Tax News & Views Eye On R&D Roundup

July 10, 2023

Business Breaks, Child Credit Top Congress’s Tax To-Dos List - Chris Cioffi and Samantha Handler, Bloomberg ($):

A time crunch looms for taxwriters seeking to mint a deal on a bipartisan tax package that could ride along on several pieces of legislation winding through Congress this year.

Leaders in the House Ways and Means and Senate Finance committees introduced bills setting their party’s tax priorities this spring before holding hearings to test their arguments. Now, with summer here, the bills serve as a rough starting point for the parties as lawmakers seek to pass legislation like the Federal Aviation Administration reauthorization, omnibus spending package, and a sequel US competitiveness bill.

Yes, this is Congress’s top priority for taxes. But that doesn’t mean it’s Congress’s top priority. The three pieces of legislation mentioned in the last sentence ARE Congress’s top priority (more on this below). Attaching a tax bill to any of them is a long shot because lawmakers are still divided over whether or not to extend/expand the Child Tax Credit.

Also, lawmakers continue to try and replace the Child Tax Credit with another provision. So far, those efforts have proven fruitless, but they continue:

[Sen.] Young said he sees opportunity to bring research and development breaks and his legislation to expand the low-income housing credit into the conversation. Rep. Jodey Arrington (R-Texas) said his bill to provide a tax code fix for auto dealers is high on taxwriters’ priority list, considering its broad bipartisan backing.

Arrington’s bill, also sponsored by Rep. Dan Kildee (D-Mich.), would grant a tax deferral for businesses that use last-in, first-out accounting for their inventory. The bill mainly impacts auto dealers facing higher tax bills due to supply chain shortages. Though the legislation passed the Senate last year, the House didn’t take it up.

The House last year didn’t vote on the LIFO bill because there was no agreement on the Child Tax Credit. A LIFO bill could pass in the current House, but passage in the Senate is iffy. Why? Because there is no agreement on the Child Tax Credit. (Are you sensing a theme?)


Weekly Column: The IRS Should Stay Out Of The Tax Preparation Business – Senator Mike Crapo (R-Idaho):

The IRS should stay out of the tax preparation business. 

In May, the IRS released a report on the feasibility of the IRS preparing and filing tax returns.  The Democrat-passed, and misnamed, Inflation Reduction Act gave the IRS $15 million to have an “independent third-party” tell Congress whether the IRS should create its own tax preparation software, called a “direct file” program.  The IRS hired a Washington, D.C., think tank called New America, labeled a “left leaning” group by the Washington Post, to help write the 106-page report, which adds up to $141,000 a page.  Considering the consultant, the report’s conclusion was no surprise: spend billions so the IRS can offer tax preparation software that companies with decades of experience already provide for free.


Business Groups Back Permanent Section 199A Deduction – Fred Stokeld, Tax Notes ($). “The Main Street Tax Certainty Act (S. 1706), which would permanently extend the 20 percent deduction under section 199A for small and individually owned businesses, “would provide certainty to the millions of S corporations, partnerships and sole proprietorships that rely on the Section 199A deduction to remain competitive both here and overseas,” more than 160 business organizations said in a July 6 letter to Senate Finance Committee member Steve Daines, R-Mont., and House Ways and Means Committee member Lloyd Smucker, R-Pa.”

Unfortunately, the lawmakers mentioned are not the ones who need to be sold on making the pass-thru deduction permanent. It’s the people on the other side of the aisle, who happen to run the Senate.


Treasury, IRS Want to Clarify Fixed Health Payment Treatment  - Lauren Vella, Bloomberg ($):

Treasury and IRS Friday proposed amending existing regulations on the treatment of certain fixed payments from accident and health insurance plans as part of gross income.

The proposal (RIN:1545-BQ28) spells out that payments made by accident or health insurance are excluded from a taxpayer’s gross income only if those payments helped to cover medical expenses.

The IRS is targeting fixed indemnity benefits and specified disease excepted benefits, though the scope of the proposals would go beyond these types of coverage. This insurance pays out a pre-determined amount to an employee on a regular basis if it’s triggered by a diagnosis or sickness. The benefits are paid to the employee regardless of whether they incurred medical expenses.

The document is here


Worried the IRS is going to audit your tax return? If you make less than $400,000, you can probably relax – Andrew Keshner, Market Watch.

Important to note: This article is from April, but worth repeating. 

Some clarity is emerging regarding statements from Biden administration officials that no one making less than $400,000 will see higher audit rates by the Internal Revenue Service, which is about to step up its scrutiny of wealthy taxpayers.

