For more than thirty-seven years, Charles R. Levun and Michael J. Cohen have been presenting the preeminent seminars on flow-through taxation. The two flagship Tax Forum programs are Fundamentals of Flow-Through® and Tax Planning Forum®. Tax Forum is expanding its programs to include self-study (on-demand) training, as well as working on an additional course, which they will share with us soon.
Please read through Part 2 of this special interview, featuring Chuck Levun and Michael Cohen. Part 1 is focused on Tax Forum, its flow-through tax planning training programs, and the importance of education for CPAs, attorneys and other tax planning professionals.
To get a sense of how the Tax Forum programs are unique in the partnership, LLC and S Corporation tax training space, please register for Tax Forum’s complimentary webinar:
Avoiding Costly Mistakes: Four Essential Tax Concepts for the Non-Tax Business Attorney or CPA taking place on Thursday, May 16th at Noon CDT
Kat Jennings’ Question: Let’s jump right in …Do you see an increase in controversy in partnership taxation? Why or why not?
Michael Cohen’s Answer: For the most part, not yet. However, with the new budget for the IRS and the commitment to go after “large” partnerships, I would think that controversy will increase. However, for this commitment to be successful in shutting down “abusive” transactions, the partnership knowledge base of the IRS auditors will need to be expanded. I will note that virtually every year we have at least a half dozen IRS professionals attend either our Forum or Fundamentals courses.
Kat Jennings’ Question: What is the biggest challenge for partnerships going forward?
Chuck Levun’s Answer: Staying on top of developments is a biggie. There have been proposals floating around from Senator Wyden and others that would make substantive changes to some of the basic partnership principles. These changes are designed to hit perceived abuses of the partnership rules by large partnerships. Unfortunately, if enacted, they also would complicate life for the smaller partnerships, which are by far a large number of business entities and growing. Moreover, there are always new structuring techniques, new thought processes, etc. that are constantly being developed. Partnerships are such a dynamic area, given, as I said before, that partners have a tremendous amount of flexibility in structuring their transactions. It’s not like the S corporation arena where everything has to be shared on a pro rata basis, there can be only one class of stock, etc.
Kat Jennings’ Question: Tell us about any cases in partnership taxation that really surprised you.
Michael Cohen’s Answer: There are a number over our long careers. However, the recent Tax Court decision in Clark Raymond holding that partners in a CPA firm that left with their client lists were taxable at ordinary income rates on the value of those client lists, and the remaining “head honcho” received a corresponding ordinary deduction, might head up the list. While the decision is only a Tax Court Memorandum decision, which does not carry the same weight as a full Tax Court decision, it is troubling, as most tax professionals would have predicted that the client lists would have taken a zero basis in the hands of the CPAs who left with them, and they would not have had a taxable event (and, in the opinion of many tax professionals, the decision may be wrong). The case does illustrate the complexity of the partnership allocation rules and the uncertainties that can arise in the partnership tax arena.
Kat Jennings’ Question: What is the biggest mistake you often see partnerships make?
Chuck Levun’s Answer: The biggest mistake I see is an LLC making a check-the-box election to be taxed as an S corporation instead of as a partnership so as to minimize payroll taxes, without taking all the S corporation inflexibilities into account. Later in the business life cycle, I often get a call about how to avoid a certain S corporation problem for which there often is not a solution, as it is a taxable event to convert back to partnership format. There are other ways to limit payroll taxes to the “appropriate” amount while continuing in partnership format which we discuss in our Tax Forum courses.
Michael Cohen’s Answer: I also should point out that a common error made in connection with providing an ownership interest to an employee by transferring to the employee a profits interest that is subject to vesting is the failure of the newly minted partner to make a timely §83(b) election. This election eliminates a future taxable event when the profits interest vests; however, the §83(b) election must be filed within 30 days of its grant. There are no extensions!
Kat Jennings’ Question: What problems have you seen when the partnership was not set up correctly?
Michael Cohen’s Answer: While deals where the partners share everything on a pro rata basis (a straight-up deal) can be the easiest, even they can present difficult issues, if thought is not given to a succession plan, and what happens when a partner dies, becomes disabled, terminates employment, etc. However, non-straight-up deals, which are common, present a plethora of potential problems, with some of the most common being (1) not properly drafting tax allocation provisions, (2) not properly addressing tax distributions, and (3) not addressing how to account for unrealized gain when one or more partners contributes appreciated property to the partnership.
Kat Jennings’ Question: And last, but certainly not least … What is the best advice you give your flow-through clients today?
Chuck Levun’s Answer: Make sure that both your attorney and your CPA are involved in major decisions and that each is made aware of any important business developments. I too often see situations where the right hand does not know what the left hand is doing. I still remember a CPA recommending that an LLC file a “check-the-box” election to be taxed as an S corporation, which requires a pro rata economic relationship between the shareholders. At the same time, the attorney was assisting the client in raising money for which the infusers were to be provided a preferred return of their investment, which is not permitted for an entity taxed as an S corporation.
Meet Your Trainers
Chuck Levun: crlevun@lgclaw.com
Michael Cohen: mjcohen@lgclaw.com
Scott Miller: skmiller@lgclaw.com
READ PART 1 OF THIS TWO PART SPOTLIGHT INTERVIEW
