CONSISTENTLY DELIVERS

Jul 11, 2017

Tax Policy Update

NUMBER OF THE WEEK: 13

Image result for unlucky number 13

Photo credit: expatbostonians.com

The number of workdays left on the congressional calendar before the start of August recess, July 31. BUT…it looks like Senate Majority Leader Mitch McConnell (R-KY) is getting ready to delay the summer recess by two weeks. Delay or no delay, the to-do list goes something like this: healthcare, budget and appropriations, and debt ceiling. Those who have been following tax reform developments already know not to expect anything major to drop before recess — according to comments made by the White House, tax reform details aren’t coming until September.

While there may be some reprieve on the tax front, it is touch and go for the Senate GOP’s healthcare bill. McConnell’s failure to hold a vote before the Fourth of July recess has made things a little more difficult, as Senate Republicans got an earful during town hall gatherings back home (for those brave enough to hold such meetings anyway). Senate Republicans are meeting behind closed doors this week to assess whether there’s a realistic path forward. Always one to brighten things up, Sen. John McCain (R-AZ) believes the bill is “probably…dead.”

Before the summer break, Republicans will also have to make some headway on the FY2018 budget resolution. Although Congress’s past budget blueprints have often been greeted with a sigh and a shrug, the FY2018 budget resolution is crucial, as it will carry the reconciliation instructions for the GOP’s tax reform plan. After two postponements due to GOP infighting over spending levels, the House Budget Committee may finally be ready to mark up the resolution this week. It remains to be seen whether lawmakers can get this across the finish line before the start of the month-long recess. Although the House Appropriations Committee has been busy churning out the annual spending bills, it is still unclear what the GOP’s plan is for these funding measures. CR, anyone?

Then there’s also the matter of raising the debt ceiling. Although the government can stretch the statutory limit to mid-October, Treasury Secretary Steven Mnuchin would much prefer Congress to raise it before leaving for recess. Sounds easy enough with a Republican Congress except GOP lawmakers are still bickering among themselves on whether to do a “clean” increase or attach some spending cuts to the legislation.

And with that…welcome back, Congress!

LEGISLATIVE LANDSCAPE

Follow the Yellow Brick Road. If only it were that easy. The Senate GOP is back from the July Fourth recess this week and with only about 13 working days left until August recess, they’re up against a tight deadline to pass their healthcare legislation. Senate Majority Leader Mitch McConnell isn’t ready to give up — GOP leadership announced that it plans to unveil a revamped draft of its legislation to repeal and replace Obamacare by the end of this week. The new bill text may be released as soon as July 13, with a CBO score to follow early next week. Depending on feedback for the bill, a vote may be scheduled for the end of next week or the week before August recess. McConnell is expected to brief …

Medicaid, HSAs, and Freedom Plans, Oh My! Major holdups littering the path to victory for the GOP include disagreements on how to handle scaling back Obamacare’s Medicaid expansion and a new initiative called “Freedom Plans” from Sens. Ted Cruz (R-TX) and Mike Lee (R-UT).

Freedom Plans are a conservative initiative designed to lower premiums and create parity between individual market and employer plans. The Cruz-Lee plan would allow the following …

Red Brick Road. As Senate Republicans struggle to reconcile ideological differences within the party, leadership is considering various fallback options, in case the GOP is unable to pass healthcare legislation before August recess.

Conservatives in both chambers are already entertaining the idea of repealing Obamacare without a replacement on hand. Sens. Ted Cruz, Mike Lee, Rand Paul (R-KY), and Ben Sasse (R-NE), as well as the Trump Administration have all expressed support for this strategy. However, this plan is unlikely to gain any traction. Several senators have already strongly opposed this idea, including McConnell who has clearly stated that “doing nothing” is not an option since the individual markets need to be fixed.

To that end, McConnell and others in the GOP leadership have been considering the possibility of bipartisan cooperation. The Senate GOP may work with Democrats on a narrower bill to stabilize Obamacare’s individual markets and lower premiums. Sen. Lindsey Graham (R-SC) has expressed support for this approach, noting that “ Obamacare is going to fail… My advice is, if it does fail, work together in a bipartisan fashion to replace it.”

Energy Tax Bills Want Some Attention. Not all tax provisions are waiting to hitch a ride on the GOP’s comprehensive tax reform legislation. After all, there’s a very real possibility that tax reform isn’t happening in 2017. Some lawmakers are hoping that a series of energy tax items could get some love on the side.

