2023 Marcum Year-End Tax Guide

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court said that the profits interest rule, producing no taxable income to the service provider on receipt of the interest under Rev Rul93-27 applied. The court did not accept the Service’s argument that the holder of the interest had to provide services to the partnership, which issued the interest, and the provision of services to a subsidiary partnership was sufficient. It is not entirely clear that the Tax Court would have decided the same way on other facts. In this case, the capital structure of the upper tier mirrored that of the lower tier precisely. The IRS is apparently expecting additional reporting of liability allocations to partners on the partnership income tax return. In a meeting of the American Bar Association Section of Taxation, Adrienne Mikolshek, IRS Deputy Associate Chief Counsel for Pass Throughs and Special Industries, indicated that additional information will be required on schedule K-1 in the recourse liability section for the 2023 tax year. She suggested that the partnership must separately report recourse liabilities allocated to a partner related to a deficit restoration obligation and the portion pertaining to partner debt guarantees. This is evidently to provide partners with information concerning their potential economic risks for partnership debt. The draft of Form 1065 for 2023 issued in July adds a new question to the liability section, asking whether liabilities include amounts subject to a guarantee of partnership debt or a deficit restoration obligation. These amounts do not

need to be separately stated on the draft of Schedule K-1. However, the form references instructions, which have yet to be released. These instructions may require an attachment setting out these amounts. The draft Form 1065 also contains new questions concerning sec 754 adjustments, including whether the substantial built-in loss rules apply and whether the partnership has used or disposed of digital assets (similar to that found on the Form 1040 individual tax return). A case is scheduled to be heard by the Tax Court to consider the ’RS’ attempt to treat a limited partner as having self-employment income based on the partner’s activity on behalf of the partnership done through a corporate general partner. A common structure is to have a limited partnership be owned 99% by an individual as a limited partner and 1% by a corporate general partner, which is 100% owned by the same individual. Under the tax law, a limited partner usually is not subject to self-employment tax. However, the IRS has attacked this treatment and prevailed in situations where the purported limited partner is active in the partnership’s business. These cases have generally involved limited liability companies, where such activity does not threaten state law liability protection. In the case to be heard, the Service is arguing that services not performed directly by the individual in the capacity as a partner but through another entity should cause the self-employment tax to apply. We must keep our eyes on this case.

INFORMATION REPORTING The Service published final regulations for electronic filing requirements under the Taxpayer First Act of 2019. These rules are effective for covered returns and information returns required to be filed on or after January 1, 2004 – which applies to 2003 returns. The new rules require more returns to be filed electronically by severely limiting the small taxpayer exception. Under prior rules, electronic filing was required for information returns if one met a 250-return threshold. This was determined per return type. The new rules reduce the threshold to only ten returns. Furthermore, returns of different types must be aggregated to determine if the threshold is satisfied. The new electronic filing requirements will apply to: • Partnership returns • Corporate income tax returns (the prior exception for corporate income tax returns which report total assets of under $10 million at the end of the tax year is eliminated) • Unrelated Business Income Tax returns • Withholding tax returns • Certain information returns • Actuarial reports

• Certain excise tax returns • Registration statements • Disclosure statements

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