Wealth Tax Mania Spreads East
With California’s wealth-tax debate heating up, it appears Congress does not want to be outdone. New York Democratic Representative Dan Goldman has introduced a new tax aimed at appreciated property held by high-net-worth individuals. The legislation offers yet another chance to highlight why tax proposals targeting capital all suffer from the same fatal flaws.
Goldman’s Redistribution of Billions by Instituting New High-Income Obligations on Overlooked Debt (ROBINHOOD) Act would impose a 20-percent excise tax on loans secured by appreciated assets. When a taxpayer borrows against the value of stock, real estate, or a business interest that has risen in value, the IRS would treat the loan as a taxable event.
The bill targets the so-called “buy, borrow, die” strategy, but it extends far beyond the wealthy, applying to individuals making as little as $400,000 a year. So while the bill’s press release makes breathless references to Elon Musk, Jeff Bezos, and Warren Buffett, the real targets are the millions of Main Street businesses that routinely use loans backed by the family’s assets to finance growth, purchase equipment, cover operating expenses, and hire new employees.
In other words, the bill would tax the ability of entrepreneurs to access the economic value of an appreciated asset. It turns appreciation into a de facto tax base, just as a wealth tax would. If your business grows in value, the growth alone triggers a tax the moment you use it to obtain financing. The tax is triggered by appreciation, and it is unavoidable unless the owner refrains from using the business’s appreciated value altogether.
For Main Street businesses, these debates are far from abstract. Their “wealth” is typically locked inside the companies they have spent decades building. Imposing a tax that springs to life solely because an asset has appreciated would force business owners to sell stakes in their own companies simply to satisfy the IRS.
We’ve already seen the real-world consequences of these policies abroad. When Norway enacted its wealth tax, founders and investors left the country, taking jobs, capital, and future revenue with them. The policy eroded the tax base and harmed workers far more than it affected high-net-worth individuals, who have the resources to move elsewhere. A U.S. version of this policy would produce the same outcome, only on a much larger scale.
Representative Goldman’s proposal is the latest iteration of a concept that has been tried, tested, and failed, many times over. As states like California and members of Congress revive these ideas, the lesson remains the same: proposals that tax capital – whether in the form of wealth taxes or a tax on unrealized gains – inevitably miss their target and end up taxing Main Street instead.
Talking Taxes in a Truck Episode 46: Tom Nichols on the Backdoor Tax Hike That Needs to be Repealed
Our guest is Tom Nichols, partner at the Milwaukee-based Meissner Tierney Fisher & Nichols, longtime advisor to S-Corp, and author of an excellent new piece exposing the Section 461(l) Excess Business Loss limitation for the money-grabbing fraud it is. Tom walks through the provision’s origins, the harm it does to affected businesses, and how flawed revenue estimates drove the policy. We also get into our SALT Parity efforts and how the state laws and legal analysis he drafted helped pave the way for $20 billion in annual tax savings for Main Street businesses.
This episode of the Talking Taxes in a Truck podcast was recorded on December 18, 2025.
Taxing Losses
Tom Nichols, a shareholder at Milwaukee’s Meissner Tierney Fisher & Nichols and a longtime S-Corp advisor, is out with a great piece in Tax Notes that takes aim at the poorly-crafted Section 461(l) excess business loss limitation. “A Problematic Solution to a Nonexistent Problem” breaks down the provision, its real-world consequences, and the flawed policy rationale that led to its inception.
Prior to the Tax Cuts and Jobs Act, active pass-through business losses were used by owners to offset wages, investment income, and other business income. This treatment reflected the basic principle that income taxes should be paid on an accurate accounting of a taxpayer’s net income.
Section 461(l) flipped that principle on its ear by capping the amount of active losses that can be deducted in a given year, requiring any excess to be treated as net operating losses in subsequent years. As many have learned (particularly in the wake of the pandemic), this change can cause real and lasting harm. Here’s Tom’s example:
Suppose a wealthy entrepreneur owns a manufacturing business that is temporarily struggling and throwing off accounting and tax losses of $2 million per year. Suppose that same entrepreneur also has $3 million of investment income, perhaps from past earnings of that same business, and she is willing to use that investment income to keep the business alive…
In the absence of section 461(l)… she would have $1 million of taxable income, pay tax of $370,000 (at 37 percent), and still have $630,000 left over to spend or invest for the benefit of her own family, even after using $2 million of that investment income to keep the business alive. Enter section 461(l). If the entrepreneur is married, “only” $1.5 million of that loss from the ongoing business would be disallowed, thereby increasing the couple’s federal income tax by $555,000, for a total of $925,000, leaving the family with only $75,000 of real, after-tax income.