You probably remember President Biden saying that audit rates would not increase on taxpayers earning less than $400,000 a year. The big question: Which audit rates? They have fluctuated over the years.  

It appears that 2018 audit rates is the winner.

The audit rate on returns for tax year 2018 is the reference point to keep in mind, IRS Commissioner Danny Werfel told senators on Wednesday. He emphasized that ‘there’s no surge coming for workers, retirees and others.’

The IRS audited fewer than 1% of 2018 returns with total positive incomes — the sum of all positive amounts shown for various sources of income reported on an individual income-tax return, which excludes losses — of between $1 and $500,000, according to statistics that the tax agency released last week.

Further down the article:

The numbers show that 0.4% of returns for taxpayers earning up to $25,000 were audited. That figure was 0.3% for returns between $200,000 and $500,000 and more than 9% for returns over $10 million, the IRS data show. Six years earlier, more than 13% of returns over $10 million were scrutinized, according to the IRS.

2018 audit rates it is. But what constitutes $400,000 in income?

Another open question has been how the $400,000 income threshold will be determined. Months after the Inflation Reduction Act passed, IRS and Treasury officials still hadn’t finalized what counted as $400,000 in income, according to a January Treasury Department watchdog report.

‘How are you arriving at this number?’ asked Sen. Marsha Blackburn, a Republican from Tennessee. Blackburn’s state has many self-employed entrepreneurs who might appear richer on paper than they actually are, she said. ‘While they may have a higher gross, their net is very low,’ she added.

‘We’re going to look at total positive income as our metric,’ Werfel said. He later added that ‘there would be no increased likelihood of an audit if they have less than $400,000 in total positive income.’


Werfel Gives Blessing to IRS Whistleblowers Dishing to Taxwriters – Jonathan Curry, Tax Notes ($):

IRS employees who suspect agency misconduct has occurred may bring their concerns to the House and Senate taxwriting committees, Commissioner Daniel Werfel reiterated to agency employees.

A July 7 internal memorandum to all IRS employees supersedes and replaces the temporary guidance posted May 24 by Jeffrey Tribiano, IRS deputy commissioner for operations support, regarding IRS employees whistleblowing on the agency. The guidance sets out a specific set of steps for IRS employees to report their whistleblower concerns in either grand jury matters or non-grand jury matters.


Some Research on Style, Design Can Use Tax Credit, IRS Says – Michael Rapoport, Bloomberg ($). “A taxpayer may be able to claim the research credit under certain circumstances for expenses that relate to matters such as the style or design of a product, so long as the research was intended for substantive matters like improving the product’s performance, the IRS says.”


Limiting the Fallout From Moore – Mindy Herzfeld, Tax Notes ($):

The U.S. Supreme Court’s June 26 grant of a petition for a writ of certiorari in Moore v. United States, No. 22-800, opened up the possibility that large swaths of the federal income tax system — especially taxes on business income — could be declared unconstitutional. The implications of a broad holding by the Court in the case cannot be overstated, in terms of the revenue costs to the U.S. treasury, the complexities and uncertainties it will introduce for taxpayers, and the inducement it would offer for shifting U.S. intangible assets and jobs overseas.

Further down the article:

It’s not at all clear how the Court could adopt the Moores’ line of reasoning, answer the question in a way that would foreclose taxes on unrealized income such as wealth taxes, and still leave intact fundamental parts of the code, including subpart F, the global intangible low-taxed income regime, and subchapters K and S.

Moreover, as a case recently filed in the U.S. District Court for the Eastern District of Virginia indicates, Moore — regardless of how the justices craft their holding — is probably just the beginning of this story. The complaint in Altria Group Inc. v. United States, No. 3:23-cv-00293, which is more narrowly focused on the impact of repealing section 958(b)(4), could provide an alternative route of constraining TCJA changes via the realization requirement.

Will Moore Upend Subchapter K? – Monte Jackel, Tax Notes (letter to Editor) ($):

Commentators have fretted that if SCOTUS holds that realization of income is a constitutional prerequisite to income taxation under section 965, various other IRC taxation regimes will also be suspect — and possibly found unconstitutional. Frequently mentioned in that vein are a number of current mark-to-market tax regimes, like those under sections 475, 1256, and 1259, and proposed mark-to-market tax regimes like the proposed billionaire’s tax.

Also mentioned as potentially vulnerable to attack are current taxation regimes that impose tax at the owner level when the entity realizes income and allocates it to the owners but the income has not yet been distributed, such as under subchapters K (taxation of partnerships and partners) and S (taxation of S corporations and shareholders).


