Quite aside from the Robin-Hood-In-Reverse economic effects of the proposed GOP tax bill, the bill already poses practical difficulties in planning. Take for instance, the proposed change in the tax treatment of alimony that I previously discussed .
Imagine that there is, right now, an ongoing negotiation of a divorce separation agreement. The stronger economic party (generally the husband) puts an offer on the table that is less than optimum for the weaker party (generally the wife). Since the effective date of the change in alimony rules applies for separation agreements entered into after December 31, 2017, the stronger party can credibly say: â€œLook, take this deal now. It will only get worse for you if you wait since the tax benefit will disappear after December 31. At that point, I canâ€™t offer you as much alimony since the effective rate on the entire economic package, including any amount that I pay you in alimony, will go up.â€ Thus, assuming two well-informed parties, the proposed bill has already affected the bargaining process since the pressure tactic can have real teeth.
Another example is one that I am facing in my practice. Client intends to lease commercial real property and operate his business out of that property. The lease is supposed to give my client an option to purchase the real estate. The preliminary documents provide that the option was to be fully assignable, but the other side has now raised an objection to the free assignability of the option. However, the ability to freely assign the purchase option takes on greater importance in light of proposed changes under the GOP tax bill.
Under current law, â€œmaterial participationâ€ in a real estate venture is generally a good thing since it allows otherwise passive losses to offset active income from a business. Under the GOP proposal, the value of material participation is turned on its head because the income from pass-thru entities in which owners donâ€™t materially participate is substantially lower than income from businesses in which they do materially participate. (From a tax policy standpoint the rule change may be a disaster. Daniel Shaviro has shown that the Serviceâ€™s enforcement of this â€œnewâ€ material participation rule will face some significant practical impediments.Â Thus, the tax loss from the provision could, over time, be far greater than now anticipated, since the concept of “material participation” cannot be accurately gauged by an examining revenue agent.)
As a consequence, my client cannot be flexible on this point since he really doesnâ€™t know (i) whether the bill will pass, (ii) if it does pass, the precise details of the new material participation rules, and (iii) what sorts of tax planning issues he will face ten years out as the law under the new rule develops.
So much for simplicity.