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Tax News & Views Here Comes The Judge Roundup

Jay Heflin
June 21, 2024

Key Takeaways

  • Supreme tax action.
  • Not a Dance: The TCJA struggle.
  • ERTC pause still paused, kind’ve.
  • Retirement guidance.
  • IRS wins $1 million case.
  • Taxpayers miss $1 million refund.
  • Oh Canada!
  • Wagyu? Yes, please!

 

The Supreme Court upholds a tax on foreign income over a challenge backed by business interests – Mark Sherman, Associated Press:

The justices, by a 7-2 vote, left in place a provision of a 2017 tax law that is expected to generate $340 billion, mainly from the foreign subsidiaries of domestic corporations that parked money abroad to shield it from U.S. taxes.

The law, passed by a Republican Congress and signed by then-President Donald Trump, includes a provision that applies to companies that are owned by Americans but do their business in foreign countries. It imposes a one-time tax on investors’ shares of profits that have not been passed along to them, to offset other tax benefits.

This provision was part of the Tax Cuts and Jobs Act. It taxed foreign profits as if they were repatriated into the U.S. It was a one-time thing.

The court ruled in the case of Charles and Kathleen Moore, of Redmond, Washington. They challenged a $15,000 tax bill based on Charles Moore’s investment in an Indian company, arguing that the tax violates the 16th Amendment. Ratified in 1913, the amendment allows the federal government to impose an income tax on Americans. Moore said in a sworn statement that he never received any money from the company, KisanKraft Machine Tools Private Ltd.

But Kavanaugh said the tax the Moores disputed was akin to other taxes, including those on foreign-earned income and partnerships. A ruling for the Moores could have called into question those other provisions of the tax code and threatened losses to the U.S. Treasury of several trillion dollars, Kavanaugh noted, echoing the argument made by the Biden administration.

If the Supreme Court had ruled for the defendants, then ‘Katie bar the door’ on folks challenging other tax policies.

Supreme Court Upholds 2017 Tax on Foreign Investments – Jess Bravin and Richard Rubin, Wall Street Journal ($):

A ruling for the plaintiffs could “require Congress to either drastically cut critical national programs or significantly increase taxes on the remaining sources available to it—including, of course, on ordinary Americans,” Kavanaugh wrote. “The Constitution does not require that fiscal calamity.”

But it was a narrow ruling:

Supreme Court Upholds Trump-Era Tax Provision – Abbie VanSickle and Jim Tankersley, New York Times:

The ruling preserved the structure of the income tax system for now, avoiding what many analysts and economists warned could have been fiscal chaos if the system had been struck down.

It also opened a window into what could be the next major tax case to come before the court: whether Congress can impose what is effectively a tax on Americans’ wealth, as President Biden and other Democrats have proposed to do in various forms. That question loomed large in the opinions, highlighting the stark divisions among the justices in how they view the notion of a wealth tax.

Certain lawmakers have been pushing to enact a "wealth tax" that would place a levy on unrealized gains. For example, the value of a home appreciates and the owner would pay a tax on the appreciation. How does the owner get the money to pay the tax? Possibly by selling the home. 

Supreme Court dodges definitive answer on legality of a ‘wealth tax’ – Michael Macagnone, Roll Call:

The Supreme Court in a decision Thursday did not foreclose the kind of wealth tax some congressional Democrats have proposed, but justices left plenty of clues that they were not exactly leaving the door open to one either…

But in the majority opinion, Justice Brett M. Kavanaugh dodged the realization issue and wrote multiple times that the court would not wade into whether Congress could tax the accumulated wealth of individuals or unrealized income, such as appreciation in the value of unsold stocks.

“And nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity,” Kavanaugh wrote.

Congress Wins A Battle For Its Taxing Authority, But More Challenges Are On The Horizon - Steven M. Rosenthal, Tax Policy Center. “...Moore will certainly spur new challenges to existing tax rules, especially the tax rules for capital income, many of which are on paper profits (like zero coupon bonds, contingent debt, futures contracts, swaps, and constructive sales). Absent these rules, sophisticated taxpayers could structure their investments to derive economic benefits without the realization events that normally create a tax liability. How would Kavanaugh and his co-authors respond to these new challenges to the tax code?”

 

Speaking of taxes…

House Republicans shift message on extending 2017 tax cuts – Caitlin Reilly, Roll Call:

The GOP party line on the expiring 2017 tax law has been to extend and make it permanent, but changing politics and growing debt has House Republicans charged with reviewing the provisions shifting away from that message.  

