September 3, 2021
The Tax News and Views Roundup will not publish on Monday in honor of Labor Day. It will return on Tuesday, September 7th.
Progressives prepare to launch counterattack in tax fight - Naomi Jogoda, The Hill. "Progressive groups are gearing up to promote President Biden's proposals on tax hikes for wealthy individuals and corporations as Democrats in Congress move forward with drafting a multitrillion-dollar social spending package. Biden and congressional Democrats aim to pay for new spending in areas such as education, health care and climate through those tax increases. But business groups are funding a lobbying blitz against the proposals, targeting Democratic lawmakers who have raised concerns about the tax plans."
Progressive advocacy organizations and labor groups hope to counteract K Street’s lobbying push and keep Democrats united. They're arguing that proposals to raise taxes on wealthy people and corporations are in line with public sentiment.
‘Taxing the rich is incredibly popular, and so I think we need to remind some Democrats about that,’ said Maura Quint, executive director of the progressive group Tax March. ‘Ultimately, I do believe that Democrats in general support Biden’s plans.’
Here’s the current plan: Congressional Democrats will try to pass before mid-October a $3.5 trillion bill that increases taxes and spending. Roughly half of it ($1.75 trillion) will be paid for by reforming the way the federal government buys prescription drugs, health care reforms, increasing IRS enforcement, and increasing taxes on corporations and taxpayers with over $400,000 in taxable income. This means that tax increases will be one part for how the bill is paid for.
Reality check: Only Democrats are expected to support this bill (which can pass if nearly all of them approve it), but not every Democrat supports passing a $3.5 trillion bill. If the price tag is lowered, the number of tax increases will likely also shrink.
Why I Won’t Support Spending Another $3.5 Trillion – Senator Joe Manchin (D-W. Va.), Wall Street Journal opinion. “The nation faces an unprecedented array of challenges and will inevitably encounter additional crises in the future. Yet some in Congress have a strange belief there is an infinite supply of money to deal with any current or future crisis, and that spending trillions upon trillions will have no negative consequence for the future. I disagree.”
Instead of rushing to spend trillions on new government programs and additional stimulus funding, Congress should hit a strategic pause on the budget-reconciliation legislation. A pause is warranted because it will provide more clarity on the trajectory of the pandemic, and it will allow us to determine whether inflation is transitory or not. While some have suggested this reconciliation legislation must be passed now, I believe that making budgetary decisions under artificial political deadlines never leads to good policy or sound decisions. I have always said if I can’t explain it, I can’t vote for it, and I can’t explain why my Democratic colleagues are rushing to spend $3.5 trillion.
Some offsets are also problematic:
Biden Tax Plan Suffers $116B Blow as IRS Revenue Forecast Drops – Allyson Versprille, Bloomberg ($). “The Congressional Budget Office estimates that increasing IRS funding by $80 billion over a decade would raise $200 billion in total revenue—more than $100 billion less than the Biden administration previously estimated. Giving the IRS more resources to audit corporations and the wealthy is among the administration’s proposals to pay for trillions in new spending. The Treasury Department in May predicted the funding increase would bring in an additional $316 billion in tax revenue from 2022 through 2031.”
The lower CBO estimate is a blow to the administration, which needs as much revenue as possible to offset the cost of a $3.5 trillion tax-and-spend bill Democrats are aiming to pass through the budget reconciliation process. The reconciliation effort already faces significant political hurdles in the evenly-divided Senate, where Sen. Joe Manchin recommended a 'strategic pause' Thursday given concerns about the national debt and inflation.
Baucus Lends Name to Stepped-Up Basis Fight – Jonathan Curry, Tax Notes ($). “Former Sen. Max Baucus, who once chaired the Finance Committee, is the latest prominent Democratic voice to call for saving the tax-free step-up in basis.”
Baucus joins his former Senate colleague Heidi Heitkamp in championing the effort to save the step-up with a September 1 op-ed in The Wall Street Journal, in which he echoed many of the same concerns about potential risks to family-owned farms and businesses that have been raised by other critics of President Biden’s proposal.
