Tax News & Views Love is in the Air Roundup

White House Shifts to Deficit Reduction to Get Manchin’s Vote – Jennifer Epstein, Erik Wasson and Laura Davison, Bloomberg ($). “The White House is considering reworking President Joe Biden’s economic plan to emphasize deficit reduction in a bid to secure support from Democratic Senator Joe Manchin, a person familiar with the administration’s discussions said.”

The plan could be reworked into a deficit reduction package by keeping the same level of taxes on the wealthy and businesses in the House bill while cutting the amount of spending by consolidating it into a few key programs.

A midterm prescription – Bernie Becker, Politico. “It’s no secret that Democrats will face a difficult time protecting their very narrow congressional majorities in less than nine months. With that in mind, the Democratic pollsters John Anzalone and Matt Hogan are urging the party’s candidates to focus on forcing the rich and corporations to pay more in taxes.”

Anzalone and Hogan, who are pollsters for Biden, noted in a new memo being circulated by the progressive group Americans for Tax Fairness that the president’s campaign ran an advertisement promising to raise taxes on corporations and not on anyone making under $400,000 a year more than any other spot in the fall of 2020.

The lesson, they added, is that Democrats should view raising taxes on the wealthy as politically popular in its own right — not just as a means to offer new benefits to struggling families and the middle class. Democrats also shouldn’t be afraid to pound the contrast on this issue with Republicans — who have unanimously opposed the proposed tax increases in Biden’s Build Back Better agenda, but also didn’t appear to get much in the way of political benefits with their 2017 tax law.

FWIW: Campaigning for tax increases is not a base-broadener, meaning the message only attracts people who already support tax increases. It doesn't broaden support. Issues that broaden the base tend to be on the social side, like ridding animal abuse from the planet. Voters for and against tax increases likely would come together and back a measure that purged animal abuse from existence. Taxes are generally a divisive issue. 

Super Bowl betting is expected to top $7.6 billion. Don’t forget the taxman if you win – Sarah O’Brien, CNBC. “If you plan to drop money on a Super Bowl bet this weekend, remember that the IRS will want a piece of your winnings.”

Americans are expected to wager $7.61 billion on Sunday night’s matchup between the Los Angeles Rams and Cincinnati Bengals in Los Angeles, according to the American Gaming Association. And no matter where you place your bet — whether at a casino, online, through a pool or fantasy league, or at your neighbor’s annual bash — the IRS expects you to come to clean at tax time.

‘In a nutshell, no matter how much you win, or where or how … it is taxable,’ said Susan Allen, senior manager for tax practice and ethics at the American Institute of CPAs.

1 in 3 young adults will see an average $800 tax credit boost this year – Carmen Reinicke, CNBC. “Young workers without kids will get a boost this tax season thanks to the American Rescue Plan’s expansion of the earned income tax credit.”

Previously, Americans age 19 to 24 without dependent children were barred from claiming the credit, a benefit to low- and middle-income workers. The Biden administration enhanced the credit for the 2021 tax year, which means more workers are eligible to receive larger amounts through the benefit.  

For the 37% of workers 19 to 24 who are now eligible to receive the credit, the expansion will mean an average boost of $820, according to a study from the Institute on Taxation and Economic Policy. If an individual has no other tax liability, that money will be sent to them in their refund for the year.  

Tax Refunds From IRS Are Smaller Than Last Year’s, Data Show - Laura Davison, Bloomberg ($). “The average tax refund issued so far this year is $2,201, down about $600 from the typical refund issued last year, according to statistics from the Internal Revenue Service.”

In the first week of the filing season, the IRS received about 16.7 million tax returns and processed about 13 million of those, according to data for the week ending Feb. 4, released Friday. That’s a slightly lower rate than in the first week of filing last year. The agency has warned of slow processing times and delayed refunds, particularly for forms filed on paper or that contain errors, both of which require more attention from the IRS.

IRS backlog hits nearly 24 million returns, further imperiling the 2022 tax filing season – Lisa Rein and Tony Romm, Washington Post. “Nearly 24 million taxpayers are still waiting for the Internal Revenue Service to process their tax returns from last year — a number far larger than previously reported by the agency — with many refunds being held up for 10 months or more.”

