NIIT tax

Technical topics regarding tax preparation.
#1
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Client and several others employee formed a holding company (partnership) to buy stock of the company they worked in. They were all full-time employees. The Company has a name-brand product/process/patent. The Company entered into negotiations, which started in 2016, for sale which lasted about 10 months. My client retired from the operating company during the negotiating process.

The Company is sold in 2017 and she gets a K-1 reporting a capital gain of ~$1million. She is less than a 1% partner. Is the capital gain reported on her K-1 subject to the NIIT?

My initial thought was that it would not be subject to it because it was not a passive activity (she worked there) and assets of the business were sold. However, with the holding company being the entity which held the stock, I'm not sure about this any more.

Any thoughts?
 

#2
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Did you reach a conclusion on this? I have a similar situation except it involves an S-corp.
 

#3
Pitch78  
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Treas. Reg. § 1.1411–4(b)(3)

Multiple passthrough entities. B, an individual, owns an interest in UTP2, a partnership, which is not engaged in a trade or business. UTP2 owns an interest in LTP2, also a partnership, which is engaged in a commercial lending trade or business. LTP2 is not engaged in a trade or business described in §1.1411-5(a)(2). LTP2's trade or business is not a passive activity (within the meaning of section 469) with respect to B. LTP2 earns $10,000 of interest income from its trade or business which is allocated to B through UTP2. Although UTP2 is not engaged in a trade or business, the $10,000 of interest income is derived in the ordinary course of LTP2's lending trade or business. Because LTP2 is not engaged in a trade or business described in §1.1411-5(a)(2) and because LTP2's trade or business is not a passive activity with respect to B (as described in §1.1411-5(a)(1)), the ordinary course of a trade or business exception described in paragraph (b) of this section applies, and B's $10,000 of interest is not included as net investment income under paragraph (a)(1)(i) of this section.
 

#4
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Multiple passthrough entities.


It’s all very confusing…do we have a chain of pass-thru’s? He talks about “stock” being owned. And if a partnership owns this “stock” then the lower tier can’t be an S-corp, which would make it a C-corp. But then OP says the assets were sold.

It’s hard to answer a question when the question doesn’t even make sense.

And it’s just NIIT, not NIIT Tax. The “T” in NIIT already stands for tax.
 


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