New York Poised to Unmask Owners of Shell Companies - Michael Bologna, Bloomberg ($):

This year’s award for the least noticed but most consequential bit of state tax legislation goes to New York and its LLC Transparency Act—a short bill with a big heart that could become a critical tool for attacking tax cheats, money launderers, terrorists, and drug traffickers.

The proposed law, A3484, passed the state Legislature at the end of June but hasn’t yet made it to Gov. Kathy Hochul (D). It requires domestic and foreign LLCs—limited liability companies—to disclose their beneficial owners and additional identifying information when new entities register with the state or change ownership structures. To many in law enforcement, this exercise will be an antidote to the scourge of anonymous shell companies, which enable corrupt businesses, kleptocrats, and criminals to hide their ill-gotten gains.


Louisiana Sales Tax Challenge Properly Booted From Federal Court - Perry Cooper, Bloomberg ($):

An online seller’s constitutional challenge to Louisiana’s sales tax system can’t be heard in federal court, the US Court of Appeals for the Fifth Circuit affirmed.

The federal Tax Injunction Act divests the court of jurisdiction because Arizona-based Halstead Bead Inc.'s suit seeks to restrain the collection of state taxes when Louisiana law provides an adequate remedy in state court, the appeals court ruled in an unsigned, unpublished opinion.


Wisconsin’s Democratic governor guts Republican tax cut, increases school funding for 400 years – Scott Bauer and Harm Venhuizen, Associated Press:

Wisconsin Gov. Tony Evers signed off on a two-year spending plan Wednesday after gutting a Republican tax cut and using his broad veto powers to increase school funding for centuries.

Evers angered Republicans with both moves, with some saying the Democratic governor was going back on deals he had made with them.


Maine to Boost Senior Tax Benefit, Offer Paid Family Leave - Angélica Serrano-Román, Bloomberg ($). “A spending bill that increases tax benefits for seniors, creates a paid family leave program, and makes Maine’s dependent exemption tax credit refundable is heading to Gov. Janet Mills (D), who has said she will sign it.”


Taxpayer’s Civil Assessment Challenge Not Barred by Jury Verdict - Holly Barker, Bloomberg ($):

A Scottsdale man’s 2013 conviction for willfully filing false tax returns doesn’t bar him from collaterally attacking civil penalties assessed over his alleged failure to report foreign bank accounts, a federal court in Arizona said.

Michael Quiel, a venture capitalist, was convicted for willfully filing false tax returns. The jury didn’t return a verdict on charges that he willfully failed to file Reports of Foreign Bank and Financial Accounts, or FBARs, but the government subsequently imposed related civil penalties.


From the “What’s Not a Priority on Capitol Hill” file:

Senate Side: 

COMING ATTRACTIONS - Ryan Lizza, Eugene Daniels and Rachel Bade, Politico:

Senate Majority Leader CHUCK SCHUMER previewed the chamber’s July work session in a Dear Colleague letter this morning, saying Democrats would prioritize (1) appropriations, (2) NDAA, (3) artificial intelligence briefings and (4) judicial confirmations before the August recess.

The Senate will also be ‘making progress,’ he wrote, on bipartisan bills dealing with prescription drug pricing, permitting reform, rail safety, marijuana industry banking, FAA reauthorization and more, but he stopped short of saying any would definitely come to the floor. ‘Passing these bills will not be easy, and we will depend on cooperation of our Republican colleagues to get any of them done,’ Schumer writes. 

The letter is here.

House Side:

Congress Dives Back Into Fights on Spending Cuts, Military as Deadline Draws Near – David Harrison, Wall Street Journal ($):

Top of mind on Capitol Hill as lawmakers return from recess this week are the annual spending bills to keep the government open, which must be enacted by the time the new fiscal year starts on Oct. 1. Other priorities include legislation authorizing military programs, updating agriculture and food-aid policy and keeping the country’s airports running, all of which must also be enacted by the new fiscal year, although Congress can also agree to temporarily extend current programs.

What's not a priority? Tax legislation that passed the House Ways and Means Committee last month. 

Ensuring the federal government does not suffer a partial shutdown due to lack of funding and providing military funding are the biggest priorities. There is a meeting later this week on the tax legislation. We’ll see if they provide any details on whether the tax legislation gets some House floor time this month.


Happy International Town Criers Day!

What’s a Town Cryer, you ask?

National Day Calendar:

International Town Criers Day honors loud people who announce the news by using a bell and making proclamations to townspeople.

What is a modern-day Town Cryer? Most likely: Newscasters. They may not have loud voices, but with news broadcasts happening 24/7 they make a lot of proclamations (whether those decrees are important is another question).  

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