The inventory of unprocessed returns and related correspondence was provided by the IRS’s taxpayer advocate service to the tax-writing committees in Congress. The backlog will probably further slow service in the 2022 filing season; the Treasury Department, the IRS’s parent agency, warned in January that it expected its response to be subpar this year.

As of Jan. 28, the tally of outstanding individual and business returns requiring what the IRS calls “manual processing” — an operation where an employee must take at least one action rather than relying on an automated system to move the case — came to 23.7 million, the taxpayer advocate data shows. The number includes 9.7 million paper returns awaiting processing; 4.1 million that were suspended because of errors with stimulus payments, pandemic relief or other issues; 4.1 million amended returns; and 5.8 million pieces of correspondence awaiting action between the agency and taxpayers to resolve issues before the returns are completed.

Ways and Means Committee Chairman Richard Neal (D-MA) calls for more IRS funding to reduce backlog:

‘For decades, Republicans have starved the IRS of funding, and now American taxpayers are paying the price. The IRS needs greater support to carry out its most essential functions, like processing tax returns, enforcing the tax code, and closing the tax gap. Without resources from Congress to update its woefully out-of-date technology, the agency simply cannot operate at the level American taxpayers expect. The COVID-19 crisis only added to the strain on the IRS, which is why the Build Back Better Act directs more funding to the agency. The backlog of tax returns is but one symptom of the fundamental issue that has been ailing the IRS for too long: inadequate resources.’

From the Yikes! Department: 

The IRS directed 7 million Americans to sign up with ID.me face-scan service, according to congressional letter - Cat Zakrzewski, Washington Post:

Treasury Signals Crypto Miners Won’t Face IRS Reporting Rule - Allyson Versprille, Bloomberg ($). “The U.S. Treasury Department indicated that it plans to spare crypto miners and stakers from rules that would require digital-asset brokers to turn over information on their clients’ transactions to the IRS.”

The decision, which was included in a letter sent to a group of senators Friday, is a big initial win for the industry in a battle that’s been brewing since last year when the reporting requirements were enacted as part of the bipartisan infrastructure bill.

In the letter obtained by Bloomberg News , Treasury Assistant Secretary for Legislative Affairs Jonathan Davidson said the department’s view is that ‘ancillary parties who cannot get access to information that is useful to the IRS are not intended to be captured by the reporting requirements for brokers.’ That language signals that people who use mining or staking to validate crypto transactions, as well as software and hardware providers, will be able to avoid the demands.

Crypto Tax Challenges Just Keep Growing – John Buhl, Tax Policy Center:

One victim of BBB gridlock is a proposal to subject cryptocurrencies to wash sale rules, which disallow the deduction of losses on an investment if the taxpayer repurchases an identical asset within 30 days.

The Joint Committee on Taxation estimated that the proposed wash sale curbs in the House-passed version of BBB would raise $16.8 billion over a decade. The Senate Finance Committee included a similar proposal in its version. Given the recent volatility of cryptocurrencies, investors can continue to take advantage of price dips to maximize any tax losses without too much change to their crypto portfolio.

As written, the proposed wash sale provisions may require some revisions. Last month the New York State Bar Association raised concerns about the House bill, including how it would treat related parties, such as family members or businesses where the taxpayer has an ownership interest.

Spouses, taxes and crypto: The unanswered questions for Congress' stock trading ban – Katy O-Donnell, Politico. “A push to ban lawmakers from trading stocks is running into a thicket of technical questions that threaten to derail the effort, compounding the looming political pitfalls.”

Bipartisan proposals that would require lawmakers to put assets into blind trusts are facing resistance from watchdogs who say they wouldn’t go far enough and that members should be forced into broad-based mutual funds. Key taxation questions are unresolved. And the scope of a ban — including whether it would apply to spouses and aides — is up in the air.

On taxes:

Most of the bills that have been introduced do not address the tax treatment of assets. For lawmakers and would-be lawmakers with millions of dollars of holdings, the tax ramifications could be massive.

Being required to sell well-performing stock and then getting hit with a hefty tax bill to boot could be enough to make some wealthy individuals decide against running for office.

