From the Hill: February 21, 2023
Lately on the Hill
Here are your latest legislative updates:
- Your weekly debt limit update. Democrats and Republicans are still doing the dance where Democrats say Republicans want to cut Medicare and Social Security spending (thanks to Sen. Rick Scott’s (R-FL) proposal to sunset entitlement programs every five years), and Republicans responding with “That was Scott, not us. We don’t actually want to cut Medicare or Social Security.” This messaging will probably keep its run all the way through 2024 elections.
- Senate Republicans are now getting into the debt limit negotiation by warning House Republicans to not cut defense spending during debt limit negotiations. Speaker Kevin McCarthy makes no promises on this front, other than saying that their priority is to root out “waste” and inefficiencies in government spending, which includes the Pentagon’s spending.
- The Congressional Budget Office released a report that if the debt limit remains unchanged, the federal government’s ability to borrow will be exhausted between July and September 2023 (assuming Treasury keeps implementing “extraordinary measures”). This projected date could shift though if tax revenues come in lower than expected in April. In response, Democrats are admitting the federal deficit is “a real issue that we’ve got to deal with” (this from Sen. Bernie Sanders (I-VT)) but insist that conversations around the deficit should be separate from a bill to raise the debt limit. Republicans, on the other hand, are saying “I told you so.”
- New bills and resolutions introduced. Here is the latest roundup of new legislation introduced in the House and Senate:
- Sen. Sheldon Whitehouse (D-RI) introduced the Big Oil Windfall Profits Tax Act, which proposes to impose a windfall profits excise tax on crude oil and to rebate the tax collected back to individual taxpayers.
- Sens. Sherrod Brown (D-OH) and Ron Wyden (D-OR) introduced the Stock Buyback Accountability Act of 2023, which proposes to increase the excise tax on stock repurchases by publicly traded corporations from 1% to 4%. This policy was part of President Joe Biden’s State of the Union address.
- A group of Republican senators introduced a joint resolution to amend the U.S. Constitution to require the President and Congress to enact annual balanced budgets, including guidelines regarding exceeding spending caps and raising taxes. Similar resolutions were introduced in prior sessions.
- Sens. Jacky Rosen (D-NV) and Jon Tester (D-MT) introduced a resolution opposing the nationwide sales tax introduced by Republicans in the House. In January, Rep. Earl L. “Buddy” Carter (R-GA) introduced the Fair Tax Act, which proposes to eliminate the tax code, replace the income tax with a 23% sales tax and abolish the IRS. McCarthy opposes this policy but promised to bring this bill to the floor during his negotiations for Speaker elections.
- Rep. Beth Van Duyne (R-TX) introduced the Uplifting First-Time Homebuyers Act, which proposes to adjust the IRA tax exception withdrawal limit. In 1997, Congress allowed a tax exception for first-time homebuyers to withdraw up to $10,000 from their IRA. This bill would increase that amount to $30,000 in order to keep up with rising house prices.
IN CASE YOU MISSED IT
- The Senate Banking Committee held its first hearing of this Congress on cryptocurrency regulation. The commentary ranged from Sen. Katie Britt (R-AK) saying that overregulation risks “stifling the market” and Sen. Tim Scott (R-SC) blaming everything on the U.S. Securities and Exchange Commission: “If the SEC had provided even the slightest bit of guidance, I wonder if we could have protected more investors from the collapses of Terra and Luna in May, Celsius in June, Voyager in July, and BlockFi in November.”
- The SEC proposed a rule that would expand custody rules to cryptocurrency and require financial institutions to get federal and state registrations to oversee crypto assets. This would essentially require investment advisors to maintain custody accounts for digital assets just like they already do for stock, bonds, or mutual funds.
- The IRS issued Notice 2023-20 with interim guidance to insurance companies and certain other taxpayers on how to determine adjusted financial statement income (AFSI) for purposes of the corporate alternative minimum tax under the Inflation Reduction Act.
- The IRS also issued Notice 2023-18, which establishes the Section 48C(e) program under the Inflation Reduction Act to allocate $10 billion in credits ($4 billion of which may only be allocated to projects located in certain energy communities census tracts). This notice also provides general rules for determining the Section 48C credit, definitions of qualifying advanced energy projects, and the procedures for allocating the credits. More guidance will be issued on this by May 31, 2023.
- Notice 2023-17 establishes the Low-Income Communities Bonus Credit Program to allocate environmental justice solar and wind capacity limitation under Section 48(e), and provides initial guidance for potential program applicants for allocations of 2023 capacity limitation.
- The IRS is making changes to the Bridge phase of the Compliance Assurance Process (CAP) Program, a cooperative pre-filing program for large corporate taxpayers, by introducing a new pilot phase called “Bridge Plus.” This impacts CAP participants that were in the Bridge phase in 2022 and have been recommended to participate in Bridge again in 2023.
- Taxpayers who receive certain CP series notices and 53 other notices from the IRS now have the option to upload documentation requested by the notice instead of having to mail in the requested information. See the expanded list of notices eligible for digital correspondence with the IRS.
- The IRS is asking for comments on the collection of information return of excise tax on undistributed income of real estate investment trusts. Read on for details on how to submit comments.
- The IRS is providing tax relief for those recently affected by severe storms and natural disasters. Individuals and households that reside or have a business in any area designated by the Federal Emergency Management Agency (FEMA) qualify for this tax relief:
- California victims of severe winter storms, flooding, landslides, and mudslides beginning December 27, 2022, now have until May 15, 2023 to file various individual and business tax returns and make tax payments.
- Alabama victims and Georgia victims of severe storms, straight-line winds, and tornadoes beginning January 12, 2023, now have until May 15, 2023 to file various individual and business tax returns and make tax payments.
- The Treasury Inspector General for Tax Administration issued a report on the IRS’s efforts to implement Taxpayer First Act provisions related to the IRS Independent Office of Appeals. Read the report conclusions and recommendations for improvement.
- Here is a case worth monitoring for flow-through entities: Soroban Capital Partners LP et al v. Commissioner, No. 16217-22, which deals with the self-employment tax (SECA tax) exclusion on limited partner allocated income under §1402(a)(13). This case revolves around three individual limited partners, who received guaranteed payments as compensation (which were reported in the partners distribute share of income as net earnings from self-employment) and distributive shares of income from the partnership income that were not reported as self-employment earnings. However, the IRS disagreed and said the partners’ distributive shares of partnership income should have been included in the calculation of net earnings from self-employment and therefore subject to SECA tax. On February 7, 2023, the taxpayer filed for summary judgment, which is basically telling the court there is no true dispute of facts and the court should rule on the law. The IRS must respond by March 3, 2023. You can monitor the case here.
- President Biden signed an executive order requiring the White House Office of Science and Technology Policy to submit a report twice a year detailing how government agencies, including Treasury and the IRS, are addressing potential biases in their algorithms. This stems from Stanford University’s Institute for Economic Policy Research study which found that Black recipients of the earned income tax credit are 2.9 to 4.4 times more likely to be audited by the IRS than non-black recipients of the credit.
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.