Washington Tax Insight June 2022
Politics and Congressional Activity
The House and Senate returned from the Memorial Day recess to face an increasing list of urgent issues that must be dealt with in a decreasing number of legislative days remaining in 2022. In addition to addressing additional pandemic relief funding, the war in Ukraine and related Russia issues, the unfinished Build Back Better Act, and China legislation, the agenda now includes gun safety legislation in the wake of the recent mass shootings.
The next “deadline” for Congressional action on these issues will be the 4th of July holiday recess followed by a limited number of legislative days in July prior to the month-long August recess. As the mid-term elections draw nearer, it becomes increasingly difficult to reach agreement on any type of legislation even if there is bipartisan support.
The Administration’s Build Back Better Act (BBBA)
Senate Democratic leadership has not abandoned the idea of passing a smaller version of BBBA legislation through the reconciliation process, but there is currently no package agreed upon that could be brought to the Senate Floor.
Bipartisan talks continue in the Senate on a possible bill to address climate change and energy security. This bill would move through Congress under regular order rather than through the budget reconciliation process, which means it would require 60 votes in the Senate. Such a bipartisan package could include many of the proposals that are included in the House-approved BBBA. A potential timetable is difficult to predict, but the July 4th recess is probably the next target date for Senate consideration of such a bill.
For information about the provisions affecting individual taxpayers that were included in the House-approved BBBA legislation, please see this True Insight. For a detailed summary of the provisions affecting businesses and in the international area, please see this True Insight, and for information on the clean energy and infrastructure provisions, please see this True Insight. For a discussion of the SFC draft for the BBBA, please see this True Insight.
Additional Pandemic Relief Legislation
The $10 billion COVID-19 relief package has been stalled for several weeks. It now faces a new challenge of finding revenue offsets to replace those that have been used for other legislation, which will require bipartisan negotiations in the Senate.
A Lame Duck Tax Package?
The Congressional schedule between now and the mid-term elections offers a limited number of days for legislative work considering the Congressional recesses for July 4th, the August recess, and Labor Day. This fact has led to speculation about the prospects for a lame-duck tax package after the fall election and tax provisions that might be part of that package.
As described in this report, Congress continues to work on a revised version of the BBBA and a possible tax title for the China competition bill. Should these issues not be completed separately prior to the mid-term elections, they are potential inclusions in a lame duck tax package. Other tax provisions that could be considered include TCJA-related changes (such as the R&D amortization issue), retirement savings legislation, and tax extenders.
House and Ways & Means Committee
Hearing on the Administration FY 2023 Budget proposal: The Ways & Means Committee held a hearing on June 8, 2022, on the Administration’s tax proposals and its FY 2023 budget proposal. Treasury Secretary Yellen testified on these topics and on the OECD global tax plan negotiations.
Hearing on IRS Audit Priorities: The Ways & Means Subcommittee on Oversight held a hearing on May 18th that focused on the audit policies and practices of the IRS. Chairman Pascrell (D-NJ) stated that IRS audits target low-income taxpayers citing a recent study by the General Accounting Office, and he called for the President to remove the current IRS Commissioner, Charles Rettig. The current term of Commissioner Rettig is due to expire on November 12, 2022.
Congressman Tom Reed (R-NY) Retires: Congressman Tom Reed announced his retirement effective immediately. In early 2021, he had announced he would not run for re-election. He currently is the Ranking Republican on the Subcommittee on Social Security.
Senate and Senate Finance Committee
China Competition Bill: During Senate consideration of the China competition bill, the Senate approved by a vote of 90-5 a motion by Senator Hassan (D-NH) to instruct conferees to include R&D tax credit legislation which would restore full expensing for eligible R&D expenditures in a tax title to the bill. The House and Senate approved bills do not currently include a tax title, and this type of motion is not binding on the conferees. There has also been an interest in including tax incentives for the semiconductor industry.
Hearing on the Administration FY 2023 Budget proposal: The Senate Finance Committee held a hearing on June 7, 2022, on the Administration’s tax proposals and its FY 2023 budget proposal. Treasury Secretary Yellen testified on these topics and on the OECD global tax plan negotiations.
