Living the Dream
“How was your weekend?” Thank you for asking. Awful.[i]
“Why?” you ask. (Humor me. Pretend you’re interested.) I’ll tell you.
One word, with 535 syllables: Congress.[ii]
When the reconciliation budget resolutions were passed by the Senate and then the House,[iii] the committees to which reconciliation instructions were given were also directed “to submit legislation to the Committee on the Budget by September 15. . . though this date is not binding.”[iv]
With its passage of the resolution, the Senate went on vacation; with its passage, the House resumed its vacation.
The Senate officially returns from its recess today, the House next Monday.
During this past Friday afternoon, a client who is selling their business called to share some news – a lobbyist with whom they are familiar informed them that this Tuesday (as in tomorrow) would mark the effective date for the rate hike for long-term capital gains. “Can we close the sale Monday?” (as in today), the client asked.
Congress won’t even be in session, I replied, and none of the revenue-raising measures have been introduced yet. Still, the client insisted that every effort be made to beat the “Tuesday deadline,” so our team committed to getting it done.[v]
Then, Friday night, Bloomberg[vi] reported that “A key Biden administration proposal to collect more tax revenue from wealthy individuals appears poised to be watered down by lawmakers and may even be removed entirely from the Democrats’ tax and social spending agenda, according to people familiar with the matter.”
“The situation remains fluid,” the piece continued, “with efforts to draft the tax portion of the Democrats’ $3.5 trillion social-spending plan expected to run through the weekend, the people said.”
“The people said.” OK.
The article added that “Senate Democrats are already planning for the possibility of scaling back some of Biden’s proposals by focusing revenue-raising efforts more toward businesses than individuals.”
Then I saw an article[vii] that quoted Senator Wyden,[viii] Chair of the Senate Finance Committee, as saying the partnership tax “rules are too complex for working people who don’t have armies of lawyers and accountants.”
But “working people” generally do not own interests in partnerships, I thought to myself.[ix]
I kept reading; it seemed Mr. Wyden wasn’t done. “The complexity of the partnership rules,” the article quoted the Senator as saying, “allow the wealthiest individuals and most profitable corporations to decide when, and whether, to pay taxes at all.”
“Where was this going?”
I followed a link in the article which brought me to a tax bill which the article indicated Sen. Wyden is likely to include “in the tax section of a broader reconciliation bill that Democrats will use to expedite their multitrillion dollar plan this month.”
I decided to stop reading. It was Friday night.[xii] Leave it for tomorrow.
The next day did not start out much better.
Bloomberg Tax reported that the House Ways and Means Committee was going to be releasing revenue-raising (tax) measures in the next few days. However, the article also stated that the “Markup is to start Tuesday.”
Tuesday? Really? Was the client’s “lobbyist friend” on the money?
Perhaps Sunday would bring better news. Nope.
Sunday Morning Coming Down[xiii]
On one of the Sunday morning talk shows,[xiv] Senator Manchin repeated his line about not being able to support the President’s $3.5 trillion spending plan. OK, we may have heard that a few hundred times by now.
Then, last night, one Washington publication[xv] reported that, “according to a Democratic source familiar with the plans,” House Democrats were thinking about raising the corporate income tax rate from its current 21 percent to 26.5 percent – just shy of the 28 percent proposed by Mr. Biden.[xvi]
But wait, there’s more.[xvii] According to the above-referenced “source familiar with the plans,” House Democrats were considering an increase in the tax rate for long-term capital gain from 20 percent to 25 percent – nowhere near the 39.6 percent sought by the President.[xviii]
The “source”[xix] also told somebody, who then told the rest of us, that the House was going to raise the top individual income tax rate for ordinary income to 39.6 percent from its current 37 percent.[xx]
Finally, we were told that House Democrats were considering the imposition of a 3 percent “surtax” on those individual taxpayers with over $5 million of adjusted gross income.[xxi] Nothing was said about whether this applied to all income or just capital gain. If the latter, then we’re talking about a rate of 25% (see above) + 3.8% (the tax on net investment income) + 3% (the surtax) = 31.8% on long-term capital gain.
It was very magnanimous of “the source” or “the people” to have provided so much information about rates, but why couldn’t they have also whispered something about the effective dates?[xxii]
Why So Glum?
So, here we are, over one thousand words of frustration into this post, and all I have done is repeat whispers coming from unidentified folks who are somehow “in the know,” and described my visceral reaction to one Senator’s ill-conceived plan – at least as to timing – to reform the partnership tax rules for the benefit of a group that doesn’t exist.[xxiii]
It’s almost entertaining, in a sado-masochistic sort of way, until you realize that business owners and their advisors are trying to make decisions based upon incomplete information, ever-changing “reports” from unknown sources, the hints given by politicians who are more interested in ensuring their re-election than in standing by their convictions-of-day.