Lawmakers’ Tax Rate to Help Pay for Reconciliation is 1,900 Percent – Erica York, Tax Foundation. “As lawmakers look for ways to pay for trillions in new spending, they are considering changes to prescription drug pricing under Medicare Part D. As explained here, H.R. 3, the Elijah Cummings Lower Drug Costs Now Act, would use the leverage of steep excise tax penalties to make drug manufacturers lower their prices, generating about $581 billion in cost savings (not new tax revenue) for the federal government.”
While the excise tax penalty is referred to as a 95 percent tax rate, it actually amounts to a 1,900 percent tax rate because of how the proposal defines the tax base. In other words, under the H.R. 3 tax penalty, a drug that sells for $100 would incur a $1,900 tax.
Democrats Weigh $3.5 Trillion Agenda—and How Much Should Be Paid For – Richard Rubin and Kristina Peterson, Wall Street Journal ($). “Democrats seeking to pass their $3.5 trillion healthcare, education and climate legislation are wrestling over the amount they should pay with tax increases and other policy changes—and what should be funded with deficit spending."
But as they confront detailed choices, senior lawmakers have begun suggesting that the intraparty consensus on taxes might not provide enough money. That scenario could prompt them to increase federal borrowing or pare back spending ambitions…
Democrats’ dilemma this month centers on how much of President Biden’s proposed taxes on capital gains and multinational corporations they are willing to accept. There is broad agreement on tax-rate increases and tax enforcement that could yield more than $1 trillion over a decade. Beyond that, some changes are likely, but centrist Democrats in both chambers have been raising concerns about the breadth of the Biden proposals.
Their concern is particularly pronounced toward plans to tax unrealized capital gains at death and raise capital-gains tax rates. Democrats from rural states say they worry about the effects on family-run farms and businesses, despite administration plans aimed at protecting those groups.
Then there's those pesky loopholes:
Rich Americans Already Have a Plan to Escape Biden’s Tax Hikes – Ben Steverman, Bloomberg ($). “Wealthy Americans are scrambling for places to hide from plans by Democrats to hike their taxes. Many on Wall Street think they’ve found just the thing. A niche strategy called private placement life insurance, or PPLI, was already gaining popularity among the very rich for its ability to shield fortunes from taxes. Now some advisers to the top 0.1% say it’s dominating conversations with their clients.”
As long as assets are held in a PPLI policy, they escape taxes. When a policyholder dies, heirs inherit the PPLI’s contents tax-free. Those perks strike at the heart of Biden’s plans to get the very wealthy to pay more taxes on their investments, especially on capital gains that currently aren’t levied if assets are held until death.
‘Private placement life insurance poses a serious obstacle to President Biden’s goal of guaranteeing that high-income individuals pay tax on large gains at least once per lifetime,’ said Daniel Hemel, a law professor at University of Chicago, who’s been talking with Democrats in Washington about ways to limit the strategy. ‘PPLI is a massive loophole — entirely legal, easy to exploit, and politically very hard to close.’
58 Groups Support Biden's Tax Plan, Condemn 'Tax Dodging' – Molly Moses, Law360 ($). “Fifty-eight organizations wrote to Congress on Thursday expressing support for President Joe Biden's tax plan, which they said will force "tax-dodging multinational corporations" to pay their share toward health care, elder care, child care, education and housing for working people.”
The groups include Americans for Tax Fairness, which bills itself as a ‘campaign of more than 420 national, state and local endorsing organizations united in support of a fair tax system that works for all Americans.'’ The groups said Biden's international tax overhaul agenda, expected to raise about $1 trillion over 10 years, will mend a tax system that currently rewards corporations for moving jobs and investments offshore and shifting profits to tax havens. Those tax havens, moreover, realize little benefit from the structures that allow American companies to dodge an estimated $60 billion a year in U.S. taxes, the letter said.
Senator Wyden seeks a seat at the table:
Wyden eyes taxes on billionaires, executive pay to fund spending plans – Brian Faler, Politico. “The Senate’s top tax writer is proposing new taxes on executive compensation, stock buybacks and plastics to help pay for Democrats’ multitrillion-dollar social spending plan. Finance Chair Ron Wyden (D-Ore.) is also suggesting the creation of a new levy on billionaires, raising the estate tax and cracking down on tax breaks for so-called conservation easements. Altogether, his panel is considering more than a dozen and a half possible tax increases.”
BIG POINT HERE:
The list amounts to a menu of options from which his fellow Democrats could choose rather than a road map of where they are headed.
