Guest opinion: An unexpected income tax threat to farm and ranch taxpayers

Guest opinion: An unexpected income tax threat to farm and ranch taxpayers

Legislation passed late last year repeals the 'small partnership' exception.

In a totally unexpected development, a tax provision passed late last year affects farmers and ranchers in a highly significant way.

Tucked away in the Bipartisan Budget Act of 2015, passed by Congress and signed by the president, it signals the end of a 34-year-old tax law that has been depended upon by thousands of taxpayers. It was a model of simplicity when enacted in 1982 and has continued to be the best example of tax simplification to this day. The late 2015 legislation repeals the “small partnership” exception, as it has become known after 2017.

Why it was passed in 1982

Neil Harl is Charles F. Curtiss Distinguished Professor in Agriculture and Life Sciences at Iowa State University and Emeritus Professor of Economics.

In 1967 this author was appointed by the U.S. Treasury Department to a task force to provide ideas on how to combat tax sheltering in agriculture and elsewhere. The ideas discussed were mostly enacted into law in 1969, 1976, 1982 and 1986. During the 1970s, the Congressional Committees focused in on partnerships, particularly limited partnerships, as the vehicle by which tax sheltering was taking place. The emerging draft legislation marked a “get tough” strategy with partnership taxation.

That worried a group of senators and members of the House of Representatives enough for them to draft a “small partnership” exception to the tough rules being considered. The “small partnership” exception passed in 1982, along with major legislation cracking down on tax sheltering. The committee reports stated that the intent was to create a simpler way for farmers and ranchers (and other small businesses) to file their tax returns.

The brief provision simply states that if an entity had 10 or fewer members (and a husband and wife were considered one member), and the members were individuals or estates of individuals (C corporations were later added), the entity is not required to file a partnership tax return, Form 1065.

The income, losses, credits and other tax items were simply passed through to the members for reporting on each individual’s tax return, Form 1040 (usually on Schedules F, C or E).

The legislation made it clear that the entity was not liable for penalties (unless they failed to pay income tax on their share of the taxable items). Those penalties, imposed otherwise on partnerships, are now $195 dollars per month per partner for up to 12 months and are now adjusted for inflation.

For those in regular partnerships, it has not been unusual to be billed several thousand dollars for a relatively minor omission in the partnership tax return.

What happened in late 2015?

The growing number taking advantage of the simplification provision threatened the bottom line of some tax practitioners and the push was on to repeal it, not in the 2015 tax bill, but in the Budget Bill where the repeal would be less likely to be spotted and resisted.

There were no hearings and no public discussion, alerting taxpayers that the most significant tax simplification in decades and decades was threatened. That clandestine effort, unfortunately, was successful.

What needs to be done

The repeal is not effective until 2018 so I am urging everyone who would be adversely affected by the repeal to contact their House and Senate members to let them know that the best example of tax simplification in decades is under attack. Ask them to support reinstatement of the provision.

I also encourage those who believe that important changes in federal tax law should not be tucked away in a thick budget bill, to communicate that fact to members of Congress. The proposed changes should be the subject of fair hearings before being voted upon in Congress.

The tax simplification did not have an impact on Government revenues. It simply required far less time, effort and expense to file the tax return. The provision is found in Section 6231(a)(1)(B) of the Internal Revenue Code.


The author is Charles F. Curtiss Distinguished Professor in Agriculture and Life Sciences at Iowa State University and Emeritus Professor of Economics. He holds a law degree from the University of Iowa and a Ph.D. in Economics from Iowa State. He retired in 2004 after 40 years on the ISU faculty. Dr. Harl has published 29 books, authored more than 800 articles and has made more than 3,400 presentations in 43 states and 17 foreign countries.

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