I am honored to serve as Chair of the North Carolina Bar Association Tax Section for the 2025-2026 year. Our Section continues to play an important role in advancing knowledge, promoting collegiality, and providing opportunities for professional growth in the field of tax law.
Key Initiatives for 2025–2026
We are working hard to achieve several goals for the coming year, including the following:
https://ncbarblogprod.wpengine.com/wp-content/uploads/2018/06/Blog-Header-1-1030x530.png00TAXhttps://ncbarblogprod.wpengine.com/wp-content/uploads/2018/06/Blog-Header-1-1030x530.pngTAX2025-10-20 16:59:552025-10-20 16:59:55Welcome from the Tax Section Chair – Introducing Our 2025-2026 Leadership Team
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.
As discussed in my February 2025 blog post Eligible S Corporation Shareholders, corporations generally cannot own the stock of S corporations, even if the owner is itself an S corporation. However, where an S corporation is the 100% owner of another corporation, it can make an election for the subsidiary to be a qualified subchapter S subsidiary (QSub).
Section 1361(b)(3)(A) provides a corporation that is a QSub is not treated as a separate corporation and “all assets, liabilities, and items of income, deduction, and credit of a [QSub] shall be treated as assets, liabilities, and such items (as the case may be) of the S corporation.” That means the S corporation owner of the QSub reports all of the QSubs’s activities on the S corporation parent’s Form 1120S, treating the QSub as a disregarded entity for income tax purposes.
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I. Wife Not Entitled to Any of Foreclosure Sales Proceeds of Husband’s Marital Home to Pay Husband’s Taxes Since Title was Solely in the Husband’s Name; United States vs. Byers, US Court of Appeals, 133 F 4th 824 (8th Cir. 2025).
Mr. and Mrs. Byers lived in Minnesota in a home titled solely in Mr. Byers’ name. Mr. Byers owed substantial taxes. The IRS sought to foreclose on Mr. Byers’ home to satisfy his tax debt.
Although the home was titled solely in Mr. Byers’ name, Mrs. Byers argued she was entitled to one-half of the foreclosure sales proceeds because the home was a marital homestead under Minnesota law. Under Minneszota homestead exemption law, even if property is owned by one spouse, the non-owner spouse has legal protections to preserve the family homestead. For example, if the homestead owner is married, he cannot convey any portion of the homestead without the signatures of both spouses. Mrs. Byers argued the Minnesota homestead exemption and the Supreme Court’s decision in Rogers, 461 U.S. 677 (1983), gave her a property interest in the home that should be protected from the IRS foreclosure sale.
Since 1916, Congress has exempted from income tax clubs formed to facilitate social interaction among their members. As a result, country clubs, hunting and fishing clubs, college sororities and fraternities, and tennis, swimming, and other sport clubs, among others, are generally exempt from taxation on income derived from their members. IRC § 501(c)(7). The exemption applies to clubs “organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder.”
Prohibited inurement under IRC § 501(c)(7) pertains to use of club assets or facilities to generate income from the public rather than club members. For example, use of a tennis club to generate income from the general public attending a national tennis tournament is private inurement by the social club. West Side Tennis Club v. Commissioner, 39 BTA 149 (BTA 1939). In 1976, Congress loosened the rules to allow social clubs to generate up to 35% of their annual revenue from non-member income, such as rents charged to the public and income from investments. S. Rep. No. 94-1318, 94th Cong., 2nd Sess. 4 (1976), 1976-2 C.B. 597, 599; see also H.R. Rep. No. 94-1353, 94th Cong., 2d Sess. 4 (1976). Thus, clubs may rent their facilities to non-members or generate investment income to a limited degree.
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The gain exclusion benefits for the sale of qualified small business stock (“QSBS”) have grown in popularity in recent years, in part due to the 2017 Tax Act’s reduction of the C corporation tax rate from a marginal rate of 35% to a flat 21%. Congress has now made QSBS even more appealing. Under the One Big Beautiful Bill Act (the “OBBB”), the gain exclusion from the sale of QSBS issued after July 4, 2025, has expanded from $10 million to $15 million per qualifying shareholder. In addition, the $15 million exclusion will be adjusted annually for inflation. For QSBS issued on or before July 4, 2025, the original $10 million gain exclusion still applies.
