Lately on the Hill
The last week on the Hill was filled with talks of bank failures, recessions, and the economy as the government and Wall Street attempted to rescue several banks in distress, starting with two regional banks: Silicon Valley Bank (SVB) and Signature Bank. Here’s a recap of what happened and what it means for financial institutions and the economy.
On the legislative front, Democrats are leading the charge, with Sen. Elizabeth Warren (D-MA) basically saying “I told you so” to Republicans and fellow Democrats who voted to roll back original Dodd-Frank requirements in 2018. Warren, along with Rep. Katie Porter (D-CA), introduced the Secure Viable Banking Act to bring small to midsize regional banks with at least $50 billion in assets back under strict Federal Reserve oversight and subject to other Dodd-Frank Act requirements that were repealed by Congress five years ago. The 2018 repeal increased the Federal Reserve oversight threshold to $250 billion, which Warren and other Democrats cite as the reason SVB and other banks were able to make risky investments (SVB and Signature Bank had between $100 billion and $200 billion of assets).
Republicans are not interested in increasing banking regulation, and some Democrats continue to stand by their 2018 votes. Rep. Seth Moulton (D-MA) introduced a re-regulation bill similar to Warren’s but was not successful in finding Republican co-sponsors. As such, we’re unlikely to see any traction on the de-regulation front, but there is some bipartisan appetite for other banking reform legislation, like expanding federal deposit insurance. Currently, the FDIC insures up to $250,000 per depositor per bank. For context, about 89% of SVB’s $175 billion in deposits were above that threshold and thus uninsured. As such, the federal government made SVB depositors whole, but a question arises about whether this sets a sustainable precedent for future bank failures.
In an appearance before the Senate Finance Committee last week, Treasury Secretary Janet Yellen assured Congress and the public that the U.S. banking system “remains sound,” but expect to keep hearing about banking regulation, especially as the Federal Reserve considers when to raise interest rates again.
New Bills Introduced
In other news, here are the latest bills introduced in the House and Senate:
- House Republicans released their energy legislative package, the Lower Energy Costs Act (H.R. 1), which includes proposals like repealing the natural gas tax and all restrictions on importing and exporting natural gas, reforming the National Environmental Policy Act permitting process to streamline federal reviews, and a variety of other energy-related policies. The bill will be considered on the House floor in the last week of March but is likely to stall if it gets to the Senate.
- Rep. William Timmons (R-SC) introduced the PPP Shell Company Discovery Act, which proposes to create a report of Paycheck Protection Program (PPP) loan recipients who had no tax withholdings in calendar year 2019 and received loans four times greater than their highest payroll amount during calendar year 2019. The intent behind this legislation is to help the U.S. Department of Justice identify potentially fraudulent PPP loans.
- Rep. Claudia Tenney (R-NY) reintroduced the End Zuckerbucks Act, which seeks to prohibit Section 501(c)(3) tax-exempt organizations from providing direct funding to official election organizations.
- Rep. Dina Titus (D-NV) reintroduced the Discriminatory Gaming Tax Repeal Act of 2023 to repeal the 0.25% excise tax placed on all legal sports bets, known as the “handle tax.”
- In light of the events surrounding the fall of SVB, Sen. Richard Blumenthal (D-CT) introduced the Deliver Executive Profits on Seized Institutions on Taxpayers (DEPOSIT) Act, which proposes a 90% tax on the bonuses of executives who make an annual income exceeding $250,000 during the year when a bank goes under FDIC acquisition.
- Sens. Todd Young (R-IN) and Maggie Hassan (D-NH) reintroduced the American Innovation and Jobs Act, which would restore immediate deduction of research and development investments, expand eligibility of the Section 41 research credit, and gradually raise the cap for the research credit for small businesses and startups.
IN CASE YOU MISSED IT
- Treasury released proposed regulations on the CHIPS Act Advanced Manufacturing Investment Tax Credit. The regulations address the credit’s eligibility requirements, an election that eligible taxpayers may make to be treated as making a payment of tax (including an overpayment of tax), or for an eligible partnership or S corporation to receive an elective payment, instead of claiming a credit, and a special 10-year credit recapture rule that applies if there is a significant transaction involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern.
- In response to the proposed rules released by the Financial Crimes Enforcement Network (FinCEN), a group of senators wrote a letter to Treasury expressing their concern that the proposed rule “strays from congressional intent and erects unnecessary and costly barriers to accessing beneficial ownership information” and offers recommendations on how FinCEN can remedy these concerns.
- The IRS released FAQs addressing whether certain costs related to nutrition, wellness, and general health are medical expenses that may be paid or reimbursed under a health savings account (HSA), health flexible spending arrangement (FSA), Archer medical savings account (Archer MSA), or health reimbursement arrangement (HRA).
- The IRS issued a reminder to tax professionals regarding Circular 230 professional responsibilities in the context of tax return preparation and the Employee Retention Credit.
- FASB issued a proposal that would add new income tax disclosures, including requiring all entities to disclose year-to-date income taxes paid by federal, state, and foreign taxes on an interim and annual basis. On an annual basis, all entities would be required to disaggregate taxes by individual jurisdiction if taxes paid exceed 5% of total income taxes paid.
- The Republican Study Committee (RSC) released a debt limit playbook to map out “solutions for the debt crisis.” The playbook also shows results of the policies RSC members want tied to the debt limit increase. The top three responses: energy independence, cutting discretionary spending, and pro-growth tax policies.
- The Joint Committee on Taxation published a report providing general background on the tax provisions related to residential housing, e.g., homeownership, rental housing, and economic incentives and data related to homeownership. This document was prepared for the Senate Finance Committee, which is currently holding hearings on affordable housing.
- We previously highlighted the ongoing Soroban case where the taxpayer, Soroban Capital Partners LP, is attempting to exclude all income from self-employment tax due to the partners being state law limited partners and, therefore, meeting the limited partner exclusion of §1402(a)(13). Soroban filed a request for summary judgment in February of this year. On March 2, the IRS filed its response and its own request for a partial summary judgment. In its response to Soroban’s summary judgment request, the IRS relied heavily on the conclusion in Renkemeyer v. Commissioner, 136 T.C. 137 (2011), that there must be a functional analysis of the partners’ actions and one cannot simply rely on a state law classification. The decision in this case will have a significant effect on self-employment income status of limited partners and LLC members.
- The IRS is asking the public for feedback on upcoming guidance regarding the tax treatment of a nonfungible token (NFT) as a collectible under the tax law.
This newsletter features developing content that is subject to change at any time. It does not constitute legal or tax advice. Consult your professional advisors prior to acting on the information set forth herein.