four necessary findings in regards to the mid-year tax replace

On June 22, Kilpatrick Townsend tax attorneys Lynn Fowler, Heather Preston, Rob Daily, and Jeff Reed attended a mid-year tax update webinar hosted by the firm. The webinar discussed current federal and state tax issues that arose in the first half of 2021. Here are 4 key takeaways from the webinar:

  1. Two-stage property acquisition delivers surprising results. We recently advised a customer on an interesting transaction that led to a surprising result. The customer wanted to acquire 90% of the shares in a company (“NewCo”) that would acquire and operate a hotel. The other 10% belongs to the operator of the hotel who is also a partner of the company that currently owns the hotel.

The twist is that the customer’s capital comes from a purchase at a discount to the existing hotel-secured mortgage. The customer would then acquire the stake in NewCo in return for the waiver of the purchased mortgage debt. While the customer’s base in the note reflected the purchase discount, the customer’s initial capital account reflected the full face value of the mortgage. Through careful planning, we were able to give everyone involved the certainty that neither the acquisition of the bond nor the acquisition of the company shares against waiver caused the previous owner to realize the debt repayment income.

  1. Tax reform is on everyone’s lips. The news this summer is dominated by the discussion of tax reform to pay for the infrastructure and other administrative priorities that have been passed. The administration has proposed a wish list with a number of tax increases, including:

    • Increase in the corporate tax rate

    • Introduction of a global minimum tax for multinational companies

    • Raising the highest income tax rates for high-income individuals

    • Abolition of preferential rates for long-term capital gains for high-income individuals

    • Elimination of similar exchanges, a popular way of deferring tax for real estate investors

    The Kilpatrick Townsend Tax Team is closely following the legislative discussions on these proposals. Later this summer we’ll be launching a new blog, the Kilpatrick Townsend Tax Legislation Tracker, to keep you up to date on developments in tax reform and other key tax laws.

  2. Changes in carried interest. Private equity and mutual fund managers will want to keep an eye on potential tax reform. These managers often receive a high level of compensation through carried interest, which under applicable law is not taxed on granting and can be taxed on sale at preferential capital gains rates. The Tax Cuts and Jobs Act added a three-year hold period to carried interest in Section 1061, but did not fundamentally change the way carried interest is taxed. Last January, the Ministry of Finance issued taxpayer-friendly regulations that simplified many of the rules in Section 1061. Most importantly, the rules clarify the “capital exemption” that exempts mutual fund managers from the three year holding period for participation in a partnership, which relates to an interest in the capital they invest as long as the capital interest is separate from the manager’s carried interest is identified.

    However, the importance of these regulations will ultimately depend on the tax reform. President Biden’s wish list includes a carried interest reform aimed at ending the ability for mutual fund managers to be taxed at preferential capital gains rates. There are also numerous bills in the Senate aimed at changing the nature and timing of carried interest. But with these proposals floating around in Congress for over a decade, it’s hard to tell if this time around. We will be tracking these carried interest proposals on our Kilpatrick Townsend Tax Legislation Tracker.

  3. States are increasingly offering elective pass-through tax systems for corporations. A popular trend in early 2021 was the introduction of state pass-through tax regimes for businesses to bypass the state and local tax withholding restriction of $ 10,000. In the background, it used to be that state and local taxes (e.g. state income taxes and wealth taxes) could be deducted from personal income tax returns without restriction. Then the Tax Cuts and Jobs Act limited the deductible amount to $ 10,000. To bypass the $ 10,000 limit, state pass-through corporate taxes allow partner taxes to be paid at the pass-through level, which are then indefinitely deductible. The Ministry of Finance’s guidelines issued at the end of 2020 confirm that the state taxes of this structure can be fully deducted for purposes of federal income tax at the partnership level). In response to Treasury Department guidance, states have rushed to put in place tax systems for business transit. So should every partnership dial into this regime? Look before you jump – there may be differences between states in how partnership tax is calculated, which can affect the utility of the choice. In addition, the question arises whether non-resident partners can claim a credit for the partnership taxes paid on their home state declaration.