Bipartisan retirement legislation: The SFC is planning a June markup of bipartisan retirement legislation. Senate proposals include the Encouraging Americans to Save Act (S. 2452) (SFC Chair Wyden); the Retirement Security and Savings Act (S. 1770) (Senators Cardin and Portman); and the Improving Access to Retirement Savings Act (S. 1703) (Senators Grassley, Hassan, and Lankford).
The House has already approved bipartisan retirement security legislation (SECURE Act 2.0) that would automatically enroll employees in 401(k) plans, enable older workers to contribute more to tax-advantaged retirement accounts, and help small employers offer retirement plans by giving them a tax credit.
Hearing on Political Activity of Exempt Organizations: The SFC Subcommittee on Taxation and IRS Oversight held a hearing on May 4th to examine laws and enforcement mechanisms related to political activity of exempt organizations, including Section 501(c)(4) organizations.
Issues related to Russia and the War in Ukraine
SFC Chair Wyden (D-OR) and Ranking Member Portman (R-OH) introduced the “Support Ukraine Through Our Tax Code” Act that would deny foreign tax credits and deductions for taxes paid to Russia and Belarus. The bill amends Section 901(j) to deny foreign tax credits for taxes paid to Russia or Belarus until normal trade relations resume under the Suspending Normal Trade Relations with Russia and Belarus Act. The denial of credits will be imposed 90 days after the bill’s enactment. The bill also amends Section 275 to deny a foreign tax deduction for taxes paid to Russia or Belarus.
In a recent set of new sanctions, the Administration banned US accounting and consulting firms from working with Russia.
Treasury and the IRS
Clausing Departure: Kimberly Clausing, the Treasury Deputy Assistant Secretary of Tax Analysis, has left that role to return to academia.
IRS Whistleblower Office: The IRS named John Hinman to be the director of the IRS Whistleblower Office. Hinman most recently worked as Director of field operations for the transfer pricing practice in the IRS Large Business & International Division. This office is currently under scrutiny after a recent report that urged the IRS to speed up the processing of whistleblower cases with thousands of such cases pending.
Issues and Guidance
Possible Changes to Final Foreign Tax Credit Regulations: As summarized in past issues of Washington Tax Insight, the IRS issued final regulations on the foreign tax credit (FTC) and the foreign-derived intangible income (FDII) regime. For a detailed discussion of key issues addressed in these regulations, see this True Insight.
As noted in the prior issues of Washington Tax Insight, there has been significant opposition to the new guidance with requests that the regulations either be withdrawn or delayed. In recent public comments, Jose Murilla, Deputy Assistant Secretary for International Affairs, stated that Treasury will issue changes to the final rules before the end of 2022 to address the complaints. He has said that the changes will deal primarily with two aspects of the rules, specifically whether royalty withholding taxes will qualify for the FTC and the cost-recovery requirement.
With respect to the withholding tax issue, Treasury is considering the inclusion of a “safe harbor” provision, which would require a new rule to be added. In addition, Treasury may issue clarifications or technical corrections on the cost-recovery requirement. He also suggested that changes may include guidance on disregarded distributions, although that may come at a later date.
Another Treasury official stated at a public conference that there will not be a delay in implementing the rules despite the fact that changes will be made to the guidance.
Employer Leave-Based Donation Programs that Assist Ukraine: The IRS issued Notice 2022-28, which instructs employees and employers on the treatment of employer leave-based donations that are intended to benefit charitable organizations focused on Ukraine. The guidance explains the federal income and employment tax implications for employers who offer workers the opportunity to donate vacation, sick, or personal leave time in exchange for cash payments to charitable organizations under Section 170(c). Under the rules, employer leave-based donation payments “made by an employer before January 1, 2023, to section 170(c) organizations to aid victims of the further Russian invasion of Ukraine (qualified employer leave-based donation payments) will not be treated as gross income or wages (or compensation, as applicable) of the employees of the employer.” The employees are not eligible to claim a charitable contribution deduction for the value of their donated leave. The IRS also states that employers can deduct the qualified employer leave-based donation payments consistent with the rules under Section 170 (charitable contribution) or Section 162 (business expense). This new guidance is similar to that issued after the terrorist attacks on September 11, 2001.
