Originally published on Forbes.com.
When President Trump was speaking about his joyous anticipation of the Tax Cuts And Jobs Act portraying the spirit of a kid who wants to open the Christmas presents now rather than waiting till Christmas morning, he emphasized that the provisions in the bill were not good for him and his rich friends, but they were just going to have to put up with it. Comparing the code in effect as he spoke to what was shortly coming, he said:
This is not good for me. I have some very wealthy friends. Not so happy with me.
If Only We Could Run Numbers
Love him or hate him (and I do both, never mind the proportions), you have to admit that our President has a complex relationship with the truth, something which he admits himself in the Art of the Deal.
The final key to the way I promote is bravado. I play to people’s fantasies. People may not always think big themselves, but they can still get very excited by those who do. That’s why a little hyperbole never hurts. People want to believe that something is the biggest and the greatest and the most spectacular. I call it truthful hyperbole. It’s an innocent form of exaggeration—and a very effective form of promotion.
Well, Mr. President, somebody with my type of analytical mind would like to take your 2017 Form 1040 and run the numbers under 2018 rules and see what the difference in tax would have been. The second bottom line tax should be higher. I have to tell you cynics out there, that it could be so. Another free suggestion to the Trump Campaign is that they hire PWC to go through that exercise and just share the result. “Had the Tax Cuts and Jobs Act had an effective date of January 1, 2017 the total tax on Line 63 of Form 1040 would have been higher/lower by $$$$$.” They did something like that for Governor Romney in 2012.
Long-Awaited Regulations
For now, we only have indirect evidence. And there is something else. The law is one thing. It can leave a lot of room for interpretation. The regulations that the IRS issues tend to narrow that room quite a bit, while sometimes reassuring you that it is as large as you thought and more rarely telling you it is even bigger.
This week we got the most eagerly awaited regulations on Section 199A, which gives a 20% deduction to a broad swath of income. The regulations made for Christmas in August for tax nerds, the hobbits of the tax accounting world
As the War of The Ring, brought the long ignored hobbits and their pleasant Shire to the center of the concerns of Middle-earth, the Tax Cuts and Jobs Act brings forth from obscurity a band of otherwise meek and mostly happy and content modest creatures. That would be the small band of geeks, in every tax practice of more than moderate size, who actually look things up and read extensively. They dress poorly, lack executive presence, associate with people they like rather than referral sources and prefer board games to golf.
Somebody Is Mad At The Dentists
As I was out walking I got a call from Jeff Kristoff, Director of Tax at Rosen & Associates who was mourning the demise of his best-laid plans for his firm’s 700 dental practice clients. There was an example in the regulations. In order to understand it you only need to know one thing – being an SSTB is bad:
Additionally, if a trade or business has 50 percent or more common ownership with an SSTB, to the extent that the trade or business provides property or services to the commonly-owned SSTB, the portion of the property or services provided to the SSTB will be treated as an SSTB (meaning the income will be treated as income from an SSTB). For example, A, a dentist, owns a dental practice and also owns an office building. A rents half the building to the dental practice and half the building to unrelated persons. Under proposed §1.199A-5(c)(2), the renting of half of the building to the dental practice will be treated as an SSTB.
Once you are over a certain income threshold you are denied the deduction if your business is a specified service trade or business (SSTB). The “field of health” is one that is specified and that includes dentistry. Jeff tweeted
I’m bitter I’m the head of tax at a firm with over 700 dental practices and they decided to use a dental office renting a building as an example…way to shoot down any thought of wiggle room on management co’s, increasing rent, etc
— Jeff Kristoff (@jckristoff) August 9, 2018
Making Money From A Name
One of the things that we had been most excited about and (figuring out how to game) was that SSTB thing, If you want a really full discussion you will go to the top forbes.com tax contributors/editors Tony Nitti and Kelly Erb. They’re not hobbits – more like Gandalf and Galadriel to Jeff and I being Samwise and the Gaffer. Regardless, the one SSTB that had us all mystified was:
any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners
Even though it was cribbed from another Code Section there was almost no guidance on what it really meant. My assessment was:
The one part of the list that will cause the most heartburn to conservative taxpayers (I’m talking attitude not politics) is the catchall “any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners”. RIA observed:
…”there is no instance in which either the Code or the regs use the term “principal asset” in the context of an intangible human quality like “reputation” or “skill.” And, the relevant Congressional Committee reports do not add any insight as to Congress’ intent with respect to this language. Thus, it is quite unclear which trades or businesses will fail this test for treatment as a QTOB as a result of this language, or which more-specific characteristics of any given trade or business are indicative of it failing this test.”
I suspect that the IRS will go after that with somebody who has a lot of other things going on. A salutary effect of that provision is that it might encourage professions of humility by entrepreneurs who will want to argue that it is all about the team.
The regulation writers noted that there was almost no guidance available.