Intel I have gathered on this list:
The House Ways and Means Committee is developing its own roster of tax hikes.
Farm State Democrats Push for Biofuel Boost in U.S. Budget Bill – Kim Chipman, Bloomberg ($). “Democratic lawmakers are asking House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer to extend a biofuel production tax credit and include other measures to expand U.S. biofuel use in upcoming budget legislation.”
The lawmakers, led by Sen. Amy Klobuchar of Minn., want the congressional leaders to include provisions that would:
- Enhance fuel pump infrastructure
- Allow retailers to sell E15 year-round
- Set a low-carbon fuel tax credit to encourage ethanol blends of 15% or more
- Incentivize manufacturing of flex-fuel vehicles able to burn fuel with higher ethanol content
- Enact a long-term extension of a second generation biofuel producer tax credit that expired last year
The letter can be found here.
Democratic Govs. Back Fed. Tax Credits To Fight Climate Change – Paul Williams, Law360 ($). “Ten Democratic governors implored congressional leaders to include an expansion of tax credits for clean energy generation and manufacturing of zero-emission vehicles in President Joe Biden's infrastructure plan that's pending before federal lawmakers.”
In a letter Wednesday to House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Chuck Schumer, D-N.Y., the governors said including tax credits for energy and car manufacturing sectors in the federal legislation would help combat climate change. Govs. Kathy Hochul of New York and Gavin Newsom of California were among the governors who signed the letter.
IRS Needs More Funding For Tax Enforcement, Rettig Says – Stephen Cooper, Law360 ($). “The Internal Revenue Service needs a significant boost in its budget to reverse lower revenue collections, longer wait times for telephone service and less tax fairness for Americans, Commissioner Charles Rettig said in a letter released Thursday by Senate lawmakers. In a 27-page response to questions from three Senate lawmakers, including Finance Committee member Elizabeth Warren, D-Mass., Rettig said the agency's budget is roughly $2.7 billion less than in FY 2010, or about 22% lower in real terms due to inflation and higher salaries.”
‘Maintaining a flat budget will continue to deprive Americans of both the nature and quality of services they deserve, producing a continuing decline in fairness and service,’ Rettig wrote to Warren, fellow committee member Sen. Sheldon Whitehouse, D-R.I., and Budget Committee Chair Bernie Sanders, I-Vt.
Two-thirds favor boosting IRS enforcement: survey – Naomi Jagoda, The Hill. “About two-thirds of registered voters favor boosting the IRS's budget to increase tax enforcement on high-income taxpayers, which President Biden has proposed as a way to help pay for Democrats' multitrillion-dollar social spending plan, according to a recent University of Maryland poll."
The survey comes as Democrats are crafting the spending bill and aiming to pass the forthcoming legislation this month. Biden proposed earlier this year that such a package could be financed in part by providing the IRS with an additional $80 billion over a decade.
Final Rule Restricts Role of Contractors Hired for IRS Audits – Allyson Versprille, Bloomberg ($). “Outside contractors will play a more limited role in IRS audits, including during summons interviews, under new final rules from the agency.”
The rules (RIN: 1545-B012), released Thursday and scheduled for publication in the Federal Register Sept. 7, implement a provision in the 2019 Taxpayer First Act (Pub. L. 116-25) that bars the IRS from sharing sensitive taxpayer books and records with outside contractors, except in limited circumstances in which the person is providing “expert evaluation and assistance.” In addition, only IRS employees are permitted to question a summoned witness under oath, according to the new law.
IRS Hardship Rule Excluding Corporations Upheld by Court – Aysha Bagchi, Bloomberg ($). “A Treasury Department regulation that allows only individual taxpayers to be released from a property tax if they face economic hardship is a reasonable interpretation of law, a federal appeals court ruled Thursday.”
Seminole Nursing Home Inc., which faced a levy over about $62,000 in federal employment taxes, argued that the regulation was invalid because Congress unambiguously included corporations within the economic hardship exception. It pointed to tax code Section 7701, which defines a ‘taxpayer’ as any ‘person subject to any internal revenue tax,’ and defines ‘person’ to include corporations.
‘But matters are not so straightforward,’ wrote Judge Harris L. Hartz of the U.S. Court of Appeals for the Tenth Circuit, noting that the code section applies the definition where it’s not contradicted by a tax statute or incompatible with the statute’s intent.