The excess loss limitation applies to pass-throughs only – consolidated groups organized under a C corporation face no such restriction when offsetting active losses with other streams of income. Why the disparate treatment?
Is there something fundamentally wrong with wealthy entrepreneurs using their investment income to fund the jobs and operations of businesses that are losing money? I don’t think so either, but that’s the “loophole” that section 461(l) is designed to close.
…Ever since section 461(l) was enacted, I have made numerous inquiries of Treasury, the IRS, the Joint Committee on Taxation, legislative staff, and other legal, accounting, and other tax professionals regarding the policy rationale behind this provision. I have yet to hear or read of anyone trying to defend this provision on policy grounds, much less a principled defense.
Section 461(l) was a clear revenue grab, but its ability to raise revenue was wildly overstated:
[T]he revenue projection for this new provision should have been small and reflect nothing more than a one- or two-year delay in the ability of business owners to recognize their losses. But that’s not what the initial revenue estimates by the JCT predicted. The JCT predicted that new section 461(I) would increase tax receipts by $9.5 billion in the first year and by amounts ranging from $16.2 billion to $20.4 billion annually for the next eight years. That stellar tax projection, totaling $149.7 billion for the entire 10-year budget window, presented a revenue offset that was apparently too big for Congress to resist when it enacted the Tax Cuts and Jobs Act.
S-Corp has critiqued these estimates since their inception, particularly as the provision has been repeatedly trotted out to offset unrelated spending. We were proven correct last year when revised estimates reduced the projected revenue by a factor of eight or ten. But by that time, Section 461(l) had already been extended twice, all with the promise of billions in new revenue that never existed.
Section 461(l) violates the rules of good tax policy, there is no rational for its existence, and it fails to raise significant amounts of revenue. It does, however, handicap family-owned businesses when times are tough by forcing them to pay tax on nonexistent income.
As Tom concludes, “Section 461(l) is bad policy and a poor revenue raiser. Congress should repeal it.”
CTA Setback
Breaking news from the Eleventh Circuit Court of Appeals. In a 3-0 decision issued this morning, a three-judge panel reversed our landmark district court ruling that the Corporate Transparency Act (CTA) was unconstitutional.
Readers will remember that district court victory as huge win for Main Street. It not only paved the way for additional successful court challenges, it also freed FinCEN to focus on new rules that limited the CTA’s scope significantly.
Unfortunately, today’s ruling goes in the other direction. Writing for the Eleventh Circuit, Judge Brasher concluded that the CTA falls within Congress’s power under the Commerce Clause:
We can safely say that the CTA facially regulates economic activity. The statute is specifically directed at domestic companies created under the laws of a state and foreign companies registered to do business in the United States… By requiring these corporate entities to provide beneficial ownership information, the CTA regulates how they operate and the level of secrecy with which they do business.
We are not sure about facially, but the CTA clearly does not regulate economic activity, or any other activity. The word “commerce” does not appear in the statute. The reporting requirements are triggered when a corporation is formed, not when it does anything. And many of the corporations targeted do not engage in commercial activity – they are personal residences and homeowner’s associations, etc.
At its core, the CTA identifies a large group of individuals – a 100 million or so “beneficial owners” – and requires them (or, more specifically, the legal entity they are affiliated with) to submit their personal information to assist with law enforcement – in this case cracking down on money laundering.
Nonetheless, the court also rejected Fourth Amendment challenges, finding that the CTA’s reporting requirements are reasonable because they’re uniform, limited in scope, and subject to privacy protections:
It is a uniform reporting requirement applied to all businesses that meet the CTA’s definition of ‘reporting company.’ There is nothing arbitrary or discretionary about its application… The information it requires is ‘sufficiently described and limited in nature’ and is no more detailed than the reports in Shultz.
When did “uniform” became a substitute for reasonable and warranted? Is an unconstitutional law exempt from scrutiny if it’s broadly applied? Moreover, the Court appears to hold that because some legal entities are engaged in illicit behavior, all legal entities (and their beneficial owners) can be treated as suspects. As S-Corp noted in a previously filed amicus brief, no other federal information-collection statute presents comparable privacy risks without significant protections against abuse.
