Tax News & Views Weekly Roundup: Opportunity Zones, AI and Ice Cream

Opportunity Zone Opportunity

Treasury, IRS Propose Smoothing Opportunity Zone Transition — Mostly - Marie Sapirie, Tax Notes ($):

For the most part, the notice received positive reviews from tax professionals who have been eagerly awaiting transition guidance. Matthew Peurach of Seyfarth Shaw LLP said the notice largely clarified the transition between OZ 1.0 and OZ 2.0 in a manner the industry expected. “It answers most of the urgent transition questions, but some of the harder structural questions were kicked down the road,” he said.

“I think, overall, people will be happy with the guidance,” said Jessica Millett of Hogan Lovells Cadwalader. “What we’re watching for now is the scope of the proposed regulations.” Tax professionals and taxpayers have a list of questions — including from OZ 1.0 — that they would like the IRS and Treasury to answer, like how to voluntarily decertify a qualified opportunity fund, Millett said.

Background on Treasury Shakeup

Top Treasury Tax Official Ousted After Clashes With White House Over IRS Audits - Brian Schwartz, Richard Rubin and Josh Dawsey, The Wall Street Journal ($):

Kies at times clashed behind the scenes with White House officials, the people said. That included a recent meeting in which he contended that a potential White House request would violate Section 7217 of the Internal Revenue Code, one of the people said. That law prohibits the president, vice president, White House staff and certain agency heads from directly or indirectly requesting that the IRS conduct or terminate an audit or investigation of any particular taxpayer.

Violations are punishable with up to five years in prison and up to $5,000 in fines, and IRS officials have long seen the prohibition as an important shield against the kind of political interference that President Richard Nixon tried to impose on the tax agency.

Latest on AI and Taxes

IRS Ethics Guidance Highlights AI Billing Tensions - Natalie Olivo, Law360 Tax Authority ($):

Recent IRS ethics guidance urged attorneys to acknowledge the time-saving features of artificial intelligence when billing clients, underlining the legal industry's ongoing reckoning with how, or if, this technology fits into the traditional practice of charging by the hour.

AI's potential disruption of the hourly billing model emerged in guidance last month from the Internal Revenue Service's Office of Professional Responsibility, which noted how the technology can reduce the time it takes to research issues and draft documents. The IRS guidance, issued June 24, largely aligns with existing ethics guidelines from the American Bar Association in stressing the need for attorneys to bill clients only for the time spent on a matter, including when AI aids efficiency.

Before Taxing AI, Consider the Chain Store Taxes of the 1930s - Joseph J. Thorndike, Tax Notes ($):

Proposals to tax artificial intelligence are not as novel as they look. They belong to an old habit in American politics: using the tax system to manage innovations that create obvious winners and losers.

New technologies deliver real economic gains, but they can also threaten jobs and unsettle social institutions. Lawmakers typically respond with regulation, antitrust enforcement, or public money for the people and places left behind. Each of those responses has advocates in the AI debate.

But so does taxation.

Taxes In Court

Courts Are Defining Crypto Tax Rules as Congress Stays Silent - Susan Seabrook, James Mastracchio (Winston Taylor), Bloomberg Tax:

To date, Congress hasn’t enacted comprehensive legislation governing the taxation of digital assets. In the absence of a cohesive statutory framework, regulators have filled the void through a series of administrative pronouncements and guidance. The result is a fragmented legal landscape shaped by the IRS, the Treasury, and other regulatory agencies.

From a tax controversy perspective, practitioners must navigate not only tax-specific guidance but also the overlapping and evolving regulatory positions adopted by other agencies. Because a court will generally construe regulatory provisions to fit together rather than create conflict, our analysis and defense of a tax position should also seek to harmonize these various sources of authority.

Eaton, IRS Sharpen Legal Divide Over Implicit Support Impact - Alexander F. Peters, Tax Notes ($):

The government's and Eaton Corp.'s simultaneous answering briefs in Eaton Corp. v. Commissioner, filed July 13 and served the following day, challenge each other's understanding of the underlying facts and the legal framework governing section 482, moving beyond the parties' April simultaneous opening briefs. Across roughly 650 pages, the parties devote much of their attention to whether the arm's-length standard requires related entities to be treated as entirely independent or whether it permits — and, if so, to what extent — consideration of expected parental support.

The case stems from Eaton's 2012 acquisition of Irish-domiciled Cooper Industries PLC, after which the U.S. operations borrowed from foreign affiliates at interest rates reflecting their stand-alone credit profile while paying approximately $241 million in guarantee fees to foreign affiliates that secured the group's third-party debt. The IRS contended that the intercompany interest deductions and guarantee fees were excessive because Eaton U.S. benefited from the financial strength of the broader multinational group and therefore should have been treated as an investment-grade borrower.

