Obama Administration to Consider Imposing Corporate Income Tax on Certain Pass Through Entities
The tax press has recently informed the professional community that “in an April 29 e-mail briefing to its members, the National Association for Publicly Traded Partnerships cited an unnamed Treasury official who said the Obama administration is interested in a plan that would tax pass through entities with [annual] revenues [gross receipts] of $50 million or more as corporations”. White House spokeswoman Amy Brundage said the process is still unfolding and “no decisions have been made about the content of any specific reform proposal or the timing or manner in which the administration” will introduce a package of corporate tax reforms for the Congress to consider. .
The proposal on taxing large revenue pass through entities as well as prior comments to reduce the corporate income tax rate in general is sure to get more attention in the weeks ahead. It is clear that corporate tax reform is on the legislative “table” as our country’s federal corporate income tax rate of 35% is the second highest in the world next to Japan’s 39.5% rate which is presently anticipated to be reduced. Some countries, such as Ireland, have a corporate tax rate that is less than one-third of the U.S. rate and significantly higher than China or certain EU countries. While there is pressure on Congress to reduce the maximum marginal rate, a GEO study released in 2008 revealed that 55% of U.S. companies paid no federal income taxes during at least one year in a seven year period that it studied. Thus, part of the Obama Administration’s thinking is to reduce the corporate income tax rate but broaden the base by denying or deferral certain deductions or cost recovery allowances. There is expected to be a set of new base broadening provisions in the taxation of U.S. persons having foreign source income.
In going back to imposing corporate income tax on certain pass throughs, i.e., those having $50 million gross revenue partnerships and pass through entities, which amount will most likely be aggregated with the gross revenues of affiliated entities, perhaps both corporate and non-corporate, should be subject to corporate level income tax should be expected to be met with stiff opposition from the business community, including owners of closely held pass through companies that have high revenues, such as hedge funds and private equity firms. Presumably the proposal would affect the favorable treatment under current law of publicly traded limited partnerships that are eligible to avoid corporate level taxation based on the predominance of passive type income.
Taxing high revenue partnerships as corporations will also trigger a fair amount of business restructuring both from a tax and governance standpoint. Moreover, it again opens the door to discuss the benefits of integrating the double tax system of the corporate and shareholder level income tax by permitting dividend tax relief on in the form of a dividend deduction, imputed tax credit at the shareholder level for corporate income tax paid or elimination of taxes on dividends. It could further result in wholesale revisions to the entire set of corporate tax rules currently in place including the reorganization provisions. So it will be quite important to see whether the tax on pass throughs being discussed is a one item concept or whether it is based of a restructuring of the federal income taxation of U.S. business enterprises.
Perhaps in the haze of political bickering that is sure to follow on evaluating and commenting on the Obama Administration’s new and controversial test balloon to tax pass throughs, it would be nice if Congress would seize the opportunity to address our double-tax corporate income tax system and solve the integration issue once and for all so that there could be horizontal equity achieved by taxing corporate and non-corporate business enterprises on essentially the same basis. So much for editorial comments, at least for now.
