Steve Forbes Says “Here They Go Again!” Regarding Clinton Administration’s Attempt to Raise Taxes Without Congressional Approval


April 2, 1997




While Republicans fight each other over tax cuts, the Treasury Department
is about to slip through a nasty little tax increase on America’s
partnerships architects, consultants, engineers, actuaries,
accountants, lawyers, etc.

Incredibly, the IRS is pulling this maneuver not through the legislative
process as prescribed in the constitution, but by regulatory decree. This
decree has been open for public comment since January. Most Republicans
aren’t even aware of its existence!

Here’s how the stealth income tax works:

Limited partners will have to pay what is in effect the 2.9% Medicare
payroll tax not only on the incomes they receive, but also on the
earnings that the partnership retains. In other words, even though their
partners don’t receive the money, they will be liable for this tax! The
Clinton Administration proposed such a tax as part of their Hillarycare
package, which Congress and the nation thankfully rejected.

How can the IRS enact a tax increase by decree? By pretending this is not
a “major rule” or “significant regulatory action”!

Knowledgeable tax experts believe that once this rule goes into effect,
it will soon be also slapped on S corporations, thereby squeezing
countless hundreds of thousands of small businesses, the very businesses
that create millions of new jobs as big business down sizes.

The attached enclosure spells out the grizzly details of Clinton’s latest
effort to find new ways to pick the pockets of the American people. Will
the House and Senate Republicans stand up and say no to this stealth tax
increase? Will they demand that the IRS back off this incredible theft of
Congress’s constitutional prerogative and obligations?


By issuing this regulation, Treasury is unilaterally imposing a tax on partnerships
that it failed to achieve legislatively. In 1994, Congress refused to broaden the
imposition of the Seca tax to limited partners (and S corporation shareholders)
who work in their business, as proposed by the Administration and by Senator
Mitchell in their health care reform proposals. Thus, even though Congress
refused to change the statute that protects limited partners from this tax, this
proposed regulation will effectively change the law administratively (albeit only
for partnerships and LLCs), without benefit of Congressional review.

The proposed regulations will subject earnings on capital to the Seca tax. This is
particularly egregious in light of the 93 Act’s repeal of the cap (currently around
$70,000) on income subject to the 2.9% HI tax.

The legal justification for the issuance of this regulation was based on an incorrect
premise, namely that at the time Section 1402(a)(13) was enacted, limited partners
could not work in the business of a limited partnership, is wrong. Limited partners
have been able to work in a limited partnership’s business since at least the
adoption of the Uniform Limited Partnership Act in 1916.

In promulgating the proposed regulation the IRS has not complied with a variety
of rules applicable to the issuance of regulations: (i) the Congressional review
provisions applicable to “major rules”, as enacted by SBREFA, 5 U.S.C. sec. 800 et
seq., (ii) the small business record-keeping provisions of the Regulatory Flexibility
Act, as amended by SBREFA, and (iii) the President’s Executive Order 12886.
According to the preamble of the regulation, this failure to comply was based on
the inaccurate belief that the regulation “does not impose a collection of
information on small entities” and is not a “significant regulatory action [i.e. it
does not have an annual affect on the economy of more than $100,000,000]”. The
regulation clearly subjects entities to record keeping in requiring taxpayers to keep
records of the time spent working on behalf of a business. Also, the regulation will
likely have an annual effect on the economy of over $100,000,000 based on the
Joint Committee of Taxation’s $500,000,000 a year estimate for a similar proposal in
the Administration’s Health Reform Proposals (albeit one that also affected S
Corporation shareholders).

The proposed regulation is expected to first take effect in 1998. There is no
transition relief or grandfather provision for existing entities. This is unfair to
small businesses who may not learn of it until after the regulation becomes
effective and will not have sufficient time prior to the new year to reorder their
affairs. Also, transition relief is needed in order for existing entities to restructure
where possible so as to reduce the amount of earnings from capital that would
otherwise become subject to the HI tax.

Although the proposed regulation does not address S corporations, it puts greater
pressure on the current law treatment, thereby increasing the likelihood of an
adverse change in the law for S corporations.

Contact: Joel Rosenberg, Communications Director, (703) 925-9281 or [email protected]
AHGO web site:

The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.