Mar 3, 2015

Tax Policy Update

NUMBER OF THE WEEK: $42,268. The projected average taxable income of all tax returns in 2015, according to the Joint Committee on Taxation’s Feb. 27 report on “Fairness and Tax Policy.” The report also projects that the top ten percent (in terms of income) of all taxpayers in 2015 will receive 45 percent of all income and pay 82 percent of all income taxes. The JCT published its report in preparation for the Senate Finance Committee’s March 3 hearing to examine the issue of fairness in the U.S. tax code. Also, look for Democrats to issue a report in conjunction with today’s hearing that will focus on tax avoidance strategies associated with financial products and deferred compensation.


Permanent Bonus Depreciation in Limbo. While select permanent extender bills have moved ahead in the House, bonus depreciation remains benched for now as House Ways and Means Republicans focus on less controversial tax legislation. In an interview with Bloomberg BNA, Congressman Dave Reichert (R-WA), who chairs the revenue subcommittee on Ways and Means, also indicated there are ongoing discussions about how the pricey provision will score under the new dynamic scoring regime adopted by House members at the beginning of the Congress.

CBO to Get New Director in April. In their search for Doug Elmendorf’s replacement to head up the Congressional Budget Office, congressional Republicans chose Keith Hall, the former chief economist on President George W. Bush’s Council of Economic Advisers. After a three-year stint on the Council, Mr. Hall served as a commissioner at the Bureau of Labor Statistics and as a chief economist at the International Trade Commission. The selection of the new CBO director has received a great deal of attention after House Republicans passed a rule for the 114th Congress requiring the CBO and the Joint Committee on Taxation to use dynamic scoring in their analyses of major legislation. Mr. Hall will start his new job on Apr. 1. Read here to learn more about the incoming CBO director, and here for a perspective from another former Bush adviser on the challenges and advantages of the new dynamic scoring frontier.

More Staffing News – Ellen Doneski Takes on New Role as Reid’s Top Tax Adviser. Following the recent departure of his chief tax adviser, Cathy Koch, Senate Minority Leader Harry Reid welcomes Ellen Doneski to his staff. Ms. Doneski, a former tax aide on the Senate Commerce Committee, has officially taken over the helm for tax policy in the minority leader’s office and will be an influential figure in all things related to tax and budget. Good luck, Ellen!

Democrats Working on Tax Package for the Middle Class. The release of a tax credits package geared towards the middle class has been put on hold thanks to the Department of Homeland Security appropriations drama. A group of four senators and four representatives had originally planned to introduce the package at a news conference last week. As uncertainty continues to loom over the DHS funding bill, we may have to wait a while longer on the tax package. Though details surrounding the tax credits are scarce, we do know that the package is likely to include proposals introduced by Senator Patty Murray last year, including the expansion of the Earned Income Tax Credit (EITC) for childless workers and a 20-percent deduction on income for secondary earners.

The package may also include an expansion of the child and dependent care tax credit, extension of the American Opportunity Tax Credit, and expansion of the child tax credit. It is unclear how these proposals would be paid for, however. Congressman Sander Levin and Senator Ron Wyden, ranking members of the House and Senate tax-writing committees, indicated that offsets are being considered. Last year, Senator Murray outlined two ways to pay for her proposals – by eliminating (1) the corporate stock option loophole, and (2) deferral on foreign income subject to an effective tax rate of 15 percent or less, with an exception for income attributable to legitimate business operations in a foreign country.

Sanders Asks GAO to Look into Corporate Tax Rates. Corporate tax avoidance has become a key issue for Senator Bernie Sanders who last week asked the Government Accountability Office (GAO) to provide a report on how much federal taxes corporations actually pay relative to their profits. The GAO published a similar report back in 2013 and found that corporations paid an effective rate of 12.6 percent in federal income taxes in 2010. The senator from Vermont has also asked the Obama Administration to use executive action to eliminate six specific tax breaks that could raise $100 billion over 10 years. In his letter to the White House, Mr. Sanders targets the following areas of tax policy: (1) “Check-the-box” rules applicable to multinational firms and their foreign subsidiaries; (2) rules related to short-term offshore loans; (3) corporate inversions; (4) carried interest; (5) real estate investment trusts (REIT); and (6) valuation discounts for estate and gift taxes.

