Here’s a look at recent tax-related happenings on the Hill, including tax legislation passing in the House, noteworthy court decisions, and guidance from the IRS.
Lately on the Hill
In a boon to families and businesses, the House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 (Act) by a convincing 357-to-70 vote last week. The legislation was passed under suspension of the rules, requiring a two-thirds majority vote and inoculating it from additional amendments by House members in a streamlined effort to send it to the Senate. Opposition to the Act included elements from the fringes of both parties taking issue with the Child Tax Credit and whether the benefits go too far or not far enough. Both parties and legislative chambers also seem to agree on keeping the termination of new claims after January 31, 2024 of the Employee Retention Credit (ERC) regardless of when the Act is enacted, if it is indeed enacted.
Moderate blue-state Republicans provided their support for the Act after securing House leadership assurances for a vote on state and local tax (SALT) deduction cap relief. In fulfillment of this compromise, the House Rules Committee held an emergency meeting to advance by an eight-to-five vote H.R. 7160, the SALT Marriage Penalty Elimination Act. This legislation provides a one-year amendment for the taxable year beginning after December 31, 2022 and before January 1, 2024 for married filing joint taxpayers with adjusted gross income under $500,000, a cap increase from $10,000 to $20,000 on deductions for SALT. Ultimate passage of this bill does not appear to draw support from the broader body of Congress, particularly because it does not contain a means for generating revenue to cover the cost and many feel it does not go far enough. However, the exercise may provide re-election campaign fodder for vulnerable Republicans in high-tax states.
The House’s emphatic show of support of the Act, without alteration, places pressure directly on the shoulders of the Senate. Early indications suggest the Senate will want to employ the legislative process more thoroughly than the House. Ranking member of the Senate Finance Committee Mike Crapo (R-ID) stated “the Senate will go through its own process. I look forward to working with my colleagues to vet the legislation, address concerns, and make the necessary changes to build support.” As a “standalone” tax bill in the Senate, it is subject to amendments and a decreased chance for ultimate passage. Possible amendments could include the previously discussed SALT cap deduction relief, changes to the Child Tax Credit, and a couple of other bills that have been waiting in the wings, including S. 341, the Broadband Grant Tax Treatment Act (exclusion from gross income from certain broadband deployment grants), and S. 443, the Supply Chain Disruptions Relief Act (LIFO relief for automobile dealers impacted by COVID-19.) If Senate leadership wishes to advance the Act more expeditiously, they may come to a unanimous consent agreement restricting debate time and the number of amendments or attach the legislation to another vehicle such as the upcoming appropriations bills coming due in March. However, the Senate is on recess from February 12 through February 23, likely delaying significant action on the Act until March and possibly postponing the appropriation bills even further. While the House vote was a positive progress indicator for the Act, the process in the Senate may prove more difficult, making its enactment far from certain.
The Joint Committee on Taxation released its analysis (JCX-6-24) on the macroeconomic effects of the Act as ordered by the House Committee on Ways and Means. The analysis estimates that over a 10-year budget window, the reductions to federal revenues should be about $399 million, which the committee considers “negligible” relative to the size of the economy. The forecast projects the total cost of the Act’s provisions as follows: $33.5 billion revenue loss for an expanded Child Tax Credit, $32.8 billion revenue loss for business-related provisions (deduction for research and experimental expenditures, business interest expense limitation, 100 bonus depreciation, and depreciable asset expense limitation), $4.9 billion revenue loss for assistance to disaster-impacted communities, $6.3 billion revenue loss for the low-income housing tax credit, $1.5 billion revenue loss for increased threshold for information reporting, and $78.6 billion revenue gain related to the Employee Retention Credit with stricter rule enforcement, penalties, and disallowance of new claims after January 31, 2024.
Sirius concedes that the Tax Court decision in Soroban v. Commission would not qualify its partners as limited partners and asks the court to issue a decision so it can file an appeal. Sirius Solutions LLLP v. Commissioner, No. 11587-20 and 30118-21.