IRS “Dirty Dozen” List: The IRS announced the first four items on its “Dirty Dozen” list for 2022, which includes potentially abusive arrangements that taxpayers should avoid. The potentially abusive arrangements in this series focus on four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance, and monetized installment sales.
IRS Priority Guidance Plan Update: The IRS issued its third quarter update of the 2021-2022 Priority Guidance Plan. This update shows 63 guidance projects which have been published or released through March 31, 2022. The update includes 15 additional projects that were not on the initial plan.
Forms and Instructions for Form 5500, Annual Return of Employee Benefit Plan: The IRS and the Employee Benefits Security Administration (EBSA) issued final forms and instructions for the Form 5500 Annual Return/Report of Employee Benefit Plan and Form 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan. The forms are effective for plan years beginning on or after January 1, 2022. In the new guidance, the IRS explained that the annual reporting changes for 2022 include revisions to Schedules MB, SB, and R and their respective instructions to improve reporting by defined benefit plans subject to Title IV of ERISA and additions to the plan characteristics codes reportable on line 8 or Form 5500 and line 9 of Form 5500-F that require defined contribution MEPs (including PEPs) to be identified as such. No regulatory changes were required to implement these form modifications.
Revisions to Broker-Withholding Agreement on Partnership Sales: The IRS issued Notice 2022-23, which proposes changes to the agreement under which brokers withhold taxes on foreign investors’ sales of partnership interests. The proposed rules would apply to “qualified intermediaries” (QIs) that withhold taxes under Section 1446(f) on foreign investors’ transfers of interests in publicly traded partnerships (PTPs). Under the proposed rules, a QI that assumes primary withholding responsibility on any portion of a PTP distribution will be required to assume withholding responsibilities for the entire distribution. The current QI agreement is included in Revenue Procedure 2017-15, which will expire at the end of 2022. The IRS intends to incorporate these proposed changes and any subsequent modifications into a new Revenue Procedure that will take effect on January 1, 2023.
US-Croatia Tax Treaty: The US has completed substantial negotiations with Croatia over a new tax treaty according to a Treasury official who spoke at a recent tax conference. The negotiations concluded in March 2022, and the text of the treaty follows the 2016 US model tax treaty. The treaty is currently being reviewed by the State Department and will be ready for signature once a translation is certified. The treaty will then need to be ratified by a two-thirds vote in the Senate.
Partnership Audits: The Deputy Commissioner of the IRS Large Business & International Division (LB&I) recently stated at a tax conference that the IRS is working to increase audits of partnerships, although she noted that this process would take years. Her division has hired 40 new people with partnership expertise, and the division has begun to use a variety of different selection methods to identify partnerships for audit. The Director of Examinations in the Small Business/Self-Employed Division said that his division is similarly working to increase its audits of partnerships.
IRS LB&I Division and the Economic Substance Doctrine: The IRS LB&I Division issued updated guidance to all LB&I and Small Business/Self-Employed examiners and managers on the assertion of the economic substance doctrine and related penalties. The updated guidance, which is included in the Internal Revenue Manual, provides that executive approval is not needed prior to raising this doctrine and asserting related penalties.
IRS Appeals Office Update: The Chief of the IRS Independent Office of Appeals recently announced that in-person conferences will resume starting June 25, 2022. Also, in a memorandum dated April 19, 2021, the IRS’s Independent Office of Appeals acknowledged that it has a large backlog of cases that is slowing down the process of resolving cases with taxpayers. The memo states that a “significant inventory” of cases docketed in the US Tax Court have been referred back to IRS Appeals. IRS Appeals has outlined this plan to address the backlog :
- Dedicating additional resources to work these cases
- Prioritizing docketed casework
- Making faster initial contact with the taxpayer or their representative by telephone shortly after the case is filed in the Tax Court
- Applying streamlined case processing, such as specific dollar settlements, expedited tax computation requests and the use of Form 5402, Appeals Settlement Memorandum, to document settlements
- Resolving cases without an IRS Appeals conference for matters that result from pandemic miscommunication rather than actual tax disputes
- Obviating an actual trial to develop the facts and instead relying on oral statements to resolve cases more efficiently
IRS Ruling on Deferred Pay Impact on Foreign-Derived Intangible Income (FDII): The IRS released a Chief Counsel Advice Memorandum that states that a taxpayer’s FDII deduction must be reduced by deferred compensation expense attributable to services provided in years prior to the effective date of FDII, which was enacted in the 2017 Tax Cuts and Jobs Act. The IRS found that the deduction on the deferred compensation has to be allocated based on the law and the groupings of income that were in effect when the compensation is recognized. This position represents a change in position for the IRS from conclusions reached in prior guidance in 2009 and 2017 about expenses related to prior law Section 199.