Of note is the extension of the Nuclear Production Tax Credit. In June, a bill (H.R. 1551) to extend the availability of the nuclear PTC beyond the 2020 deadline for nuclear power plants easily cleared the House by voice vote. Additionally, there’s a push to fix the Investment Tax Credit — its extension back in 2015 left off a number of qualifying sources (e.g. fuel cells, small wind projects, combined heat and power, etc.). It’s hard to see Congress …

Hatch’s Helpers. Following up on his request for public input on tax reform, Senate Finance Chairman Orrin Hatch (R-UT) has asked certain members of the tax-writing committee to take lead on developing specific policy ideas for tax reform:

  • International tax – Sens. Rob Portman (R-OH) and Mike Enzi (R-WY)
  • Individual tax – Sen. Chuck Grassley (R-IA)
  • Business tax & estate tax – Sen. John Thune (R-SD)
  • Energy tax – Sens. Bill Cassidy (R-LA) and Dean Heller (R-NV)
  • Agriculture tax – Sen. Pat Roberts (R-KS)

Hatch’s decision is a repeat of the committee’s tax reform efforts from two years ago, when he convened five working groups to examine key aspects of a tax overhaul. Although Hatch said that the process should not be limited to “just Republican input” and that he would like to see Democrats come to the table, no Democratic member has been invited to participate in these working groups.

REGULATORY WORLD

Here’s Another Treasury Report. In response to the April 21 executive order on “Identifying and Reducing Tax Regulatory Burden,” the Treasury Department issued Notice 2017-38, an interim report identifying eight regulations that are burdensome and overly complex. The list includes debt-equity and estate tax issues.

As a refresher, the executive order directed the Treasury to review all significant tax regulations issued in 2016 that may:

  • impose an undue financial burden on U.S. taxpayers;
  • add undue complexity to the federal tax laws; or
  • exceed the statutory authority of the Internal Revenue Service.

From that initial review, Treasury flagged the following eight regulations, noting that they meet at least “one of the first two criteria” specified in the executive order:

  1. Proposed regulations under Section 103 on Definition of Political Subdivision
  2. Temporary regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs)
  3. Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview
  4. Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes
  5. Temporary Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities
  6. Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness
  7. Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit
  8. Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations

It is interesting to note that the interim report does not …

INTERN-VENTION

Special thanks to McGuireWoods’ summer interns Colin Russell and Bayza Anteneh for contributing to this week’s Tax Policy Update. Check out their blurbs below.

Don’t Fall for It. The IRS is issuing warnings to tax professionals that they are being targeted by hackers out to steal taxpayer information.

The IRS is getting three to five data theft reports a week from tax practitioners. Most of these scams involve "spear phishing,” where fraudsters use legitimate-looking emails to install malware on tax preparers’ computers or try to trick them into divulging usernames and passwords.

But in an effort to raise awareness, there is a 10-week campaign called "Don't Take the Bait" that the IRS, state tax agencies, and the tax industry kicked off on July 11. The campaign includes advisories on spear phishing, business identity theft, account takeovers, ransomware, business email breaches and theft of Electronic Filing Identification Numbers (EFINs). In addition, security tips from the IRS, FBI and the National Institute of Standards and Technology are provided.

I Know What You Did Last Summer: IRS Budget Slashed Again. Under the FY2018 Financial Services appropriations bill approved by a House subcommittee last week, the Internal Revenue Service would receive $11.1 billion in the new fiscal year — about $149 million less than current funding levels. The House bill is a little more generous compared to President Trump’s request, which proposed to cut the agency’s funding by $250 million.

Despite the overall reduction, the House bill intends to provide additional funding to help the tax-collecting agency bolster its cybersecurity and information technology. The bill also includes provisions that address underperformance and poor management at the IRS:

  • A prohibition on a proposed regulation related to political activities and the tax-exempt status of 501(c)(4) organizations;
  • A prohibition on funds for bonuses or to rehire former employees unless employee conduct and tax compliance is given consideration;
  • A prohibition on funds for the IRS to target groups for regulatory scrutiny based on their ideological beliefs;
  • A prohibition on funds for the IRS to target individuals for exercising their First Amendment rights;
  • A new prohibition on funds to determine church exemptions unless the IRS Commissioner has consented and Congress has been notified; and
  • A requirement for extensive reporting on IRS spending and information technology.

Ways & Means Talks Payroll Tax Compliance. On June 29, the Social Security and Oversight Subcommittees of the House Ways & Means Committee held a joint hearing on the challenges and complexity of Section 218 agreements and payroll tax compliance. They examined the roles of the Social Security Administration (SSA), the Internal Revenue Service (IRS), and state social security administrators play in overseeing social security coverage for state and local governments.

What’s the problem? When social security was created, state and local government employees were initially excluded from receiving benefits. Overtime, laws were changed to allow state and local governments to extend the coverage to their employees. Now, the definition of “covered employee” varies drastically by state.

But not so fast. SSA and IRS officials who testified at the hearing stated that this is not really an issue. Only on rare occasions are public employers found to be out of compliance after being audited by the IRS. If a public employer is found to be noncompliant, it is usually due to the lack of legal knowledge, not fraud or purposeful wrongdoing.

Senate Bill Gives Workers a Piece of the (Stock) Pie. A group of bipartisan lawmakers reintroduced a bill to make it easier for businesses and startups to offer their workers stock options. The tax implications often make this impractical for many rank and file employees.