Rubio Wants to be President, Talks Tax Reform. At a Club for Growth meeting, GOP presidential hopeful Senator Marco Rubio told the audience that he and Senator Mike Lee will soon unveil a plan for tax reform that’s been in the works for at least the past year. “If I got to start our country over from scratch, I would either have a flat tax or a consumption tax,” the Florida senator said. But for now, Mr. Rubio would like to reduce the corporate rate to 25 percent, eliminate taxes for both capital gains and dividends, and bring parity between C and S Corps. He would also like to simplify the current system by setting two individual income tax rates, at 15 percent and 35 percent. We expect to see more details of his plan later in the week, but previous iterations of his and Lee’s proposed reforms included the elimination of most deductions and a move to full expensing.


CFTC Examining Dividend-Arbitrage Trades. The U.S. Commodity Futures Trading Committee is looking into the roles that banks play in dividend-arbitrage trades. These trades are complex transactions where banks are helping their clients avoid paying withholding taxes on stock dividends. While this examination is in the early stages, the CFTC is looking for information on the mechanics of these transactions and how the strategies affect U.S. securities or futures exchanges. They are also looking into whether the prices in the trades reflect market values and arm’s-length negotiations. A number of large U.S.-based banks are under review, and similar investigations are being conducted in Europe as well.

IRS Tightening Its Belt Due to Budget Constraints. In light of the IRS’s decreased budget this year, Commissioner Koskinen announced that the IRS will “scale back the guidance plan to better target resources.” However, an IRS official said that anti-inversions regulations will still be one of their top priorities, along with finalizing Section 871(m) regulations and addressing controlled foreign corporation loans to foreign partnerships. Some IRS resources will go towards re-tooling their international audit process to identify compliance risks up-front rather than assigning returns and allowing the agents, over a period of months or years, to find the compliance risk in the return. While the risk-assessment process details weren’t made public, Sharon Porter, acting director in International Business Compliance, identified transfer pricing and withholding as areas of risk.

U.S. Ramping Up BEPS Efforts. The U.S. is making strides in an effort to keep up with the fast-moving progress of the OECD’s Base Erosion and Profit Shifting (BEPS) project. A Treasury Department official recently said that the U.S. template for compliance with the BEPS country-by-country reporting requirement is under development and on track to meet the deadline for reporting to begin on Dec. 31, 2017. The Treasury Department also announced last week that it is planning to deliver a “bold, radical proposal” to the countries participating in the BEPS project to adopt a controlled foreign corporation (CFC) regime similar to President Obama’s minimum tax budget proposal.


Losing Big Equals Winning Big. In a recent court ruling, the Fifth Circuit Court of Appeals reversed the Tax Court’s holding that Pilgrim’s Pride Corporation’s abandonment of Southern States Cooperative stock resulted in a capital loss. Pilgrim’s Pride Corporation (Pilgrim), prior to going public in 2004, formally surrendered that stock and took a $98.6 million ordinary loss deduction for abandonment under Section 165. There was an offer to re-purchase at $20 million, but the tax incentive to take an ordinary loss outweighed it. The IRS challenged the characterization of the loss arguing that it was capital in nature under Section 1234A(1). Pilgrim argued that the legislative history of Section 1234A(1) was limited to the termination of rights or obligations with respect to capital assets and not the capital asset themselves. The Fifth Circuit Court agreed with Pilgrim.


Tuesday, 3/3

Senate Finance Committee
The full committee holds a hearing on “Fairness in Taxation” in 215 Dirksen.

Senate Appropriations Committee
The Financial Services Subcommittee holds a hearing to review the FY 2016 funding request for the Department of Treasury. Secretary Jack Lew and IRS Commissioner John Koskinen are testifying.

Wednesday, 3/4

House Appropriations Committee
The House Financial Services and General Government Subcommittee holds a hearing on the Treasury Department’s budget in 2359 Rayburn. Secretary Jack Lew will testify.