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From the Hill: December 5, 2023

Now that Congress is back from its Thanksgiving holiday hiatus, the remainder of the year will be focused on passing the remaining appropriations bills as well as aid packages to Ukraine and Israel.
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Here’s a look at recent tax-related happenings on the Hill, which include a retreat on 2024 fiscal year spending cap demands and bipartisan support for a Taiwan tax relief bill.

Lately on the Hill

Congress returned to work last week after its Thanksgiving holiday hiatus. For the remainder of the year, focus will be centered on passage of the remaining appropriations bills as well as aid packages to Ukraine and Israel. This week House Ways and Means committees are holding several hearings concerning IRS whistleblowers related to the Hunter Biden investigation, the federal debt, and tax policies for economic growth and prosperity.

In a reversal of their base argument to remove former Speaker of the House Kevin McCarthy (R-CA), House Republican Freedom Caucus members have backed off their demands for 2024 fiscal year spending to be capped at 2022 levels. Caucus Chairman Scott Perry (R-PA) said, “We realize that $1.47 trillion is not going to happen,” referencing the 2022 fiscal year discretionary budget. The retreat opens the door for House Speaker Mike Johnson (R-LA) to negotiate a bipartisan spending measure.

Members of the House Ways and Means Committee advanced, by unanimous vote, the United States-Taiwan Expedited Double-Tax Relief Act. The bill addresses the issue of double taxation by amending the Internal Revenue Code with treaty-like provisions and provides an avenue for tax agreement negotiations between the economic partners. Bipartisan support of the bill provides some encouragement that other significant tax legislation may surface, addressing priorities supported by both parties.

In a letter to Johnson, scores of Republicans in the House offered support to their colleagues on the House Ways and Means Committee in urging action on “three important, pro-growth strategies,” namely, “immediate R&D expensing, full capital expensing, and a pro-growth interest deductibility rule.” The referenced strategies pertain to bipartisan supported legislative changes to Section 174 immediate deductibility of research and experimental expenditures, §168(k) extension of 100% bonus depreciation, and §163(j) addback of depreciation and amortization to a company’s adjusted taxable income calculation.

U.S. business leaders and lawmakers alike criticized newly introduced Canadian legislation that seeks to enact a 3% digital services tax, undercutting the Organisation for Economic Co-operation and Development’s (OECD) ongoing international tax reform efforts. The OECD’s Pillar One proposal would allow a country’s taxing authority to collect taxes from large international companies that make sales into their country but have not established a physical presence there. The Canadian legislation imposes a tax on revenues from online marketplaces and advertising, social media services, and user data. The unilateral pivot comes as the planned 2023 implementation deadline of Pillar One is unlikely to happen, further delaying Canada’s perceived share of the global revenue.

The buzz around proposed regulations on digital asset transactions continues as a recent IRS public hearing on the proposed rules garnered substantial pushback from cryptocurrency proponents. Patrick McHenry (R-NC), chairman of the House Financial Services Committee, and a group of bipartisan lawmakers wrote a letter to the U.S. Department of the Treasury stating that the “proposed regulations would inhibit innovation and harm the digital asset ecosystem, if finalized in its current form.” Particularly, the letter takes issue with how the Treasury defines a “broker” as being too broad, capturing entities such as decentralized finance exchanges that typically are not considered brokers, and defining “digital assets” to include nonfungible tokens that vary in type and do not always represent financial assets.

The U.S. Supreme Court will begin hearing arguments this week in the much-anticipated case of Moore v. United States. The dispute centers on 2017 legislation, levying a one-time repatriation tax on past foreign earnings and the constitutionality of taxing unrealized income. If the court were to determine that the law was indeed unconstitutional, several other existing tax regimes would be put into question such as the tax on Subpart F income, for which tax is paid on income earned by controlled foreign corporations (CFCs) whether distributed to domestic shareholders or not. In addition, planned “tax-the-rich” legislation to tax unrealized earnings and the U.S.’s ability to join in on the OECD’s global tax initiatives may be frustrated.