IRS permanently allows e-signatures on dozens of tax forms – Michael Cohn, Accounting Today. “The Internal Revenue Service has extended the ability to digitally sign a wide variety of tax forms indefinitely, enshrining a temporary grant of relief for the pandemic into a more permanent policy.”
The IRS updated the web page Wednesday on using e-signatures for certain forms, explaining the move would help reduce the burden on the tax community to allow taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically. The IRS said it’s balancing the e-signature option with the security and protection needed to safeguard against identity theft and fraud. The agency will accept a variety of electronic signatures.
Voices: IRS lists R&D tax credit among its Dirty Dozen, so is it still safe to claim? – David Seibel, Accounting Today. “In July, the IRS wrapped up its annual Dirty Dozen scams list, designed to warn taxpayers against abusive tax promotions. One practice mentioned is the improper claiming of business credits, specifically the R&D tax credit. But does this mean a taxpayer should not be claiming the research credit?”
The reason for the R&D credit appearing on the Dirty Dozen list is not that taxpayers are claiming the research credits in general. Rather, the issue is that certain firms are aggressively marketing the R&D credit to taxpayers who don’t qualify in the first place. These firms use an extremely broad application of the R&D credit criteria to persuade taxpayers they qualify for the credit and have an enormous amount of expenses that are eligible. Rogue firms spend little time getting to know a client’s operations but nonetheless assign high qualified percentages to employees based on their titles and charge a high percentage of the calculated benefit in fees.
Bill to Preserve California Solar Tax Break Heads to Governor – Laura Mahoney, Bloomberg ($). “The solar energy system financing transactions known as partnership flips wouldn’t be subject to tax benefit limits under a bill California lawmakers sent to the governor Thursday.”
The bill (S.B. 267) would address tension between state and federal tax law and retain tax incentives for solar energy development, author Sen. Robert M. Hertzberg (D) said. State law exempts solar systems from property tax from the time of installation until the property is sold, while federal law offers an investment tax credit for renewable energy production, including solar energy.
Va. Extends Time Heirs' Property Owners Can Pay Back Taxes – Asha Glover, Law360 ($). “Virginia's governor signed a bill allowing owners of ‘heirs' property’ to claim their property and provides additional time to pay delinquent taxes.”
Gov. Ralph Northam, a Democrat, signed H.B. 2165 Wednesday. The measure, sponsored by Del. Patrick Hope., D-Arlington, extends the time period for which a local tax official may suspend an action for the sale of tax delinquent property from 36 months to 60. The law is an attempt to mitigate the systemic inequities of the state's heirs' property system under which land becomes an heirs' property when its owner dies without a will.
Treasury Eyes Foreign Tax Credit Rules, Others By Year End – Michael Rapoport, Bloomberg ($). “The Treasury Department is aiming to issue a flurry of long-awaited tax regulations by the end of the year, including regulations on foreign tax credits, a Treasury official said Thursday.”
Treasury also expects to issue rules by year’s end on previously taxed earnings and profits; elections under the passive foreign investment company rules; foreign pension funds under Section 897(l); and repatriations of intellectual property under Section 367(d), said Jose Murillo, Treasury’s deputy assistant secretary for international tax affairs, speaking at a Practising Law Institute virtual conference. A package of rules on partnership aggregation could be out even sooner, by the end of September, he said.
Final Regs Will Keep FTC Nexus Rule, With Clarifications – Andrew Velarde, Tax Notes ($). “Forthcoming final regs on the foreign tax credit will maintain the monumental jurisdictional nexus change included in the proposed regs, but they will offer new clarifications on the provision.”
‘There will be some refinements to that requirement but not a complete overhaul. We’re looking to clarify and maybe make a little bit more flexible . . . the requirement that foreign law be reasonably similar to U.S. law,’ said Jose Murillo, Treasury deputy assistant secretary for international tax affairs.
What better way to kick-off Labor Day weekend than U.S. Bowling League Day!
Interesting tidbit: “Primarily an outdoor sport until around 1840, the game was called ninepins and was popular with gamblers. To snuff out the gambling, the state of Connecticut banned the game in 1841. As a result, indoor lane owners added one pin to their alleys to circumvent the law,” according to National Day Calendar.
This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.