deduction amount for individuals? That is a good question. I think that they're probably going to try to find some way to keep the doubled standard deduction amount. People I think have gotten really used to it. It's easier than figuring out both your standard deduction and all your personal exemptions. It also is ultimately cheaper for the government to do the standard double standard deduction because once you get up to a family of five, the benefit starts to go down. The government actually starts to save money or make money off of larger families not having an exemption. So I think the double standard deduction is probably going to stick around. Sarah,

Simcha David: Dunno if you want to move two slides ahead and put up that final

Sarah Adkisson: Oh yay

Simcha David: Polling question, then we can continue the discussion on these pieces.

Sarah Adkisson: Yeah, absolutely.

Simcha David: Ashley, I don't know if you need to read it. Are you required to read anything?

Astrid Garcia: Polling Question #5.

Simcha David (00:39:39):

Awesome. Okay. Sarah, go ahead with the questions. I guess.

Sarah Adkisson: Yeah, we have somebody who asked how might tariffs pay for extending the TCJA? That's a really interesting question and I think it's one that Congress right now is trying to figure out. Tariffs are very, very hard to price. Ultimately, unlike a lot of tax things, tariffs are a lot more likely to have impacts on human behavior, which makes them less predictable overall. So it depends on how other companies react to tariffs. It depends on how Americans spending habits react to tariffs. The general budgets modeling on tariffs has ranged from, it could bring in $2 trillion to it could cost $300 billion, which is a huge delta. So it's possible that Congress could look at it and say, okay, well we're going to include tariffs is one of the ways that we're paying for the TCJA, but I think it's hard to do it with some certainty. So that I would expect that'd be more of a last resort.

Oh, that is a very good question. Do you think they'll be able to pass the change in social security being tax exempt? No, I don't. And the reason for that is it is $2 trillion. It costs $2 trillion. If they exempt social security benefits from being taxable, it will increase the deficit by $2 trillion and make social security insolvent by 2032 I believe. So I don't think that they will pass it. They maybe will lift the income level at which it becomes fully taxable. Maybe they'll do something like that. They may make some change, but I don't think that they're going to be able to pass that. I could be wrong, but it's just so expensive.

Those are some very good questions. All right, so we're going to move on now to case updates. There's really just two. Everyone's very favorite case, Orbin Capital, not a huge update on it, but it is worth kind of following it and noting where it is right now. So for those who don't know, soaring Capital, it's an investment firm. It's formed as a Delaware Limited partnership in 2016 to 2017. It had one general partner, three limited partners. The general partner is the one who handed all of the business affairs. They had ultimate authority to act for the partnership and the limited partners performed some services, but they were not allowed to take part in management, operation or control. Those limited partners received guaranteed payments and those guaranteed payments were subject to seca, but they excluded their distributed shares from cica citing internal revenue code section 1402 A 13.

The IRS did not like this, so they challenged their position taken on their tax returns. Soin, the company requested a summary judgment from the tax court that definitively said a limited partner's distributive share of a partnership is excluded from net earnings from self-employment entirely because they are a limited partner. Limited partner, of course is not defined in the code because that would make life easy for people. So the tax court, because there's no real clear answer in the statute, they look to previous decisions to make their decision on limited partners, and that is the Ranken Meyer decision In Ranken Meyer, the CAC court held the interest of a limited partner in a limited partnership is generally akin to that of a passive investor.

Simcha David: No. Now just to point that, Sarah, it's nice to say that 1402 a 13 is unclear. I think that's why that's the part that shocked everybody because we know what the IRS's position was. They never liked that legislation. But as we know, the IRS is not a legislative body. They cannot make law. They have to apply law. And exactly

That's the point of the summary judgment was to say, Hey, you guys, it says limited partner when this was written. That meant the state law limited partner. That's the normal definition of limited partner. We are a state law limited partner, whether you think we're active or not active. That doesn't go into the definition of limited partner. And the court managed to throw something into two words that follow limited partner as such to somehow show that there maybe was question as to what limited partner meant that maybe it did not mean state limited partner. So I think that's a little bit maybe on shaky ground. But again, like you said, they asked for a summary of judgment and they didn't give them summary judgment, which is kind saying, we think you can read it this way. Whether another court will agree or disagree is kind of up in the air. Since when things are clear in the legislation, you're not supposed to go outside the legislation to help determine what that is and the courts know that. So I just want to point that out for those.