IRS Comments on Proposed PFIC Rules: The IRS issued proposed rules in January 2022 that deal with domestic partnerships’ income from PFICs, which are foreign companies that derive their income from passive sources like dividends and royalties. For additional information on the proposed rules, please see this True Insight. At a recent tax conference, an official from the IRS Office of Chief Counsel acknowledged that the proposed rules would create a bigger compliance burden for partnerships’ individual partners by making them responsible for electing to treat a PFIC as a qualified electing fund (QEF). He commented that the IRS believes it makes sense for partners to decide for themselves whether to make QEF elections, but the IRS has asked for public comments on the change to “see if we could make it work.”
Comments Requested – Section 1031 exchanges: The IRS requested comments on Rev. Proc. 2003-39 that provides safe harbors for certain aspects of qualifying under Section 1031 for certain exchanges of property pursuant to LKE Programs. Comments are due by July 5, 2022.
IRS New Release on Enhanced Deductions for Business Meals and Home Offices: An IRS News Release urged taxpayers to begin planning to take advantage of the enhanced 100% deduction for business meals and other tax benefits available when they file their 2022 tax return. For 2021 and 2022 only, businesses can generally deduct the full cost of business-related food and beverages purchased from a restaurant. There are also rules related to the home office deduction that may benefit taxpayers who are now working from home. Finally, the IRS noted that there are other tax benefits available to business owners including the treatment of start-up expenses, the qualified business income deduction, and the health-insurance deduction for self-employed individuals.
Surprise Billing Rule: A Treasury official stated that the final rules on resolving payment issues when patients receive emergency health care from out-of-network medical providers should be released soon. The No Surprises Act was effective January 1, 2022, and it limits how much patients can be billed for emergency services from care providers who are not in their insurance network. The law also provided for an arbitration process for cases where insurers and out-of-network providers cannot agree on an appropriate reimbursement amount. An interim rule was jointly issued in September 2021 by the Centers for Medicare & Medicaid Services, the Employee Benefits Security Administration, the IRS, and the Office of Personnel Management. The interim rule was challenged by health-care providers and advocacy groups, and a federal court threw out parts of the rule in the case in February.
PTEP Regulations: At a recent tax conference, comments were made by two government officials about the timing of the release of proposed rules on previously taxed earnings and profits (PTEP). An official from the IRS Office of Chief Counsel predicted that the proposed rules would be issued by the end of 2022. An official from the Treasury Office of the International Tax Counsel, however, spoke at the same conference and expressed some caution with respect to that prediction, stating only that the proposed rules are being worked on and they are a high priority. Treasury has said that the PTEP rules would come in multiple tranches with the first tranche providing a framework with which to build further PTEP rules, such as merger and acquisitions guidance and transactional rules. The first tranche is also expected to address transfer of shares, basis adjustments under Section 961(c), and controlled foreign corporations owned by partnerships.
NOL rules: An IRS official stated at a recent tax conference that the agency is planning to re-propose rules governing the computation of built-in gains and losses when determining a corporation’s limitation on deductible losses following certain ownership changes under Section 382. Proposed rules on this topic were issued in 2019 after enactment of the TCJA, but have never been finalized.
Qualifying Energy Property under Section 48: An IRS official recently stated that the IRS is actively working on regulations relating to the definition of qualifying energy property for purpose of the energy tax credit under Section 48. In 2015, the IRS requested public comment on a number of issues including whether property such as storage devices and power conditioning equipment can be considered energy property and whether dual-use property should be eligible. This regulations project is included on the current IRS Priority Guidance Plan.