The court’s casual treatment of serious constitutional concerns may help in the long run. A more rigorous ruling would be less likely to be granted cert, while their treatment of commerce clause and Fourth Amendment concerns is out of synch with the Supreme Court’s current membership.
The path to success just moved forward one step. It would have been better for the Eleventh Circuit to uphold the lower court’s ruling, but either way this issue was headed to the Supreme Court, and the weakness of today’s adverse ruling may be a benefit in the end.
Meanwhile, the interim final rule issued by FinCEN last spring remains in place. That rule exempted US companies and US citizens from the CTA’s reporting requirements. Treasury has promised to issue final rules within the year (Is that 2025 or twelve months? Not sure.) and S-Corp has been encouraging them to issue the rules and publicly purge the existing database of beneficial ownership information at the same time. According to FinCEN, about half the targeted 32 million entities filed under the CTA, and that data is still on the CTA’s books. Purge away is what we say.
Today’s reversal is disappointing, but it’s not the end of the story. The limited scope of FinCEN’s current rules combined with continued legislative advocacy and potential Supreme Court review means we have multiple paths forward. Much more to come.
SALT Parity Certainty
It’s been seven years since the first state enacted our SALT Parity legislation restoring the SALT deduction for pass-through businesses.
Since that time, thirty-five other states have followed suit, the IRS issued Notice 2020-75 in support of the state laws, and Congress considered but rejected several efforts to repeal or otherwise limit the deduction for pass-throughs. (As always, C corporations continue to deduct their SALT without limitation or debate.)
After all that, you’d think the tax community would accept that our SALT Parity laws are in good standing. You’d be wrong.
The latest example of hand-wringing comes from a recent Tax Notes article, where the authors make the following observation:
Congress or the IRS might clarify the deductibility of PTETs in the coming months or years. Until then, taxpayers and their advisers will need to take into account both the absence of any follow-up to Notice 2020-75 and the statutes and regulations that cast doubt on whether PTET payments may be deducted from non-separately-stated taxable income. [Emphasis added.]
The casual reader might come away thinking there’s still some ambiguity to the issue – there isn’t. State and local taxes directly paid by pass-through businesses have always been deductible and continue to be deductible under the new rules. Here’s the lead paragraph from Treasury Notice 2020-75:
This notice announces that the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to issue proposed regulations to clarify that State and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment.
The notice goes on to point out:
In enacting section 164(b)(6), Congress provided that “taxes imposed at the entity level, such as a business tax imposed on pass-through entities, that are reflected in a partner’s or S corporation shareholder’s distributive or pro-rata share of income or loss on a Schedule K-1 (or similar form), will continue to reduce such partner’s or shareholder’s distributive or pro-rata share of income as under present law.” H.R. Rep. No. 115-466, at 260 n. 172 (2017).
The conclusions of the Notice are consistent with the legal analysis S-Corp sponsored regarding our SALT Parity legislation enacted in Wisconsin in 2019:
The Internal Revenue Service has consistently held that income and other taxes imposed upon and paid by pass-through entities are simply subtracted in calculating nonseparately computed income at the entity level, and are not separately passed through or incorporated into the various provisions and calculations applicable to itemized deductions at the individual level, such as the standard deduction, alternative minimum tax and the Pease reduction. In discussing the final provisions of the Tax Cuts and Jobs Act, the Conference Committee Report explicitly reiterated and relied upon this principle in describing the scope of new section 164(b)(6) of the Code.
For the IRS to reverse itself, it would have to ignore the very clear statement of legislative intent included in the Conference Report of the TCJA:
In describing the conference agreement with respect to the final section 164(b)(6) provision contained in the Tax Cuts and Jobs Act, the Conference Committee Report states as follows: “taxes imposed at the entity level, such as a business tax imposed on pass-through entities, that are reflected in a partner’s or S corporation shareholder’s distributive or pro-rata share of income or loss on a Schedule K-1 (or similar form), will continue to reduce such partner’s or shareholder’s distributive or pro-rata share of income as under present law.”
Such legislative history is quite compelling. As the Supreme Court noted in United States v. Vogel Fertilizer, “Of course, it is Congress’ understanding of what it was enacting that ultimately controls.” Vogel, 455 U.S. 16, 31 (1982). In that case, the Supreme Court held that “The legislative history of [one of the provisions contained in the controlled group provisions of the Code] resolves any ambiguity in the statutory language and makes it plain that [an inconsistent provision in the Treasury regulations] is not a reasonable statutory interpretation.”