Sarah Adkisson: We're going to be discussing some of that next. Awesome. Awesome. Yeah, this was about one of the most legally opinions that I feel like I've ever read. The fact that it was turning on two words of a statute as such, I cannot believe that somebody was able to write that many words about the words as such, but I was very impressed. So the court held that limited partners of a state limited liability partnership are not qualified for the 1402 a 13 exclusion for the sole reason that they have been called limited partners. So they denied this MRA judgment like Simko just said, and they held that a functional analysis test should be applied to determine whether those limited partners qualify for oh 2 13 14, sorry, 1402 A 13. Now of course, they did not tell us what the functional analysis test should look like because again, that would make things a little too easy.

So the case is not settled. It's not over yet. It is actually now back in front of the tax court. Both parties filed their briefs on September 13th, so that was a little over two months ago. The IRS's brief is arguing that limited partners are not limited partners for purposes of 1402 A 13. Under the functional analysis test, they're arguing that the determinative factor is whether they earned their distributive shares by acting in the manner of a self-employed person, and that under that test bins limited partners acted in that manner because they provided services and Soin investments income is derived from services.

That is a very summation of a several hundred page brief soin. In turn, they argued that all of the control was given to the general partner and therefore the LPs are eligible for that 1402 a 13 exclusion because they had no control. And that really is the functional test. We don't know exactly when that case is going to come down. It's been two months since they filed the briefs. I think they waived to trial. So it can take a while for opinions to be written, but the tax court is, I believe now fully, I believe all of the judges have been confirmed. So they're at full capacity for the first time since I think the nineties. So that may end up meaning that they can put a decision out sooner rather than later. But once we get that decision, we'll obviously update you. I don't think that the tax court decisions is going to be the end of this case in any way. Whoever wins is going to be like, yay, I won't. But whoever loses is going to appeal. I wouldn't be shocked if this ended up in front of the Supreme Court at some point feel that

Simcha David: A couple of text cases. So I just want to point out also the idea, I mean, they're still arguing, right? That 1402 a 13 applies to them. There is a middle ground here that doesn't seem to be brought out now, which is kind of if you have this set up properly, you'll know that the attorneys that set this up for whoever they set it up for have insisted that the general partners take or the limited partners take a guaranteed payment, a nice size guaranteed payment. And I think that always went to the argument that if they ever come and say 1402, A 13 is, that's not necessarily applicable to your entire distributive share. Well, why not create a situation? Why does it have to be all or nothing? Why can't it be that my guaranteed payment pays me for services? And then there's an investment component that would be akin to a normal distributive share as a limited partner. And yet the IRS has always pushed, seems to always pushed for an all or nothing approach to this. So even say at the end of the day that the court says, well, you're not a limited partner necessarily under law is that for the entire amount? And I think that is yet to be discussed, but obviously they're still trying to get under the full exclusion for 14 0 2 8 6.

Sarah Adkisson: Yeah, and I mean, I think that's a really good point. The tax court could absolutely say, okay, well we disagree with the IRS that it's all or nothing and we disagree with so and then it's all or nothing. We're going to say that, hey, some of the distributive share was yeah, totally not paid for services, but maybe some of it is provided for providing services. There was actually a different case. It did not have to do with funds, but where they did kind of reject the fact that the parties tend to always kind of be like, oh, it's all or nothing, and they did reject an all or nothing and basically said some of it, yes, some of it, no, we are going down the middle on it. We'll see. Maybe they're going to take that approach more often or maybe that other one was a one off. We'll find out.

All right. So I do also want to give an update on this just because even though it's not a tax case, it is possibly the biggest administrative law case that I will see in my lifetime. I don't know. We'll find out. So to give background, in 1984, there was the Seminole administrative Law case. This has been the law for longer than I've been alive, and this was Chevron versus the EPA. This created a two-pronged test that had been around for 40 years for when an agency's interpretation of a statute, so a regulation, a promulgated rule, whatever it is, should be given binding deference by a court in a case. So the first prong was, is the intent of Congress clearing the statute. If the intent is clear, you stop. You don't go any further. You send it back. If it's not you then go to the second step.

If the statute does not address that precise question, is the agency's interpretation based on a permissible construction of the statute, not the best construction? Is it reasonable? And if that second question was yes, then agencies were entitled to binding deference. The court had to give them the most weight in their argument. So this was the law for 40 years, and then Loper Bright came along and they challenged a national marine fishery service rule that said that these fisheries had to have federally mandated monitors with them. So basically federal employees who monitored the phishing to ensure against overfishing and that they had to cover the costs of the federally mandated monitors. So the lower courts held that, yeah, there was am ambiguity in the statute. The government's wasn't totally unreasonable. It was permissible interpretation. It wasn't arbitrary and capricious, the courts gave deference to that interpretation under Chevron because they were kind of required to Loper.