Public Comments Requested on Notice 2021-56: The IRS said it would like more input on Notice 2021-56, which was issued in November 2021 related to the standards that LLCs must meet in order to be recognized as tax-exempt under Section 501(c)(3). Comments received to date have shown that the LLC tax exemption laws vary from state to state and can conflict with the federal requirements. For example, the laws in some states (e.g., New York, California and Texas) require that an LLC be formed for a business purpose, and thus an LLC could not be formed exclusively for a charitable purpose in those jurisdictions. An IRS official stated that more details are needed about the possibility of having an LLC with members who do not have an economic interest, similar to a non-profit corporation. Comments were due by February 2022, but they can still be submitted.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
On February 4, 2022, the OECD announced that it was launching a public consultation on Amount A of Pillar One that would occur in stages. This release also stated that for Amount B of Pillar One, a public consultation document would be issued in mid-2022 with a public consultation event to follow the comment period. On February 4th, the OECD also released the first building block of the process on “Draft Rules for Nexus and Revenue Sourcing under Pillar One Amount A,” and comments were due February 18th. Several other releases have now occurred including:
- On February 18, 2022, the OECD issued a new set of proposed rules for Tax Base Determinations under Amount A of Pillar One with comments due by March 4th.
- On April 4, 2022, the OECD released a public consultation document on draft rules for domestic legislation on scope under Amount A of Pillar One.
- On April 14, 2022, the OECD released a public consultation document on the Extractives Exclusion under Amount A of Pillar One.
- On May 6, 2022, the OECD released a public consultation document on the Regulated Financial Services Exclusion.
- On May 27, 2022, the OECD released a public consultation document on the Amount A Tax Certainty Framework for Amount A and Tax Certainty for Issues Related to Amount A.
On December 20, 2021, the OECD issued its Global Anti-Base Erosion (GloBE) Model Rules under its Pillar Two proposal to impose a 15% minimum tax on a jurisdictional basis, and on March 14, 2022, the OECD released the Commentary and illustrative examples to the Pillar Two Model Rules. For a detailed discussion of the OECD guidance, please see our True Insight. The OECD has now announced that it will be issuing guidance on the global minimum tax in stages with a goal of issuing all guidance by the end of 2022.
In comments at the World Economic Forum in Davos in May 2022, OECD Secretary General Mathias Cormann stated that the projected implementation of Pillar One will be delayed to 2024 (from 2023) because the technical details are taking longer to finalize than expected. He also said, however, that he believes the implementation of Pillar Two and the global minimum tax could proceed. That decision, however, is in the hands of member countries who must agree to move ahead with implementation.
European Union: European finance ministers have continued to fail to reach a unanimous agreement on a minimum tax in the EU. The EU is currently at a stalemate due to the opposition of Poland to advancing the Pillar Two Directive based on their position that the EU should be voting on both Pillar One and Pillar Two rules as a package so that they are tied together in a legally binding way. A follow up vote scheduled for May 24th has now been rescheduled for the EU Finance Ministers’ meeting on June 17th.
United States: The Treasury Department under the leadership of Secretary Yellen has been strongly committed to this project. House and Senate lawmakers from both parties, however, have expressed caution about proceeding with US approval without assurances that other countries in the Inclusive Framework will also change their country’s tax laws. Over the past year, several letters have been sent by members of Congress to Treasury expressing their concern over the negotiations and asking for more information from Treasury.
Senator Crapo (R-ID) is the senior SFC Republican and would become Chairman if the Republicans gain control of the Senate after the mid-term elections. He has stated that he would stop US work on the OECD plan if he takes charge of the SFC.
OECD – Other Issues
The OECD is planning to establish an “inclusive forum” of countries working on carbon mitigation approaches by the end of 2022, but the goal will not be to produce an international agreement on carbon pricing. The OECD’s role will likely be to gather data and facilitate an international discussion on the issue.
The European Commission published an EU Directive proposal regarding a debt-equity bias reduction allowance and a limitation of the tax deductibility of exceeding borrowing costs. This proposal is one of the Commission’s key actions on corporate tax as set out in their document, Communication on Business Taxation for the 21st Century. The proposed rules would apply to taxpayers that are subject to corporate income tax in one or more EU Member States, including permanent establishments of non-EU head offices. Comments will be accepted until July 8, 2022.
The UK announced a proposal to impose a 25% windfall tax on the profits of oil and gas companies to fund aid for lower income households. The tax would collect $6.3 billion to provide one-time disbursements of £650 to certain UK taxpayers.