By John G. Hodnette

Since its enactment on March 30, 2010, in connection with the Affordable Care Act, Section 1411 has assessed an additional 3.8% income tax on individuals, estates, and trusts on the lesser of net investment income (“NII”) or the excess of the taxpayer’s modified adjusted gross income over the threshold amount. There are a number of exclusions from the 3.8% tax. Nonresident aliens are not subject to the tax per Section 1411(e)(1). Under Section 1411(e)(2), there is an exemption for charitable trusts that are organized to support religious, charitable, scientific, literary, or educational purposes or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment) or for the prevention of cruelty to children or animals.

NII includes certain gross income or net gain from the disposition of property derived from a trade or business that is a passive activity within the meaning of Section 469 as to the taxpayer or that is trading in financial instruments or commodities (as defined in Section 475(e)(2)). Gross income or net gain from the disposition of property derived from a trade or business in which the taxpayer materially participates (as defined in Section 469) is not NII. Section 1411(c)(4) applies the same reasoning to the disposition of an interest in a partnership or S corporation in which the taxpayer materially participates. Accordingly, the rules of Section 469(h) defining material participation are key in determining whether gain from the sale of a partnership interest or stock in an S corporation is subject to the 3.8% tax.

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By John G. Hodnette

When an S corporation sells its assets, often part of the purchase price is paid via a promissory note issued by the buyer. These promissory notes are part of the purchase price and reported on the installment sale method in Sections 453, 453A, and 453B. Under that method, gain on the sale is recognized over time as installment payments are made. There is often a required interest component that is taxed at ordinary income rates. When the S corporation has sold all of its assets, it often wishes to liquidate and distribute the installment note to its owners. Absent a special rule, this plan would be problematic because the disposition of an installment note generally results in acceleration of the built-in gain of the note. Distribution in liquidation of an S corporation is generally treated as a deemed sale of the assets of the corporation.

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By John G. Hodnette

The 2017 Tax Cuts and Jobs Act included Section 67(h), which eliminated miscellaneous itemized deductions for tax years beginning after December 31, 2017. The 2025 One Big Beautiful Bill Act made that disallowance permanent. One such eliminated deduction is for unreimbursed employee expenses. They include expenses for transportation, travel fares, lodging away from home, business meals, continuing education courses, subscriptions and dues to professional materials and organizations, uniforms, job hunting expenses, and otherwise deductible home office expenses. To have been deductible, such expenses must not have been reimbursed or reimbursable by the business for which the employee worked. Under current law, however, unreimbursed employee expenses are simply nondeductible.

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By Brian C. Bernhardt

The Qualified Offer rules are part of the broader framework for resolving federal tax disputes. As a general rule, taxpayers who prevail in disputes with the IRS may recover reasonable administrative and litigation costs (“Fees and Costs”) only if the IRS’s position was not substantially justified. However, the Qualified Offer rules create a safe harbor: If a taxpayer makes a Qualified Offer to settle a dispute with the IRS, the IRS rejects it, and the taxpayer later obtains a better result in court, the Tax Court will automatically treat the IRS position as not substantially justified, making it easier for taxpayers to recover their Fees and Costs.

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By John G. Hodnette

Section 7704 provides a partnership is a publicly traded partnership if interests in the partnership are (1) traded on an established securities market or (2) readily tradable on a secondary market or the substantial equivalent thereof. A publicly traded partnership is generally taxed as a C corporation. That means it is subject to corporate taxes rather than being a pass-through entity like other partnerships.

The first test about whether the interests of a partnership are traded on an established securities market is fairly easy to apply. The second test is less clear and requires a facts and circumstances analysis. The regulations provide a number of safe harbors for avoiding publicly traded status.

One commonly relied on safe harbor is the private placement exception of Reg. § 1.7704-1(h)(1).   It states a partnership’s interests are not considered readily tradable (and therefore will not fall within the second test) if (1) all partnership interests are issued in transactions that are not required to be registered under the Securities Act of 1933 (i.e., private placements), and (2) the partnership does not have more than 100 partners at any time during the partnership taxable year.  Under Reg. § 1.7704-1(h)(3), a look-through approach applies for certain pass-through entities to prevent a partnership from avoiding the 100-partner limit by using tiered pass-through entities.  This safe harbor provides comfort to most partnerships.

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