Tax News & Views Weekly Roundup: Data Center Spending, Immigration Queries and Manufacturing

AI, Data Centers and Tax

How Meta Uses A.I. Data Centers to Avoid Billions in Federal Taxes - Kashmir Hill, Jesse Drucker, Eli Tan and Mike Isaac, The New York Times ($):

Characterizing its A.I. data centers as experimental is “kind of wild and out there,” said Andre Shevchuck, a partner at the advisory firm BPM who specializes in the research and experimentation tax credit.

Indeed, Meta’s own accountants recognize that the strategy is on shaky legal ground. In disclosures buried in securities filings, the tech giant warns that billions in tax savings are vulnerable to being overturned by the I.R.S., in large part because of “uncertainties with our research tax credits.”

Data-Center Spenders Save Billions From Depreciation Tax Break - Michael Rapoport, Bloomberg Tax:

Critics say those billions amount to a giveaway to the companies because the demand for artificial-intelligence capacity means they already have to spend heavily on data centers to stay competitive. The critics also question whether the huge tax break is encouraging the building of still more data centers, adding to the 3,000 to 5,000 already active or planned in the US as concerns surge about their impact on energy and water use and jobs.

“It’s as clear a case as you’re ever going to imagine of rewarding a company for doing something markets were already telling it to do,” said Matthew Gardner, senior fellow at the Institute on Taxation and Economic Policy.

The scrutiny will likely grow, particularly if Democrats retake one or both houses of Congress in the midterm elections.

“Tax breaks should go to families, not data centers,” said Rep. Kristen McDonald Rivet (D-Mich.), one of the sponsors of a new House measure to eliminate bonus depreciation for data centers, the latest in a string of similar proposals in Congress.

A hurricane is coming to tax systems - The Economist ($):

THE YIELD on ten-year US Treasuries has charged through the 5% barrier. The spread between French government bonds and German Bunds is at levels not seen since the euro-zone crisis in 2012. Britain’s newish prime minister has this week set out a plan for spending bolstered by a taboo-busting promise to curb state-pension increases—and yet is still in a fiscal pickle. Across the rich world, countries are struggling to coax more growth out of their economies. And that’s not the worst of it. As we explain this week, the tax base in all countries, which depends heavily on taxing labour, may be upended by artificial intelligence.

Congress Update

Senate Democrats Urge IRS to Drop Immigration Question on Form - Macon Atkinson and Chris Cioffi, Bloomberg Tax ($):

Democrats on the Senate Finance Committee are pressuring IRS CEO Frank Bisignano to drop a question inquiring about filers’ citizenship status from a draft version of Form 1040 for the upcoming tax year, arguing it serves no legitimate tax administration purpose.

Led by Sen. Ben Ray Luján (D-N.M.) and ranking member Sen. Ron Wyden (D-Ore.), the letter — shared first with Bloomberg Tax — says turning the form “into an immigration tracker actively sabotages voluntary tax compliance and undermines the IRS’ core tax collection responsibilities.” Sen. Catherine Cortez Masto (D-Nev.), who also sent a letter to Treasury this week about immigrants getting excluded from certain tax credits, has also signed on, along with Sens. Alex Padilla (D-Calif.), Peter Welch (D-Vt.), Martin Heinrich (D-N.M.), Chris Van Hollen (D-Md.), Jacky Rosen (D-Nev.), Patty Murray (D-Wash.), Cory Booker (D-N.J.), and Elizabeth Warren (D-Mass.).

Treasury Business

School-Choice Tax Credit Gets Big Boost From Treasury - Richard Rubin and Ashlea Ebeling, The Wall Street Journal ($):

The change will make the school-choice program cost significantly more to the government in foregone revenue than previously expected. By 2030, the Treasury Department estimates that 11 million taxpayers will contribute a total of $26 billion a year to scholarship groups, giving them up to $26 billion in tax credits and funding up to 2.2 million full-time scholarships.

Last year, the congressional Joint Committee on Taxation estimated the federal cost for fiscal year 2030 at just $3.4 billion.