The limited partner exception of Section 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 Tax Court ruled in late 2023 in Soroban Capital Partners L.P. v. Commissioner. 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. The Soroban case was the first ruling of several pending petitions involving asset managers arguing that the exception is based on state-law classification, including the case of Sirius Solutions LLLP. Sirius disagrees with the Soroban ruling but has conceded that the functional analysis test would not qualify its partners as limited partners and consequently requested that the court enter a decision in the IRS’ favor so that it can proceed with an appeal to the Fifth Circuit.
Payments from one S corporation to another where both were wholly owned by the same shareholder were determined to be constructive distributions/contributions rather than debt. Fry v. Commissioner, No. 13242-20, T.C. Memo. 2024-8.
The IRS issued a notice of deficiency of approximately $1.3 million to the petitioner, arguing that he did not have adequate basis in his S corp to allow deductible losses of approximately $3.5 million. The petitioner was the sole shareholder of two S corps, one of which became unprofitable and required funding from the other to continue operations. The court noted that the transfers were not accompanied with any promissory notes, no due dates for return of funds, no security interest, and no interest payments, even though they were recorded as debt between the corporations. The petitioners argued that the payments were not bona fide debt, but rather equity contributions that would provide sufficient stock basis in the corporation to deduct the losses. The IRS argued that because the petitioner had consistently characterized the payments as debt on their books and tax returns, they could not recharacterize them as equity. To determine the characterization of debt versus equity, the IRS invoked §385(c), which states “[t]he characterization (as of the time of issuance) by the issuer as to whether an interest in a corporation is stock or indebtedness shall be binding on such issuer and on all holders of such interest (but shall not be binding on the Secretary).” The petitioner argued, and the court agreed, that §385(c) is inapplicable because no formal issuance ever occurred, whether in the form of a stock certificate or promissory note. The court relied on 11 factors promulgated by the Ninth Circuit in determining debt versus equity, including certificates evidencing the debt, presence or absence of fixed maturity dates, and the right to enforce payments of principal and interest. The court determined the payments did not constitute true indebtedness under the 11 factors while also finding that the payments constructively constituted distributions and contributions—under Ninth Circuit case law—to and from the petitioner as the sole shareholder of both S corps.
Other Important Developments
IRS Technical Guidance
- The IRS is requesting comments concerning the information reporting burden associated with electing out of generation-skipping transfer deemed allocations. The IRS requires certain information from taxpayers who make the election to have the automatic allocation rules not apply to current or future transfers to trusts or to terminate the election. The information also is required for taxpayers electing to treat trusts as generation-skipping trusts or to terminate the election.
- Revenue Ruling 2024-5 addresses the issue of housing agencies that allocate additional housing credit dollar amounts under §305 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 in 2021 or 2022 to buildings in a qualified disaster zone, that subsequently receive returned funds, whether the agencies may reallocate the funds, and if the reallocations are restricted to buildings in a qualified disaster zone. The IRS holds that the returned funds are part of the overall returned credit component of a state’s housing credit ceiling and are not restricted to qualified disaster zones.
- IR-2024-30 provides details on the IRS’ free webinar on the ERC Voluntary Disclosure Program occurring Thursday, February 8. The webinar will focus on who can participate, how to apply, advantages of the program, what happens after applying, and available ERC resources. Attendees must register on the IRS’ webinar website.
- IR-2024-29 reminds taxpayers who received extensions to file 2022 returns due to disasters occurring between August 8 and October 9, 2023 that the returns are due by February 15, 2024. Disasters included Hurricane Idalia, Hurricane Lee, Tropical Storm Bolaven, wildfires in Hawaii, seawater intrusion in Louisiana, and storms and flooding in Illinois.
- IR-2024-27 announces relief for individuals and businesses affected by storms, flooding, and tornadoes in certain areas of Rhode Island currently including Providence County. These taxpayers have until June 17, 2024 to file tax returns and make tax payments. The relief also applies to extension, although any extension filed between April 15 and June 17 will have to be paper filed.
- The Financial Crimes Enforcement Network (FinCEN) is requesting comments concerning requests for beneficial ownership information (BOI) by authorized recipients as provided in the BOI Access Rules issued in December 2023. Comments are due by April 1.
- IR-2024-25 announces that close to 250 IRS Taxpayer Assistance Centers are extending office hours through April 16. Local offices can be found on the IRS website. Normally, offices are open from 8:30 a.m. to 4:30 p.m. Monday through Friday and operate by appointment.
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.