Apparently, staffers writing these bills don’t know that auditors have been selling stock to ensure independence for quite a while. Maybe give them a call and see how they do it, or speak with the SEC - they've been there and done that.

Chemicals Industry Pushing IRS for Flexibility on Revived Tax – David Hood, Bloomberg ($). “The chemicals industry is pushing the IRS to provide flexible provisions in new rules for a reinstated toxics tax the industry hasn’t had to pay in decades.”

The requests come as the agency is developing rules required by the massive infrastructure law signed late last year that included the tax, known as the Superfund chemical excise tax. The levy is projected to raise $14.5 billion over a decade, according to the Joint Committee on Taxation.

The deadline for the agency to release rules is July 1, 2022. Trade groups representing a broad swath of industry stakeholders say the summer deadline doesn’t leave enough time to recalculate the amount of tax companies will owe. Their requests aim to make it easier for the industry to adapt to the tax, as well as clarify statutes from 40 years ago.

Manchin Prods Fed to Tackle Inflation, Citing Economy Risk - Tony Czuczka. Bloomberg ($). “Senator Joe Manchin said the Federal Reserve needs to ‘stop pussyfooting around’ and ‘tackle inflation head-on,’ renewing his call for the central bank to act against the fastest pace of price increases since the early 1980s.”

The West Virginia Democrat has warned for months about the impact of U.S. government spending on inflation. In December, he pulled the plug on negotiations on President Joe Biden’s plan for expanded social programs and tax increases, citing rising prices among his concerns.

4 Tax-Related Administrative Procedure Act Cases To Follow - Joshua Rosenberg, Law360 ($). “A recent high-profile case in the Eleventh Circuit has once again demonstrated the power of the Administrative Procedure Act in challenges to Internal Revenue Service regulations alleging that the agency didn't follow the law in crafting regulations or other guidance.”

Hewitt v. Commissioner
In a closely watched case, the Eleventh Circuit recently found that the U.S. Department of the Treasury violated the APA by not adequately taking into consideration public comments when promulgating a regulation involving conservation easements.

Oakbrook Land Holdings LLC v. Commissioner
In a similar conservation easement case before the Sixth Circuit, the appeals court has yet to rule whether Treasury Regulation Section 1.170A-14(g)(6)(ii) violates the APA.

Mann Construction v. IRS
Mann Construction, an Ohio construction company, has askedthe Sixth Circuit to overturn a Michigan federal court ruling that upheld more than $26,000 in penalties on the company for violating a notice issued by the IRS.

CIC Services LLCv. Commissioner
In a landmark decision last year in CIC Services v. Commissioner, the U.S. Supreme Court held that a regulatory mandate backed up with tax penalties is subject to judicial review before the rule is violated. 

Tax Cuts and Fights With Feds Predicted for States in 2022 – Michael Bologna, Bloomberg ($):

Grant Thornton’s clairvoyants predict at least three states will make cuts to their personal and corporate income tax regimes due to better-than-expected revenue collections last year. Seems like a safe bet, because 11 states are already considering substantive bills cutting personal income taxes and eight are examining reductions or phase-outs of their corporate income taxes.

All that tax-cutting gives rise to a second critical prediction, which deals with the legal battle over an American Rescue Plan Act provision that bars states from replacing revenue lost from tax cuts with portions of the $350 billion allotted for pandemic assistance.

NC tax collections soaring above expectations – again – Gary Robertson (Associated Press), WRAL.com. “North Carolina government tax collections have soared above expectations so far this fiscal year, as the state's pandemic-rebounding economy has pumped consumer spending and edged the jobless rate close to pre-COVID-19 levels.”

Through Jan. 31, state revenues are already almost $1.4 billion ahead of the total anticipated by the executive and legislative branches, the state budget office said Friday.

The revenue surge in state government's first seven months of the fiscal year is happening in every major tax category, according to a summary provided by the Office of State Budget and Management. Corporate and franchise taxes, along with taxes related to alcoholic beverage and real estate transactions, are among those seeing the highest percentage growth.

The office said Friday that it now estimates overcollections will reach $2.4 billion by June 30, the end of the fiscal year.

