Here’s a look at recent tax-related happenings on the Hill, including budget proposals from President Joe Biden that are unlikely to see any progress prior to this year’s election.
Lately on the Hill
The U.S. Department of the Treasury released the General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals, otherwise known as the “Greenbook,” on the heels of Biden’s release of his 2025 proposed budget. The document outlines “a series of reforms that would raise revenues, expand tax credits for workers and families, and improve tax administration and compliance. These reforms cover all areas of tax policy and together they result in a tax system that is both more equitable and more efficient.”
In his State of the Union address, Biden touted several revenue-raising proposals “to make the tax code fair” and “to make big corporations and the very wealthy pay their share.” Biden’s revenue proposals contain such reforms in corporate taxation, including an increase in the tax rate for corporations from 21% to 28%, an increase in the corporate minimum tax from 15% to 21%, and an increase in the tax rate on corporate stock repurchases to 4%, among many other proposals.
Those identified as “high-income taxpayers” would see an increase in additional Medicare tax rate by 1.2 percentage points, an increase in the top tax rate from 37% to 39.6%, taxation of long-term capital gains at ordinary income tax rates, and a minimum tax of 25%—inclusive of unrealized gains—for those “with wealth greater than $100 million.”
In support of economic security for workers and families, the budget proposals include increases in the Child Tax Credit to $3,600 for qualifying children under six years of age and $3,000 for all others; expansion of the Earned Income Tax Credit as was temporarily instituted by the American Rescue Plan Act of 2021; exclusion of forgiven student loan debts from income; and tax credits for first-time homebuyers and qualified home sellers.
The proposal also includes $104.3 billion of funding for fiscal years 2026–2034 for the IRS in addition to its annual discretionary appropriations. Ironically, the forthcoming appropriations bills due March 22, 2024 are expected to include $20 billion in rescinded IRS funding provided in the Inflation Reduction Act, as agreed upon by Biden and the former House Speaker Kevin McCarthy (R-CA) as part of the debt-limit negotiations.
In total, the net revenue effect of the budget proposal is projected to be $4.3 trillion through 2034. With Republican control of the House and this being an election year, Biden’s budget proposals will not see the light of day in the short term but could manifest after the dust settles on the upcoming November elections.
Office of Management and Budget Director Shalanda Young told reporters, “The president’s vision of progress, opportunity, and fairness is in stark contrast to congressional Republicans, who have repeatedly fought to slash critical programs the American people count on and increase the deficit by trillions of dollars with giveaways to big pharms, the wealth, and big corporations,” as reported by Tax Notes. House Budget Committee Chair Jodey Arrington (R-TX) countered, “The Biden budget proposes the highest sustained levels of borrowing and spending in U.S. history and nearly $5 trillion in new taxes on American families, all while adding more than $16 trillion to our public debt.”
Noteworthy Decisions
In response to a U.S. district court ruling on March 1, 2024 deeming the Corporate Transparency Act as unconstitutional, the government has filed a notice to appeal the decision. The act requires as of January 1, 2024, certain companies to report the identities and other information of their owners to the Financial Crimes Enforcement Network (FinCEN) in an effort to combat illicit financial activities. The ruling only applied to the plaintiffs but could have a wider impact in other legal proceedings.
In a bench opinion, a couple’s reported business expenses are disallowed and recharacterized as start-up expenditures under Section 195. Hutchings v. Commissioner, No. 13321-20
Matthew and Shari Hutchings reported business expenses on Schedule C, Profit or Loss from Business, of their 2017 joint tax return. The expenses included supplies, car and truck expenses, repairs and maintenance, and other expenses related to a health and wellness camp they were planning on opening. For the year in question, the petitioner reported no gross income and had not yet held the business out to paying customers, nor engaged in marketing or advertising. The commissioner issued a Notice of Deficiency disallowing the expenses as the camp was not yet operating as a trade or business under §162 and did not have a genuine profit motive under §183. The court sided with the commissioner, disallowing the expenses and characterizing them as start-up expenditures under §195, “A start-up expenditure is any amount paid or incurred in connection with (1) investigating the creation of an active trade or business, or creating an active trade or business, or (2) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins.”
Communications related to a syndicated conservation easement must be provided and were not protected under the common interest doctrine or attorney-client privilege. Picayune Pearl Aggregates, LLC v. Commissioner, Nos. 7045-19, 12364-20, and 12379-20
The commissioner sought an order from the court to compel Picayune Pearl Aggregates, LLC (Picayune) to produce documents related to the claimed charitable contribution of a conservation easement. Picayune argued that the documents were privileged under the common interest doctrine or the attorney-client privilege applicable to direct or indirect partners. The court determined that Picayune’s assertions could not be upheld and ordered the documents be provided to the commissioner.
The Fifth Circuit Court of Appeals, under which an appeal would be heard, has provided that the common interest doctrine applies to communications between co-defendants in actual litigation and their counsel, and communications between potential co-defendants and their counsel. The privilege is limited to parties with a common legal interest or a “palpable threat of litigation at the time of the communication.” Picayune argued that the IRS’ aggressive pursuit of syndicated conservation easements was a palpable threat of litigation and so the common interest doctrine applied. However, the Court disagreed that the threat was actually palpable at the time the documents were prepared but was in contrast “a mere awareness that one’s questionable conduct might someday result in litigation.”
Picayune also argued that the communications involving the management company, its counsel, and its direct or indirect partners are protected by attorney-client privilege. The Fifth Circuit considers a partnership as a representation of an entity rather than individual partners. The court determined that there was insufficient evidence as to an attorney-client relationship between the partnership’s attorneys and the direct or indirect partners, citing the lack of an engagement letter, fees paid to counsel, or an affidavit outlining an attorney-client relationship with the direct and indirect partners. Therefore, the privilege could not be applied.
Other Important Developments
IRS Technical Guidance
- The IRS has issued FAQs providing guidance to withholding agents related to the exemption from electronically filing Form 1042 for the years 2024 and 2025.
- The IRS is requesting comments due May 13, 2024 on Form 8924, “Excise Tax on Certain Transfers of Qualifying Geothermal or Mineral Interests,” concerning the excise tax on certain transfers of qualifying mineral or geothermal interests.
- The IRS is requesting comments due May 13, 2024 on Form 1099-A, “Acquisition or Abandonment of Secured Property,” used by persons who acquire interest in property held as security for a loan to report the acquisition or abandonment.
- The IRS is requesting comments due May 13, 2024 on Form 8582, “Passive Activity Loss Limitations,” which is used to figure passive activity losses allowed.
- The IRS is requesting comments on regulations on the application of passive activity loss and credit carryovers under §469 and at-risk losses under §465 to the bankruptcy estates of individuals who file petitions under Chapter 7 or Chapter 11.
Employee Retention Credit (ERC)
- IR-2024-72 urges businesses to review questionable claims of the ERC as the March 22, 2024 deadline quickly approaches to apply to the ERC Voluntary Disclosure Program. “We strongly urge businesses to review the Employee Retention Credit guidelines immediately before a key disclosure program closes, especially if they encountered a high-pressure push to apply for these credits. Taking action now will avoid potentially hefty penalties and interest if the IRS takes action later. The deals available now are good, and the cost and risk for bad claims will sharply escalate over time,” said IRS Commissioner Danny Werfel.
Continued Coverage of the Inflation Reduction Act (IRA) and CHIPS Act
- IRS Tax Tip 2024-16 reminds auto dealers and sellers they must register on the Energy Credits Online tool to submit time-of-sale reports and receive advanced payments of the Clean Vehicle Tax 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.