Bright enterprises challenged the ruling, explicitly asked the Supreme Court to overturn Chevron, and the Supreme Court took it up. Everyone knew where this was going by the way, as soon as they took it up, we all know knew what was coming. Every lawyer, so they've overturned Chevron six to three. They did not rule however, that courts are not allowed to give weight to agency interpretations. They held that as the responsibility of the court to decide whether the law means what the agency says, even if it's highly technical, even if it's highly scientific, the court has that responsibility. So even though it's not a tax case, it is going to have a lot of repercussions in the tax world in the entire regulatory world. Any agency rule is now extremely likely to be challenged, and it is a lot less likely for that rule to just win because hey, they came up with the rule.

Simcha David: Just to explain to everybody, the IRS is an agency.

Sarah Adkisson: Yes, yes. So the IRS has already had some problems. The IR is kind of for a very long time had almost like a special deference, even more so where even some of the things that they have put out, they have not gone through the normal rulemaking process but have been allowed and given deference. The case I'm thinking of is I think Mead, even though it was not a regulation, they gave what was called Skidmore deference to, I think it was like a private letter ruling that the IRS put out. So the IRS has for a very long time gotten special treatment even within Chevron, in my opinion. And that special treatment has already been slowly eroding, and now with Chevron being overturned, it's going to be a lot easier to challenge the IRS and a lot, potentially a lot easier to win. There's a flip side of this though, O because the regulations will be looked at more closely, more strictly, I think we're going to see regulations slow down. I think that they're going to take even longer to put out regulations to make sure that they will be upheld.

So there's some good, there's some bad with this decision, and there's also probably likely to be a lot more circuit splits on interpretations, so that also might not be great. People in one circuit may have to do something that someone in another circuit doesn't have to do, and they have to wait for the Supreme Court maybe to say which circuit is correct. I will say there was another case called Corner Post that may allow challenges in older regulations as well, and those challenges may not have any kind of congressional fix depending on what the challenges are with a Republican trifecta,

Simcha David: Hopefully maybe that pulls off the IRSs. Sometimes what they do is they clarify through enforcement, which nobody likes because there's ambiguity and instead of making things clear, they just come in and they're all over the map and how they do an audit. So maybe more people will be emboldened to take those to tax court so that they can say their side of the interpretation.

Sarah Adkisson: I do think that ultimately this could hopefully result in more certainty of what a regulation, sorry, of what a statute means or says. It may also result in Congress writing the laws more clearly. A lot of people, a lot of commentators think that Chevron by passing the buck, I guess to the agencies that Congress didn't worry as much about writing laws as clearly because they could just put in there the Secretary shall promulgate regulations. Honestly, the big one that came to my mind was the Digital Asset rules, the actual congressional text for the new crypto basis rules. I think it's a paragraph. It's so small. The regulations are over 600 pages because how do you interpret this thing that says, Hey, you have to start. You have to basically start giving 10 90 nines to all of your Digital Asset Clients Alliance.

Go figure it out. So hopefully Congress will step up and do make clear laws. We'll find out. All right, so I just had some key takeaways here. If this is the only slide you read, hopefully you'll get as much information as possible out of it. So a Republican trifecta I think is going to increase the chances of TCJ provisions being extended and hopefully extended quickly. I don't think anybody wants it to be a battle. It may end up being won. It does not necessarily increase chances of expensive provisions being brought back, but the bipartisanship of those may give them a leg up. Oh, I forgot to mention this. The no salt, no deal. Republicans in New York lost all of them, lost their seats. There were three, no salt, no deal. Republicans in New York, they all three lost their seats. So that might end up being that there's not as much pressure to reverse because that brings the number of no salt, no deal Republicans down from, I think it was seven to four, so they have a less of a pressure valve. Now to get that included, corporate rates could be further reduced between to 20% or 15% for American manufacturers. There have been some Republicans who have expressed support for further reducing capital gains, but I think that might be too expensive. I do think we're going to see potentially a more corporate and business friendly environment in the next two to four years, and that regulation and enforcements will be possibly more lax and some of them will be outright reversed.

Simcha David: Amazing. Thank you so much, Sarah. I just want to point out, we do have the third part of our series on Friday, December 6th, I believe it is, and we will be going through international tax and state and local tax with regard to financial services. Thank you all for joining Astrid.

^{Transcribed by Rev.com AI}