Taking a deep dive in a narrow, yet controversial, part of the tax code

WASHINGTON, April 14, 2016 – As Americans finalize their taxes – due April 18th – and laboriously sift through the tax code, an expert is warning that one provision in particular may not be long for this financial world. But there’s a faction of the financial realm that says he’s warning about the disappearance of something that never really existed in the first place.

Neil Harl is a professor emeritus from Iowa State University and at one time, he was one of the foremost tax experts in the country. He spent 40 years on the faculty in Ames and has published almost 30 books and more than 800 articles on economics and agricultural tax issues. In 1967, he served on a Treasury Department task force dealing with tax sheltering in agriculture and throughout the economy, which led to some changes to tax law. One of the most important, Harl thought, was called the small partnership exemption, which was included in legislation eventually passed in 1982.

The purpose of the exemption was to simplify the filings of small partnerships – involving 10 or fewer parties – that make up things like small businesses and agricultural operations. Since its inception, Harl has been touting the exemption – he told Agri-Pulse he’s been “the outspoken spokesperson for it” – as a way for small partnerships to get out of filing a partnership tax form (Form 1065).

“I swear I must have been the only one doing it, because people would perk up and say ‘Gee, I haven’t even heard of that,’” Harl said. “All of my life… there’s been talk about tax simplification. This is easily the most obvious, most visible tax simplification we’ve ever had, and yet it never really got as much play as it should have.”

However, Harl says the provision is set to expire after the 2017 tax year after it was repealed in the Bipartisan Budget Act of 2015 (H.R. 1314), the last legislative act of then-House Speaker John Boehner, R-Ohio. In that legislation, the exemption was repealed in a manner that Harl called “a bit underhanded,” adding that the lawmakers were using tactics that made it look like they were “trying to hide something.”

Now, Harl is “using every avenue I have” to try and drum up support to reverse the repeal. He’s run identical opinion pieces in the Des Moines Register and the Cedar Rapids Gazette and recently had a phone conversation with Iowa Sen. Chuck Grassley. Harl says that he hasn’t made a trip to Washington yet on the issue, but he’s willing to. “If it looks like there’s going to be a hearing, I will probably be there,” he said.

But many tax experts think Harl has it all wrong. And most don’t want to publicly challenge Harl, who is well-respected and has decades of experience, but privately told Agri-Pulse that they wish he would just drop the issue and avoid confusing taxpayers.

Chris Hesse, a CPA and principal within the national tax office of CliftonLarsonAllen, said that other tax attorneys and CPAs “disagree with Harl’s interpretation” of the tax code when it comes to the exemption. (Ironically, Roger McEowen, formerly the director of the Center for Agricultural Law and Taxation at Iowa State, joined CliftonLarsonAllen in February 2016 as Agribusiness and Cooperatives tax director in its Des Moines office, but McEowen was not interviewed for this article.)

“There is no small partnership exception to filing a partnership tax return,” Hesse said in his response. “Following Harl’s position risks the partnership being subject to failure to file penalties, which may be substantial.”

Hesse later elaborated in an interview with Agri-Pulse. He said he understands the desire not to fill out unnecessary paperwork, but worries that people following Harl’s advice could be setting themselves up for a run-in with the IRS.

“I haven’t found anyone that agrees with Dr. Harl’s interpretation,” he said. “The unfortunate part is that he has a lot of credibility – justly deserved – across the country in agricultural taxation, but my concern is that . . . people relying on this advice are exposing themselves to penalties.”

Running afoul of IRS partnership laws could result in penalties of $195 (adjusted for inflation) per partner per month for up to 12 months.

Hesse also took issue with Harl’s assertion that the exception wasn’t widely used – actual use figures aren’t known – because the nation’s tax preparers “caught on that this is going to reduce their bottom line” because of less onerous filing requirements.

“He’s just slammed the entire tax preparation world with that comment without any merit,” he said. “We’re out here to protect our clients from penalties, and where we can’t find this small partnership exception that he claims exists, we’re duty bound to be telling our clients that you have to be filing a partnership tax return or you run the risk of penalties.

“It’s an insult against the entire profession,” Hesse added. “He painted a pretty broad brush in that comment, and he continues to do so both verbally and in writing, and that’s where he’s crossed the line.”

Since the repeal doesn’t go into effect until 2017, Harl is pushing for reversal before then. But whether or not Harl will be able to gain any traction on Capitol Hill remains to be seen.

A spokeswoman for Sen. Grassley told Agri-Pulse that his staff “is setting up a call between Professor Harl and the Joint Committee on Taxation to discuss the matter further.”

(Sara Wyant contributed to this story)

#30