Tax Pros Wrangle With Treasury Rule Authority Post-Loper Bright - Shannon Najmabadi, Bloomberg Tax ($):

One reason tax has become a contentious battleground post-Loper Bright is that Treasury has assumed “immense discretion” over the years to “interpret statutes which are often incredibly vague and brief,” according to Chad Martin, principal lead of transfer pricing services at Eide Bailly Advisory LLP.

A prime example of that is code Section 482, which covers transfer pricing, he said, adding “three sentences govern one of the most contentious domains of corporate taxation in the world’s dominant economy.” In practice, it’s dictated by lengthy accompanying Treasury regulations.

High-profile transfer pricing cases such as Coca-Cola Co. v. Commissioner and McKesson Corp. v. United States “have the potential to impose some of the most significant and lasting constraints on the IRS’s ability to interpret and enforce corporate tax laws,” Martin said.

IRS Enforcement

IRS Documents Indicate Low Scrutiny of Life Insurance Vehicles - Lauren Loricchio, Tax Notes ($):

The documents provide insight into IRS concerns about PPLI and its recommendations for addressing them. But little has been done by the agency to intensify scrutiny in this area, two IRS sources told Tax Notes.

“It’s another abusive tax shelter we’ve known about [for] several years that we aren’t addressing,” said an IRS source familiar with the matter, who requested anonymity for fear of retaliation.

“We actually address less than 1 percent of the abusive tax structures utilized by our largest taxpayers costing our country more than $500 billion a year,” the individual said. “This loss of yearly revenue isn’t part of the tax gap figures which allows us to ignore it.”

The Social Media Influencer Who’s Outplayed the IRS for 30 Years - Cady Stanton, Tax Notes ($):

With thousands of loyal followers across the internet, Mottahedeh — wearing his signature American flag tie — argues that there is no law requiring 99 percent of Americans to pay federal income taxes.

“Even though I haven’t openly filed income taxes for over 30 years, and the DOJ and the IRS have been after me for over 30 years, they have not been able to put me in prison,” Mottahedeh told Tax Notes.

Mottahedeh’s “tax truth” organization, Freedom Law School, is one of many groups taking advantage of the explosive growth of social media to promote misleading tax strategies to wide audiences. While Mottahedeh has managed to avoid prison, some of his followers haven’t been as lucky.

Wealth Tax Thoughts

Precedent Pummels Wealth Taxes - Carrie Brandon Elliot, Tax Notes ($):

Eroding support for California’s wealth tax as voting draws near is consistent with the tendency of governments that enact wealth taxes to eventually repeal them. Wealth taxes may be back in vogue, but is this a sign of staying power, or another cycle of history repeating itself?

Voters in Washington state will also decide in November whether to repeal a 9.9 percent tax on income of over $1 million per year. In the spring, the state legislature approved the tax, which proponents of repeal blame on high-profile departures like Jeff Bezos, Howard Schultz, and Gabe Newell.

Opinion: Can a wealth tax actually solve our political and fiscal problems? The math says no. -Jeffrey Hoopes, The Hill:

Then there is the revenue argument. The entire Forbes 400 is worth about $8 trillion. The Congressional Budget Office currently estimates the fiscal 2026 federal deficit at about $2.1 trillion.

Even confiscating 100 percent of every Forbes 400 fortune would equal only about 3.8 years of deficits at that annual rate. After that, the stock of wealth is gone, while the annual budget gap remains indefinitely. And no one is proposing 100 percent wealth taxation.

Blogs & Bits

Top Five Options Guide Reforms to Simplify the Tax Code, Andrew Lautz, The Tax Foundation. "Tax codes should be easy for taxpayers to comply with and for governments to administer and enforce."

Filing your extended Form 1040 is the first of five tax moves to make this October, Kay Bell, Don't Mess With Taxes. "Taxes also add to the traditional spookiness."

Trump Accounts Are Going Automatic. Here’s What Families Need To Know., Kelly Philips Erb, Taxgirl. "Millions of children will soon receive Trump Accounts—even if their parents never signed them up."

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