Lower tax rates on individuals, relief from the alternative minimum tax, treatment of money U.S. companies make abroad, small-business deductions and other provisions established by 2017 law are set to expire at the end of next year.

The impending tax cliff has prompted lawmakers to start laying the groundwork for 2025, even though no one can predict the outcome of November’s elections.

Supporters for extending tax cuts got a splash of reality earlier this week.

National debt will exceed $50 trillion by 2034, budget watchdog estimates – Jacob Bogage, Washington Post.

As lawmakers grapple with increasing defense demands and spending on social safety net programs, the Congressional Budget Office projected Tuesday that the federal debt will equal 122 percent of the United States’ annual economic output by 2034, far surpassing the high set in the aftermath of World War II.

The deficit will swell to $1.9 trillion this fiscal year and keep growing until the overall national debt hits $50.7 trillion a decade from now, Congress’s nonpartisan bookkeeper said in its latest report. The group revised its forecast from four months ago, when it projected that the debt would reach $48.3 trillion in 2034, and 116 percent of economic output.

Back when the Bush tax cuts were being debated in Congress, the chief argument for enacting the tax cuts was that the Federal government was running surpluses and that money should be returned to voters. Don't expect a similar argument when lawmakers debate extending expiring tax cuts in the Tax Cuts and Jobs Act. 

Senate Finance Democrats look to raise revenue for 2025 tax cliff – Caitlin Reilly, Roll Call:

Senate Finance Chair Ron Wyden said committee Democrats left a meeting on next year’s tax battle aligned on the need for wealthy individuals and multinational corporations to pay more in taxes.

Wyden, D-Ore., said he would work with other Democrats on the panel to come up with a “menu” of possible revenue raisers, as preparations heat up for next year’s expiration of many provisions in the 2017 tax law. It’s the same approach Wyden used ahead of what became the 2022 health care and clean energy budget law.

Housing, Child Care Top Dem. Senators' 2025 Tax Deal Goals – Asha Glover, Law360 Tax Authority($):

Senate Democrats plan to prioritize tax policies that will make child care and housing more affordable in the midst of the debate over the extension of the 2017 tax law's expiring provisions in 2025, Senate Finance Committee Chairman Ron Wyden told reporters Thursday.

Wyden, a Democrat from Oregon, said after a closed-door meeting with fellow Democrats on the panel that his party will focus on helping working families during the negotiations to extend the Tax Cuts and Jobs Act 's expiring provisions, including building upon the success of the low-income housing tax credit.

Democrats might not control the Senate in the next Congress, which would make their "menu" less important. Tax Notes ($) published Democrats’ menu, which is here.

Tough tax choices lie ahead.

Capitol Hill Recap: Soaring Deficits and Tax Policy – Jay Heflin, Eide Bailly:

Call it a coincidence, but the CBO released a report about exploding debt as lawmakers begin behind-closed-door negotiations about extending Tax Cuts and Jobs Act (TCJA) provisions slated to expire in 2025.

Extend the tax cuts:

Extending TCJA provisions beyond 2025 is projected to add $3.9 trillion ($4.5 trillion with interest) to the deficit over the next ten years, according to the Committee for a Responsible Federal Budget, a D.C. thinktank.

Allow them to expire:

Allowing the TCJA tax cuts to expire would extract roughly $400 billion from the economy every year – for the next ten years. Individuals would pay roughly 11 percent more in taxes, according to the CBO, and that level of taxation could mean the U.S. economy takes a financial hit.

If the U.S. economy retracts, then jobs are likely lost, which means that people no longer have salaries and aren’t paying taxes, leading to a revenue decline for the Federal government. So, the $400 billion increase in annual revenue to the Federal government could never materialize.

 

Agency Updates

IRS to Reject Billions of Dollars in Covid Employer Tax-Credit Claims – Richard Rubin and Ruth Simon, Wall Street Journal ($):

The Internal Revenue Service is planning to deny billions of dollars of what it says are improper claims for a popular pandemic-era tax credit, while starting to gradually pay out some claims that have been sitting at the tax agency for more than nine months. 

The IRS, following a long review of the employee retention tax credit, plans to maintain a moratorium on processing claims filed since mid-September 2023. The agency, which had said it hoped to resume significant processing of claims in late spring, announced its plans less than an hour before the summer solstice. 

There were a lot of fraudulent claims that upped the cost of the provision.