Noteworthy Decisions

  • The limited partner exception of §1402(a)(13) relating to the exclusion of distributive shares of partnership income or loss in net earnings subject to self-employment tax does not apply to a partner who is limited in name only, the U.S. Tax Court has ruled. Although the partner may be considered limited in a state law limited partnership, a functional analysis test must be applied to determine if, in fact, a partner is a limited partner for purposes of this exception. (See Soroban Capital Partners LP v. Commissioner.) Notably, the Soroban case is the first ruling of a number of pending petitions involving asset managers arguing that the exception is based on state-law classification, including the case of the New York Mets owner Steve Cohen (Point72 Asset Management, LP v. Commissioner).
  • The U.S. Tax Court decided that business owners could deduct payments made to their sons’ qualified retirement accounts. The commissioner had contended that since there were no W-2s filed for the sons for the year in question, they were not employees. The court commented that failure to file information returns may undermine an assertion of an employer-employee relationship; however, credible testimony and contemporaneous evidence provided by the petitioner were sufficient to establish the facts of the relationship. (See Jadhav v. Commissioner.)

Other Important Developments

  • The IRS is requesting comments due January 30, 2024 related to employers and administrators of qualified retirement plans and their requirements to provide certain explanations, notices, obtain consents, and elections, pursuant to regulations §§1.402(f)-1 and 1.411(a)-11.
  • The IRS is proposing amendments (REG-104194-23) to regulations related to long-term, part-time employee 401(k) plans pertaining to rules set forth in the SECURE and SECURE 2.0 Acts. The proposal defines who is considered a “long-term, part-time employee” and the requirement for a qualified CODA (cash or deferred arrangement) to satisfy participation and vesting requirements. Furthermore, the proposed amendments provide guidance for certain contributions and elections made on behalf of such employees.
  • The IRS has issued proposed amendments (REG-131756-11), updating regulations under §§267 and 707 concerning special rules for transactions between partnerships and related persons. These code sections contain related party loss disallowance rules, gain recharacterization rules, and matching rules. The changes seek to conform to congressional intention that partnership be viewed as an entity, rather than as an aggregate of its individual partners, when applying these rules.
  • The Financial Crimes Enforcement Network (FinCEN) in coordination with the IRS’ Criminal Investigation Division issued an alert (FIN-2023-Alert007) to financial institutions listing 10 red flags to help detect, prevent, and report potential fraudulent activity related to the Employee Retention Credit (ERC). The notice describes third-party promoters and their aggressive tactics posing as “ERC experts” that require large upfront payments or fees based on a percentage of the credit amount, incentivizing them to prepare inflated credit claims and ignore eligibility requirements.
  • FinCEN has amended (RIN 1506-AB62) the reporting rule for beneficial ownership information (BOI), extending the deadline for entities created or registered on or after January 1, 2024 but before January 1, 2025 from 30 days to 90 days. Entities created or registered on or after January 1, 2025 will have 30 days to file the initial BOI reports. Entities created or registered before January 1, 2024 have until January 1, 2025 to file initial reports.
  • In an effort to “combine, conform, clarify, and update” existing rules for qualified and §403(b) pre-approved retirement plans, the IRS has issued Proc. 2023-37 organizing the rules into three categories: remedial amendment periods, the remedial amendment cycle system, and plan amendment deadlines; provider application for an opinion letter; and adopting employer application for a determination letter.
  • The IRS released in Rev. Rul. 2023-22 the overpayment and underpayment interest rates for the quarter beginning January 1, 2024. The rates did not change from the prior quarter.
  • Internal Revenue Bulletin 2023-48 has been published containing Rev. Proc. 2023-34 detailing 2024 inflation-adjusted items, including tax rate tables, the standard deduction, and the annual exclusion for gifts.

Continued Coverage of the Inflation Reduction Act (IRA)

  • The IRS has issued proposed regulations (REG-118492-23) concerning the clean vehicle credit under §30D. Specifically, the proposals would provide guidance to the excluded entity provisions and provide clarity on definitions of credit-eligible new clean vehicles.
  • Procedures under §30D(d)(3) have been updated as explained in Rev. Proc. 2023-38. The updated procedures relate to information reporting on vehicles eligible for a clean vehicle credit as required of qualified manufacturers. All the procedural rules are combined into one document and establish procedures to submit vehicle information for review by the U.S. Department of Energy to determine eligibility for the credit.
  • The IRS is requesting comments related to the transfer of credits under §§30D and 25E from taxpayers to dealers of new or previously owned clean vehicles. The IRS intends to modify obligations for qualified manufacturers of new clean vehicles, requiring a report and attestation to battery components, critical minerals, and associated materials contained in the battery.

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.

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