Bruce Wein

The IRS has released proposed regulations under Section 1411 of the Internal Revenue Code, which imposes a 3.8 percent tax on certain unearned income or investments of certain individuals, trusts and estates, for tax years beginning after December 31, 2012.

These proposed regulations, released at the end of November along with accompanying frequently asked questions, provide taxpayers and their advisors much needed guidance in interpreting the statutory provisions imposing this tax.

Despite application of the tax beginning in 2013, the effective date of the proposed regulations has been delayed until January 1, 2014. To assist taxpayers, the IRS has stated that taxpayers may rely on the proposed regulations for compliance purposes until publication of final regulations under Section 1411, which is anticipated to occur during 2013.

The proposed regulations indicate that the IRS will closely review transactions that manipulate a taxpayer’s “net investment income” to reduce or eliminate the amount of tax imposed by Section 1411 and will challenge such transactions based on applicable statutes and judicial doctrines. Therefore, careful tax planning to accommodate this new tax is essential.

Among other things, these proposed regulations provide definitions of operative phrases and terminology in the statute, indicate where definitions used elsewhere in the Code should be incorporated into the statute, identify how certain entities are treated under Section 1411, expand income categories potentially subject to the tax, allow taxpayers to regroup activities with respect to the passive activity grouping rules and describe how the tax applies to dispositions of interests in passthrough entities and income/distributions from certain foreign entities.

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