Last week, the House Ways and Means Committee sprung several leaks. During the immediately preceding week, it was “information from a source familiar with the deliberations of the Senate Finance Committee regarding some of the tax proposals being explored by the Committee” that escaped the cone of silence[xxiv]
Your client is a business owner. Their business is their life. It is the product of their labor, their creativity, their risk-taking, and their capital. The value it represents is their retirement plan. The business is also the employer of other individuals – it is their source of retirement funds and their safety net.[xxv] It transacts with, and sustains, other businesses, which employ other individuals. You get the picture.
The sale of one’s business is one of the most difficult decisions any owner must make. Who is the right buyer? Will they continue the business and, if so, in what form? What about its employees, especially key people? How will the buyer pay for the business: cash, a note, equity, contingent payments, over how many years?
Economics is a key consideration in these deliberations, and nothing will affect the economics of a transaction as certainly and as immediately as taxes.
Yet here we are. Folks who were already thinking about selling their business are making decisions out of fear based on whispers. I understand that tax rates are open for negotiation – that makes sense. But the effective date? C’mon.
The Green Book indicated the capital gain hike would be “effective for gains required to be recognized after the date of announcement.”[xxvi] Secretary Yellen intimated that date would be April 28, the date the President officially disclosed his plans to Congress.[xxvii]
Since then, the effective date has continued to move, with the result that many business owners are rushing to complete deals that I hope they will not regret later.[xxviii] Let’s face it, when someone is that close to the end of a project, the temptation, or the pressure to concede points can be overwhelming, and the warnings of one’s advisors to hold fast or to walk away may be difficult to accept.
I cannot believe that Congress intended such an outcome.
[i] This is the cleansed version of the post.
[ii] Certain letters appear with greater frequency than others. Do I have to “spell” it out for you?
[iii] On August 14 and August 24, respectively.
[v] Thank you, Kate Heptig, Sean Simensky and Bernadette Kasnicki.
A special thank you from me to three of my closest and most steadfast friends: Ronald, Big Mac, and Mayor McCheese.
[vi] “Biden Inheritance-Tax Plan Poised to Be Scaled Back in Congress,” by Colin Wilhelm.
[vii] “Wyden Seeks to Overhaul Partnership Taxes as Revenue Raiser,” by Colin Wilhelm. Bloomberg Tax.
[viii] Oregon. The Beaver State.
[ix] Except for “professionals,” whose only asset (intellectual capital) truly depreciates over time. Yes, they are working people. They never stop working or learning. Ask any of my acquaintances. But I digress.
[x] I can’t write what I said. Maybe I should.
I also thought it would make a great blog post.
[xi] The partnership tax rules.
[xii] I’ve heard that means something.
[xiii] OK, not as soulful or as pained as the narrator in Kris Kristofferson’s song.
[xiv] “State of the Union.”
[xv] The Hill.
[xvi] But still way above the 15% minimum global tax rate espoused by the White House. Still trying to figure that one out.
[xvii] No, I am not offering Ginsu knives if you call within the next 30 minutes.
[xviii] Query what “The Squad” makes of all these whispers. Will they vote against the legislation if it includes what they will certainly view as seriously “watered down” provisions? They have threatened to do so.
[xix] I assume there is no connection to the Matrix movies, but who knows. Frankly, what comes to mind is Louis Tully as the Key Master in “Ghost Busters.” You know, the Keymaster of Gozer, who was a demigod and a loyal minion of The Destructor.
[xx] Back to where it was before 2018.
[xxi] Query whether they are borrowing from Albany’s tax play book, which is chock full of “temporary” income tax surcharges on certain high-income individuals. Will this surtax be temporary, or will it be a “permanent fixture” like many Senators?
[xxii] I’m going through the Ways and Means Markup this morning.
[xxiii] I remember when the idea of the flat tax was floated in the mid-1990s. “Simplicity,” incarnate, its proponents told us – that is until a lot of very bright people started poking holes for which new legislative and regulatory solutions would have to be found. How long do you think the Senator’s reformed Subchapter K would last?
Remember “Get Smart”?
[xxv] In almost 35 years of practice – I’m finally getting the hang of it, sort of, though I still prefer to use paper and dislike computers (don’t ask me to do a mark-up, as one of the buyer’s attorneys found out this weekend) – I have never met a business owner who did not take care of their employees, even upon the sale of the business.
[xxviii] What’s the saying? Act in haste, repent at leisure.