The OBBB also made changes to the QSBS holding period requirement, providing a phase-in of gain exclusion benefits rather than the previous cliff-vesting approach. For QSBS issued on or before July 4, 2025, no benefits are available for taxpayers who hold the QSBS for less than five years. For QSBS issued after July 4, 2025, 50% of the gain exclusion is available after a holding period of three years. 75% is available after four years. 100% is available after five years.
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The 2024 IRS Data Book released in April 2025 contains audit statistics for years 2014 through 2022, as of the fiscal year ended September 30, 2024 (FY 2024). For tax years 2020 and earlier, the statute of limitations for audits had generally expired as of September 30, 2024. However, for 2021 and later returns, the statute of limitations has yet to expire, so additional returns of those years may be audited.
For 2014 through 2022, audit rates dropped significantly. For example, individual tax returns had an audit rate of 0.6% for 2014 returns versus 0.2% for 2022 returns. For individuals with income between $1 million and $5 million, the audit rate dropped from 2.7% for 2014 returns to 1.1% for 2022 returns.
Limited Liability Companies (or LLCs) were invented in Wyoming in 1977. They have since spread to all states and become one of the most popular entities to use for businesses. From a tax perspective, LLCs are hybrid entities that can elect to be taxed in a number of different ways. Regulations that became effective in 1997 (commonly referred to as the “check-the-box regulations”) provide tax classification. Treas. Reg. § 301.7701-1, et. seq.
Treas. Reg. § 301.7701-3(b)(1) describes the default treatment of LLCs where no check-the-box election is made. The default treatment of an LLC with a single owner is as an entity disregarded as separate from its owner for income tax purposes. Treas. Reg. § 301.7701-3(b)(1)(ii). As a disregarded entity, the LLC has no federal income tax filing requirements. Its activities (including income and loss) are instead reported on the tax return of its sole owner. Where an LLC has more than one owner, the default treatment is as a partnership. It is required to file an annual Form 1065 to report the pass-through income and loss allocated to its partners.
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Section 269(a) applies where a “person or persons acquire, directly or indirectly, control of a corporation” and “the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy.” Section 269 allows the IRS to disallow the acquired deduction, credit, or other tax benefit and to “distribute, apportion, or allocate gross income . . . between or among the corporations, or properties, or parts thereof, involved.” Control means at least 50 percent of the total voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.
Importantly, Section 269 does not apply to any acquisition for which tax benefits were a consideration, but only those where the principal purpose was tax benefits. Treas. Reg. § 1.269-3(a) defines principal purpose as where “the purpose to evade or avoid Federal income tax exceeds in importance any other purposes.” Thus, the tax benefit purpose must be the most important purpose for the acquisition, but it need not be the only purpose.
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I. Real Property Distributed from Testamentary Trust Meets the Section 1031 “Held for Investment” Requirement; PLR 202449007.
A testamentary trust terminated on the death of the decedent’s child. Real property held in the testamentary trust then passed to the decedent’s grandchildren. Prior to the trust termination, the trustees entered into a contract for the sale of the property and began to make arrangements for a deferred Section 1031 exchange of the property held in the trust. After the trust termination event, the trustees completed the sale of the property and sought a private letter ruling confirming the trust remainder beneficiaries (grandchildren of the decedent) would be permitted to complete like-kind exchanges as to their inherited real property.
The IRS ruled the trust’s previous purpose of holding the real property for investment purposes is imputed to the grandchildren notwithstanding the trustee’s planned sale at the time of the trust termination. The IRS emphasized, because the trust was a testamentary trust, the terminating event was fixed by the decedent and could not be modified or changed. The trust terminating event was an involuntary disposition of the trust’s real property. The transfer of the property to the grandchildren subject to the sales contract did not violate the held for investment requirement of Section 1031(a).
By Chris Hannum
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