The administration says business partnerships are shielding tens of billions of dollars from taxation by using basis shifting , which allows them to move assets from one entity to another on paper for no reason other than to reduce or avoid taxes .

At the heart of the concern is partnerships ’ use of “ pass-through ” business structures that allow them to link entities for purposes of selling assets so that taxes are determined only after subtracting the assets ’ original cost , or basis , from profits . By moving such assets from entity to entity on paper , hedge funds , wealthy investors and other businesses are able to manipulate their basis and inappropriately reduce their tax liabilities , officials argued .

As a result , some businesses and wealthy individuals are depreciating the same asset repeatedly , officials said .

Such basis shifting fails “ to create any economic activity for the nation ,” Treasury Deputy Secretary Wally Adeyemo told reporters , adding that such partnerships ’ “ sole purpose is to reduce tax bills .”

The Biden administration said in a statement in mid-June that the basis-shifting maneuvers , which are promoted by attorneys and CPAs , have soared in popularity in the last two decades , allowing wealthy investors to shield assets while largely flying under the radar of the IRS .

Treasury officials said they are taking a multiprong approach to begin collecting the additional $ 50 billion over the next 10 years , or $ 5 billion annually , from partnerships .

IRS Commissioner Danny Werfel told reporters that the agency has created a unit solely dedicated to investigating business partnerships after hiring hundreds of new auditors this year . Some of the new employees have already found what they

believe to be illegal or inappropriate basis shifting accounting , he said .

In the audits the IRS is already conducting , “ we are seeing this systemic use of basis shifting where there is no economic basis to the transaction ,” Werfel said . “ That is not allowed .” The discovery of what he said were potentially tens of billions of dollars in untaxed transactions led the service to dedicate resources to business partnership audits .

At the same time , the IRS is creating extensive guidance for accountants , attorneys and taxpayers , stressing the agency ’ s belief that basis shifting just for tax avoidance is illegal and will open up pass-through entities to audits . The guidance will also require partnerships to provide more details about their asset transactions and basis accounting , Werfel said .

The Treasury Department said in a statement announcing the new guidance that there is an estimated $ 160 billion gap that the top 1 % of earners likely owe in taxes and what they pay .

The Treasury Department said there is an estimated $ 160 billion gap that the top 1 % of earners likely owe in taxes and what they pay .

The new regulations will include three different notices of proposed rulemaking and an additional revenue ruling from the IRS , which will be open to the public for comment , Werfel said .

— Tracey Longo

about their confidence in the future earnings growth potential of the business .”

With fixed income , Hoag said it ’ s time to deploy cash and cash-equivalent funds into longer-duration assets .

“ The problem with a certificate of deposit right now is when it matures you ’ re going to potentially reinvest at a lower rate . And

so it ’ s kind of this stair-step down of your return stream ,” he said . “ If you take this opportunity to own a little more duration , so actually move out on the yield curve and own some longer-dated securities , you will get that nice income stream but also have the potential for capital gains again .”

Another area Hoag said he favors is

corporate debt . Oftentimes at this point in a cycle , companies start increasing their leverage by issuing debt to fuel their growth .

“ It ’ s remarkable how disciplined companies have been from a bond holder ’ s perspective ,” he said . “ They ’ re maintaining a very manageable , healthy level of debt .”

— Jennifer Lea Reed

JULY / AUGUST 2024 | FINANCIAL ADVISOR MAGAZINE | 13