To address this issue, the Empowering Employees through Stock Ownership Act would lengthen the time period for employees to pay income taxes on their stock options to up to seven years. The bill would also require companies to offer stock options to at least 80 percent of their workers to qualify for the tax benefit. In an effort to further promote these benefits to everyday employees, certain categories of employees would not be eligible, including majority owners, corporate officers and executives.

The bill has garnered support from more than 60 companies, including GitHub, Medium, and Foursquare and has bipartisan support in Congress.

The bill (S. 1444) was introduced by Sens. Mark Warner (D-VA) and Dean Heller (R-NV). Reps. Erik Paulsen (R-MN) and Joe Crowley (D-NY) introduced a companion bill (H.R. 3084) in the House.

COMMANDER-IN-TWEET

LINE ITEMS

  1. In a July 5 letter, House Financial Services Chairman Jeb Hensarling (R-TX) threatened Consumer Financial Protection Bureau Director Richard Cordray with contempt, accusing him of failing to respond fully to a subpoena request. Specifically, Hensarling claimed that the CFPB missed a May 2 deadline for sending information related to a proposed rule on arbitration agreements.
  2. The Internal Revenue Service launched a new website to help companies make sense of the OECD’s country-by-country reporting requirements.
  3. The Joint Committee on Taxation issued its estimates for the revenue provisions included in the president’s FY2018 budget request. According to the one-page score report, requiring a valid social security number to claim the Child Tax Credit and Earned Income Tax Credit would help raise about $30 billion. Increasing the oversight of paid tax return preparers would generate $149 million, and providing the IRS with more flexibility to fix correctable errors would raise $283 million.
  4. A House appropriations subcommittee approved the FY 2018 Financial Services spending bill, which includes provisions to bring the FDIC, FHFA, OCC, NCUA, and CFPB under the regular congressional appropriations process. The bill would also repeal the Volcker Rule’s ban on proprietary trading. The FY 2018 Financial Services measure is not expected to pass as a standalone bill due to these problematic provisions.
  5. Chris Campbell, the Republican staff director for the Senate Finance Committee, has been tapped to serve as assistant secretary for financial institutions at the Treasury Department.
  6. The Department of Labor has issued a request for information in connection to the Fiduciary Rule. The request for information specifically seeks public input regarding potential new exemptions or revisions to the rule as well as the advisability of extending the Jan. 1, 2018 applicability date of certain provisions in the BIC exemption. Comments regarding the extension of the applicability date are due July 21, 2017. Comments in response to all other questions in the request are due Aug. 7, 2017.

IN THE QUEUE

Congressional Activity

Wednesday, 7/12

House Financial Services Committee
Subcommittee hearing to examine legislative proposal to provide targeted regulatory relief for community financial institutions.

House Financial Services Committee
Hearing on the Federal Reserve’s semi-annual monetary policy report and the state of the economy. Fed Chair Janet Yellen is set to testify.

Thursday, 7/13

Senate Banking Committee
Hearing on the Federal Reserve’s semi-annual monetary policy report to Congress. Fed Chair Janet Yellen is set to testify.

House Financial Services Committee
Subcommittee hearing on the impact of the Fiduciary Rule on capital markets.

House Ways and Means Committee
Tax Policy Subcommittee hearing on the benefits of tax reform for small businesses and job creation.

Agency Activity

Tuesday, 7/11

FDIC
Meeting of the FDIC Advisory Committee on Community Banking to provide advice and recommendations on a broad range of policy issues that have particular impact on small community banks throughout the United States and the local communities they serve, with a focus on rural areas.

Internal Revenue Service
An open meeting of the Taxpayer Advocacy Panel Tax Forms and Publications Project Committee – the Taxpayer Advocacy Panel is soliciting public comments, ideas and suggestions on improving customer service at the Internal Revenue Service.

Thursday, 7/13

Internal Revenue Service
The Taxpayer Advocacy Panel is soliciting public comments, ideas, and suggestions on improving customer service at the Internal Revenue Service. The agenda will include a discussion on various letters, and other issues related to written communications from the IRS.

Other Activity

Tuesday, 7/11

Bipartisan Policy Center
A discussion panel on “Solutions to Long-Term Care Financing in Politically Challenging Times” with special guests Tom Daschle and Bill Frist.

Wednesday, 7/12

National Economic Club of New York
SEC Chairman Jay Clayton to deliver his first major public speech – he is expected to discuss the commission’s plans and agenda.


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The McGuireWoods’ Tax & Financial Services Policy Group assists clients in understanding how the latest legislative and regulatory proposals and decisions may impact their business and industry. To learn more about how our team can help you monitor, analyze, and navigate all relevant legislative and regulatory developments, please contact any of our attorneys and consultants below at (202) 857-1700. For more information on how to subscribe to our weekly Tax Policy Update and tax news alerts, please contact Radha Mohan, , (202) 857-2944.

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