Treasury’s Dividend Deduction Limits Struck Down by US Tax Court - James Matheson, Bloomberg Tax ($):

Siemens Medical Solutions USA Inc. is entitled to a full dividends-received deduction from certain foreign corporations, the US Tax Court held Wednesday, invalidating a Treasury regulation the IRS used to disallow $315 million of the deduction.

A limitation to dividends-received deductions established in a temporary Treasury regulation doesn’t override the plain statutory text of IRC Section 245A, Judge Kathleen Kerrigan wrote for the court in its reviewed opinion.

Around the World

IEEPA Refunds Roll Out Amid Continued Uncertainty - Amanda Barr, Tax Notes ($):

CBP’s system for administering refunds of tariffs imposed under IEEPA has been operational since April 20. Its launch followed the Supreme Court’s February decision in Learning Resources Inc. v. Trump and V.O.S. Selections Inc. v. United States that the president lacks authority to impose tariffs under IEEPA. Refunds are being processed using the agency’s new Consolidated Administration and Processing of Entries (CAPE) tool within its existing Automated Commercial Environment portal.

Since the launch of CAPE, public companies have begun to include real numbers in their disclosures about IEEPA tariff refunds, although many also add disclaimers about uncertainty. (See table.)

“It’s difficult to predict anything when it comes to tariffs and customs administration in this current environment,” Russell Semmel of Davis Wright Tremaine LLP said. However, since the Supreme Court ruling, it’s not really a question of whether refunds are coming — it’s a question of when and how, he said.

Democrats Resurface Public Country-by-Country Tax Reporting Bill - Lauren Vella, Bloomberg Tax ($):

A pair of Democratic lawmakers reintroduced a bill Thursday that would require US multinational companies to publicly disclose their financial information for each country where they do business.

The bill, the Disclosure of Tax Havens and Offshoring Act, is sponsored by Sen. Chris Van Hollen (D-Md.) and Rep. Brittany Pettersen (D-Colo.). It would require large American companies to disclose their profits, taxes, employees, and tangible assets on a country-by-country basis.

“While working Americans struggle to get by, large corporations continue to ship jobs overseas and take advantage of tax loopholes to hide their profits. This bill will provide critical transparency to both the American public and investors as to how these corporations abuse our broken tax system and the risks they are taking in the use of offshore tax havens,” Van Hollen said in a statement.

HMRC’s Generous New Whistleblower Program - Lee Sheppard, Tax Notes ($):

As the king was trying to change U.S. foreign policy, Tom Allnutt, North American operations manager of HM Revenue & Customs’ Financial Crime Liaison Network, was pitching HMRC’s new whistleblower program, called the Strengthened Reward Scheme, the first of its kind in Europe, to the OffshoreAlert conference in Miami Beach. Anthony Rodgers, HMRC Operational Lead for the Strengthened Reward Scheme, helped explain the program to Tax Notes.

The point of the new program is straight-up revenue collection. The United States, with the reserve currency and unrestricted spending, can emphasize compliance and respect for the law, but the United Kingdom strives to balance its budgets. HMRC’s ideal case involves millions of pounds of tax deficiency, a large corporation, or offshore tax evasion — something that could generate public interest and future referrals. HMRC wants to be able to brag about how much it has paid in rewards.

EU Tax Omnibus Matters for the Precedent It Sets, Businesses Say - Elodie Lamer, Tax Notes ($):

More than the promised €8 billion savings in compliance costs, the EU tax simplification omnibus (TSO) represents a mindset shift that could have effects extending far beyond this proposal, according to the trade association BusinessEurope.

In its July 2 letter to all EU ambassadors urging them to preserve the TSO's ambition during EU Council negotiations, BusinessEurope mentioned that the tax compliance costs are estimated at approximately €200 billion across the EU, reflecting a figure far higher than the €8 billion in savings promised by the European Commission with its TSO and the recast of the directive on administrative cooperation (DAC).

Blogs & Bits

Tax Court allows IRS levy after erroneous refund caused by faulty assessment - Adam Parr, Tax Coda. "If the IRS’s original assessment significantly understated a taxpayer’s actual liability, it can recover an erroneous refund by making a supplemental assessment and using its usual collection methods."

Can New York City Tax Itself Out of Traffic? - Cole Kellison and Adam Hoffer, The Tax Foundation. "Overall, congestion pricing is an economically efficient tax that reduces traffic while raising revenue. However, questions remain about its role in the U.S."

Better Service, Better Data, Smarter Audits: The Future Of Tax Administration - Terrence Olu Rouse, Tax Policy Center TaxVox blog. "Tax compliance improves when the IRS makes it easier to comply, has better information before returns are filed, uses audits more effectively, and learns from taxpayer behavior over time."

What Day Is It?

Peach Ice Cream

It's Peach Ice Cream Day! (Part of Ice Cream Month) Can't say it's one of my favorite flavors, but in this heat and humidity I'll take any ice cream I can get! Hope everyone has a great weekend!