Guidance on the meaning of the “reputation or skill” clause in section 1202(e)(3)(A) is limited to dicta in one case. In John P. Owen v. Commissioner, T.C. Memo 2012-21, the Tax Court examined whether Mr. Owen, whose business was insurance, was entitled to benefits under section 1202 with respect to the sale of his interest in a corporation conducting such business
I had also dug up that case. Not bragging, just saying. Well maybe bragging a little.
I only found one Tax Court decision TC Memo -2012-21 that addresses the list. It is a mess of a case with a lot of things going on. There are five docket numbers associated with it. One of the eight issues Judge Wherry decided was whether the sale of stock in a company called Family First Advance Estate Planning qualified for nonrecognition under Section 1045(a), which refers to 1202 for its definitions.
I tend to be a little wild and crazy and told people not to worry about it, because nobody knows what it means. There was some thought that it might apply to authors. So there was a great deal of relief that the regulations say that the “principal asset” “reputation and skill” concept applies to a pretty narrow band of activity.
(A) A trade or business in which a person receives fees, compensation, or other income for endorsing products or services, (B) A trade or business in which a person licenses or receives fees, compensation or other income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity, (C) Receiving fees, compensation, or other income for appearing at an event or on radio, television, or another media format. (Emphasis added)
They Mean You, Mr. President
What really struck me about that was asking myself who is the most famous person in the world who receives a lot of income of that sort? Well with Michael Jackson being dead and all, I am going with President Trump. Here is an Aaron Willams and Anu Narayanswamy did a story in the Washington Post – How Trump has made millions by selling his name.
President Trump’s last name has been licensed to at least 50 different licensing or management deals according to a Washington Post analysis of his financial disclosures from 2015 and 2016. These deals are linked to properties that bear the Trump name — contracts that have earned his companies at least $59 million in revenue.
So we have a provision in the bill that excludes from favorable treatment a narrow class of income that the President has a lot of. Go figure.
There is more. There is another provision of TCJA that is not discussed much since it does not apply to very many people. New Section 461(l) is a limitation on the “excess business losses of noncorporate taxpayers”. As I discussed with Ken Weissenberg in this piece that provision is very bad for highly leveraged real estate owners like, well, President Trump.
To make up an extreme example consider Bruno Bigbuilding. Bruno supports his family with a modest $10 million salary that he takes from his development and management company. His net worth is close to a billion and it is based on real estate interests in which he is 90% leveraged. That produces a lot of depreciation, the deduction that President, then developer, Trump said he loves so much in The Art of The Deal:
“I don’t have to please Wall Street, and so I appreciate depreciation. For me the relevant issue isn’t what I report on the bottom line, it’s what I get to keep.”
After sheltering the income from the real estate, there will be plenty left over to shelter the $10 million salary. Not anymore.
So much as I would like it if we could see the President’s 2017 return and run the numbers, there is some good evidence that when he said “This is not good for me”, he was actually telling the unvarnished truth. It happens.
And you would think that after the grief I have gotten from covering the Pussy Church of Modern Witchcraft, I would know better than to write something like that, but I call them like I see them. I have further thought on that.
The Spirit of 1824
My moderately sized circle of friends includes those who love President Trump, those who hate him, and some with a nuanced view. Whenever I mention the President, some of them will get mad at me. What I would like them and all my fellow countrymen to embrace is the Spirit of 1824.
In 1824 and 1825 Americans came together to honor General Lafayette, the only surviving Major General from the Revolution. More people came out for him in New York than there were for the Beatles and his brief stop in a small town like Charlton, Mass or Sturbridge, Mass would be the biggest event in that town in decades.
While expressing close to universal admiration for Lafayette and the remaining veterans of the Revolution and the system of government by the people that was a unique innovation, an experiment whose outcome was still to be determined, Americans were going through one of the most divisive Presidential elections in our history. It went to the House of Representative where John Quincy Adams was chosen in what some saw as a corrupt bargain as Henry Clay was made Secretary of State.
Lafayette’s secretary, Auguste Levasseur, was concerned that the country that his boss had helped found was in danger of falling apart. Not long after the selection of Adams, he spoke with a Jackson supporter about the rumblings of a military coup in the event that they viewed it as a stolen election. He was relieved by the answer.
“You recall our threats then,” one of them said to me. We were, indeed, very busy shouting; but our adversaries did not take account of it, and they were right; they have judged us better than we would have wanted them to. Now that the law has spoken, we have only to obey it. We will second Adams with the same zeal as if we had supported him; but at the same time, we will shine a light on his administration, and according to whether it will be good or bad, we will defend it or attack it. Four years are passed very soon. And the consequences of a bad election are very easy to repair. –
So next time you reflexively react to coverage of the President, think about the Spirit of 1824. They believed that if you didn’t like an election outcome, you fixed it next time. President Lincoln fruitlessly asked for the same treatment in 1860. Even though it did not work that time his words are worth remembering.
We are not enemies, but friends. We must not be enemies. Though passion may have strained it must not break our bonds of affection. The mystic chords of memory, stretching from every battlefield and patriot grave to every living heart and hearthstone all over this broad land, will yet swell the chorus of the Union, when again touched, as surely they will be, by the better angels of our nature.