It would also have to reverse numerous established revenue rulings on the treatment of SALT paid by pass-through entities:
For example, in Revenue Ruling 58-25, the Service ruled that a City of Cincinnati tax on net profits “imposed upon and paid by a partnership” is “deductible in computing the taxable income of the partnership.” Similarly, in Revenue Ruling 71-278, the Service ruled that an Indiana tax imposed on gross income at the partnership level (thereby exempting such gross income from tax at the individual partner level) is deductible from partnership gross income “in computing the taxable income of a partnership and the distributable shares of the partners.” The Service has consistently followed these rulings in its publications. For example, publication 535, “Business Expenses,” “For use in preparing 2018 returns,” states that “A corporation or partnership can deduct state and local income taxes imposed on the corporation or partnership as business expenses.”
And:
The Service followed these prior rulings to reach the same conclusion with respect to another Wisconsin tax based on income in a Field Service Advisory, which dealt with the Temporary Recycling Surcharge imposed under section 77.92 of the Wisconsin Statutes. At the time, the Surcharge was imposed at the rate of .4345% on the net business income of S corporations and partnerships allocated or apportioned to Wisconsin (subject to a cap of $9,800 and other exceptions). Citing both Revenue Ruling 58-25 and Revenue Ruling 71-278 and analyzing the provisions in the Code and Regulations requiring the separate treatment of certain items passed through to partners, the Service concluded that “the Wisconsin temporary surcharge . . . imposed on and paid by a partnership based on its net business income . . . is not separately stated under section 702(a)(1) through (7) of the Code and . . . would be included under section 702(a)(8) in determining the partnership’s [nonseparately computed] taxable income or loss,” unless section 469 (relating to passive activity losses) applied.
Another issue is that our SALT Parity laws allow the taxpayer to elect to pay at the entity level, as if the presence of an election makes the tax voluntary or illegitimate. Once again, these arguments ignore the long history of other elections in the Tax Code and their historic treatment.
There are numerous elections under state and federal law, and the results of those elections have been consistently respected under the Code. Perhaps most fundamentally, revocation of an S corporation election itself and check-the-box elections for partnerships and limited liability companies to be treated as corporations (without making a corresponding S corporation election) trigger state-level corporate income and other taxes in nearly all circumstances.
As noted, taxes triggered at the entity level by such elections are deductible, the same as the entity-level taxes of C corporations. The same applies to our SALT Parity elections.
Finally, missing from the SALT Parity critiques is a discussion of the other taxes paid by pass-through entities that are non-separately stated and deductible at the federal level:
For example, the District of Columbia has imposed an income tax on corporations, including S corporations, and an unincorporated business franchise tax on partnerships at the entity level since at least 1975. Just like under Wisconsin Act 368, the corresponding income is excluded from taxation at the individual shareholder or partner level.
Also similar to Wisconsin, Pennsylvania allows S corporations to opt out of pass-through treatment for its state income tax. Conversely, Georgia, Mississippi, New Jersey and New York require some form of affirmative election or consent to qualify for S corporation pass-through treatment. Finally, Alabama, California, Illinois, Kentucky, New Hampshire, New York City and Tennessee have also had income taxes imposed at the entity level for some time.
All of these entity-level income taxes have been consistently deducted in calculating nonseparately computed income passed through to the owners for federal income tax purposes, and have not been treated as state income taxes paid at the individual level so as to trigger disallowance of the standard deduction, alternative minimum tax disallowance and/or the Pease reduction.
The DC approach to taxing S corporations was the basis for our SALT Parity model legislation. Those taxes have been applied since the 1970s and have always been deducted in computing nonseparately stated income.
The bottom line is our SALT Parity laws are well grounded in all legal respects – with the statute and IRS rulings and case history. Arguing otherwise would require a complete rewrite of the rules regarding how businesses treat the taxes they pay to states and localities. It would also be contrary to the legislative record, and Treasury and the IRS have made clear they have no intention or incentive to do so.
Nonetheless, the debate continues, at least among some inside the beltway. One sure way to clear this up would be for Treasury to issue final regulatory guidance consistent with Notice 2020-75. S-Corp will work to get that done in the coming months. In the meantime, businesses and practitioners should make their SALT Parity elections with confidence. Reversing the fundamental principles the government and practitioners have been relying on since enactment, principles based on decades of published guidance and legislative history, is just not a realistic possibility.