Utah Legislature Passes Personal and Corporate Income Tax Cut – Michael Bologna, Bloomberg ($). “Utah taxpayers will save nearly $200 million next year under tax legislation headed to Gov. Spencer Cox that cuts personal and corporate income taxes, and expands tax credits available to senior citizens and low-wage families.”

Cox said he would quickly sign S.B. 59, which won unanimous support in the state Senate Thursday. The bill passed the state House on Wednesday by a vote of 63-12. The cuts ‘are a tremendous win for Utah families and seniors, and I look forward to signing this bill into law,’ Cox, a first-term Republican, said in a statement.

Kan. Will Spend $1B In Tax Breaks To Lure Unindentified Co.- Maria Koklanaris. Law360 ($). “Kansas will spend more than $1 billion on the state's largest-ever tax incentive package to attract a company whose identity has not been disclosed under a bill signed by the governor.”

Democratic Gov. Laura Kelly on Thursday signed S.B. 347, which has the strong support of Republican leaders, who represent the majority in the state Legislature. The bill also contains a limited trigger for cutting the corporate income tax rate. Each time the state signs a deal with a company meeting certain criteria, the corporate income tax rate would drop by half a percentage point. The main criterion to trigger the drop would be a deal with a company that commits to investing at least $1 billion in a new business and completing that investment within five years. However, the limit on the trigger would be one deal a year for two years.

Tobacco Company Wins $11 Million Refund in Virginia Tax Dispute - Jeffery Leon, Bloomberg ($):

A cigarette manufacturer is entitled to an $11 million refund from Virginia after the state’s highest court found that the company’s storage of tobacco in a Danville facility didn’t qualify as the product being ‘used’ so it wasn’t subject to additional taxes.

Report Advises Developing Countries To Ignore Minimum Tax - Kevin Pinner, Law360 ($). “Developing countries should simply ignore the Organization for Economic Cooperation and Development's worldwide designs for a 15% minimum corporate tax and instead use unilateral measures to collect needed revenue, according to an intergovernmental think tank's report published Friday.”

The minimum corporate tax plan called Pillar Two, part of the OECD's plan for taxing the digital economy, is optional for jurisdictions that signed onto the plan in October, said the policy brief published by the South Centre. That cannot be said for Pillar One, which reallocates a portion of profits to countries where companies make sales without a taxable physical presence, the report said.

‘Going forward, developing countries are advised to ignore Pillar Two, which is anyway optional, and use unilateral measures such as alternative minimum taxes,’ the report's author, Sebastien Babou Diasso, a tax research consultant with the South Centre Tax Initiative, told Law360 on Friday.

The Myth of GILTI Conformity – Mindy Herzfeld, Tax Notes ($). “The Biden administration — eager to see Congress pass the international tax provisions of the Build Back Better Act — has pushed a narrative that if the U.S. system of global intangible low-taxed income is revised so that foreign earned income inclusions and the foreign tax credit limitation are calculated on a country-by-country basis, the U.S. minimum tax on foreign earnings will be treated as conforming to the rules developed by the OECD’s pillar 2 proposal, and U.S. companies won’t be harmed by the adoption of pillar 2. Some practitioners agree.”

But the notion that is all that’s needed to make GILTI consistent (or 'co-existent,' in the OECD’s parlance) with the OECD model rules for a global minimum tax is a myth, relying on the conviction that the OECD and Treasury will be able to agree on precise language that grants the GILTI regime an exemption from the OECD rules. 

OECD's Pillar 1 Poses US Tax Law Changes Beyond Treaties - Dylan Moroses, Law360 ($). “Reallocating countries' taxing rights under the Organization for Economic Cooperation and Development's draft Pillar One rules will require a host of changes to U.S. law along with treaty amendments, tax policy observers told Law360.”

Tax specialists pointed to several Internal Revenue Code sections that would likely need revisions to implement the new regime, which would reallocate taxing rights to countries where companies above a certain profit threshold have customers but no physical presence.

Additional legislative changes on both a federal and state level could be required depending on how the new regime materializes. Congress will likely also need to ratify a multilateral tax treaty to implement Pillar One, which would need two-thirds approval in the Senate under the Constitution.

Two-Fer!

Happy Valentine’s Day and National Football Hangover Day! Yes! Sweets for the sweet. And Alka Seltzer for everyone else!