The program has cost the government roughly $230 billion, about triple early projections. And although the credit expired in 2021, employers can still file amended tax returns to claim up to $21,000 per employee for tax year 2021…

In coming weeks, the IRS plans to deny tens of thousands of claims that had shown the greatest risk of being improper, the agency said. It will continue to analyze an even larger batch of claims that showed an “unacceptable” level of risk. About 60% to 70% of the one million pending claims it reviewed carry unacceptable risk, while 10% to 20% fall into the highest risk category, the agency said.

 

IRS Details Exceptions to Retirement Plan Distribution Penalty - Naomi Jagoda, Bloomberg ($):

The IRS on Thursday issued guidance on exceptions to an additional tax on early retirement plan distributions for emergency personal expenses and for domestic abuse victims.

A 2022 law known as the SECURE 2.0 Act added these exceptions to the 10% additional tax.

In Notice 2024-55, the IRS provided definitions and outlined limitations to the exceptions.

 

Tax Pros Predict Rocky Road for Basis-Shifting Initiative – Kristen Parillo, Tax Notes ($):

A Treasury and IRS plan to combat abusive related-party basis-shifting transactions via guidance will likely face a host of legal challenges and implementation difficulties, according to tax professionals.

“The guidance will almost certainly be subject to a challenge that the IRS lacks the authority to change the result dictated by the relevant statutes,” Lee S. Meyercord of Holland & Knight LLP told Tax Notes.

The details:

According to a June 17 IRS release, the three guidance items — Notice 2024-54, 2024-28 IRB 1; proposed regs (REG-124593-23); and Rev. Rul. 2024-14, 2024-28 IRB 1 — are needed to stop the use of basis-shifting transactions by related-party partnerships.

 

Court Side

US Beats $1 Million Negligence Suit Over Restitution Lien Notice - John Woolley, Bloomberg ($):

The US isn’t liable for not notifying a spouse of a lien resulting from her husband’s criminal conviction because a restitution lien isn’t subject to the same notice requirements as a tax lien, a California federal court said.

Dorthea Walton’s husband [...] was sentenced to 55 years in federal prison for his role in organizing a series of daytime smash-and-grab robberies of Southern California jewelry stores. The government recorded a nominee restitution lien against the Waltons’ property related to his almost $1.05 million restitution obligation without notifying Dorthea, the US District Court for the Central District of California said.

 

International Zone

Canada Lawmakers OK Digital Tax, Advance Min. Tax – Dylan Moroses, Law360 Tax Authority ($):

Canada's Senate passed a 3% digital services tax that would target the revenue of large technology companies, following through on a plan that has drawn criticism from the U.S. and groups representing American tech giants.

Canada's DST was approved by the Senate on Wednesday and awaits royal assent to become law. The measure follows through on Canada's promise to enact a DST if there were delays in implementing a global agreement to redistribute taxing rights among countries, known as Pillar One of a plan negotiated at the Organization for Economic Cooperation and Development.

 

From the “Regrets, I've Had A Few” file

Couple Missed Chance to Challenge $1 Million Income Adjustment - John Woolley, Bloomberg ($):

Lisa and Todd Kohout, who own Cornerstone Enterprises Inc., sued the IRS to challenge $1.1 million in alleged taxes and accuracy-related penalties, which the agency said resulted from their underreporting of income from Cornerstone’s medical funding and real estate business ventures. The parties agreed before the Tax Court to reduce the IRS’s adjustment to the couple’s Schedule E income from $1.3 million to $1 million...

But the couple “never asked the tax court to disregard or amend the first stipulation of issues,” the US Court of Appeals for the Eleventh Circuit’s unpublished opinion said. “Their own computation brief discussed the same stipulation without asserting it was inaccurately phrased in any way.”

The Kohouts forfeited their opportunity to set aside the stipulated Schedule E adjustment by not raising it in the Tax Court, the appeals court said. That forfeiture is enough to affirm the Tax Court’s order, it said.

 

What Day Is It?

Oh my, it’s National Wagyu Day! Try it if you get the chance. (It’ll cost ya.)

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About the Author(s)

Jay Heflin Photo

Jay Heflin

Director of Legislative Affairs
Jay brings more than two decades of experience to his job as Director of Tax Legislative Affairs in Eide Bailly’s Washington D.C. office. Jay provides political intelligence and guidance to the firm on the progress of tax legislation on Capitol Hill. Prior to joining the firm, he was a director at the tax lobbying shop Federal Policy Group, LLC, where he tracked tax legislation in Congress and participated in lobbying efforts to amend tax legislation. Before joining the Federal Policy Group, he was a Congressional reporter for several news organizations where his beat was tax policy.

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.