Small Partnership Exception Repealed – call for reinstatement

To: Sen. Charles Grassley; Sen. Joni Ernst; Rep. Rod Blum; Rep. David Loebsack; Rep. David Young; Rep. Steve King

Dear Senators and Representatives:

Rarely, have I been driven to correspond with our Senators and Representatives in Congress. But a recent development has made that necessary. A highly important provision, enacted in 1982 as part of the Tax Equity and Fiscal Responsibility Act of 1982 was slipped into the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 1101(a), 129 Stat. 584 (2015), and passed along with the rest of the Act. The provision, which has been relied upon since enactment by farmers and other small businesses is found in Section 6231(a)(1)(B) of the Internal Revenue Code and has become known as the “small partnership” exception.

First, let me say that it is highly unusual for an important tax issue to be lodged in the massive budget bill although it is probably done. Moreover, there were no hearings preceding the enactment and those of us who monitor fairly closely the various tax bills were taken totally by surprise.

But let me explain what is involved. In 1967 I was a member of a small task force appointed by the Department of the Treasury to provide ideas on how to reduce tax sheltering including tax sheltering in the agricultural sector. We provided several ideas which were mostly enacted in 1969, 1976, 1982 and 1986.  During the 1970s, the Congressional Committees focused heavily on the way partnerships, principally limited partnerships, were being employed in the bulk of the tax shelters. That led to several hearings which made it clear that tougher rules would be forthcoming governing partnerships. That alarmed a small group of Senators and Representatives who, according to the committee reports, succeeded in getting drafted and included in the Tax Equity and Fiscal Responsibility Act of 1982, a provision for simplification of tax reporting for those operating as partnerships and more recently, operating as limited liability companies. As recited in Rev. Proc. 81-11, § 2.04, 1981-1 C.B. 651:

The committee reports indicate that Congressional intent was not to impose additional filing requirements on existing small partnerships of the type that historically had not filed partnership returns, e.g., a small family farm partnership, a small, family-owned retain store, or in some cases, co-ownership of property.

The statutory provision, included in TEFRA, simply provided that, for eligible entities, income, losses, credits and other tax items would pass through to the appropriate schedule on Form 1040. Thus, there was no revenue loss for the United States Government, but it provided a very simple procedure for tax filing for the taxpayer. That provision, in Section 6231(a)(1)(B), was used in the 34 years following by hundreds and hundreds of farmers and small businesses. It was a regular item in my all-day seminars for lawyers, CPAs and accountants since 1982.

The surprise inclusion of repeal of the “small partnership” provision in the Bipartisan Budget Act of 2015, § 1101(a) was a great surprise to those of us who are involved in helping small business and farm taxpayers understand the tax law, which has grown more and more complicated. To put it even more bluntly we were shocked and dismayed. At a time when we hear talk of tax simplification, the repeal would eliminate, in my opinion, the most obvious and successful tax simplification move ever and it had been in use for 34 years with great success.

Therefore, on behalf of small taxpayers everywhere, I plead with you to do what you can to repeal the offensive provision which is scheduled to go into effect after 2017. Please accept my thanks for whatever you can do to eliminate this provision as soon as possible so that tax planning will not need to be changed to a more expensive and complicated procedure.

Sincerely yours.

Neil E. Harl

Comments are closed.