Washington Tax Insight May 2022
Politics and Congressional Activity
The Senate returned from a two-week recess with a busy schedule of issues to address including additional pandemic relief funding, additional funding for Ukraine, the unfinished Build Back Better Act, and China legislation. The House returned to a DC work schedule on May 10th. The Senate has confirmed Jerome Powell as the chairman of the Federal Reserve but still has nearly 100 other nominations to consider. House and Senate Appropriations will begin their consideration of funding amounts for Fiscal Year 2023 this month.
A draft Supreme Court opinion was leaked last week that shows the conservative majority is planning to overturn the decisions in Roe v. Wade and Planned Parenthood v. Casey that guaranteed federal constitutional protections of abortion rights. Although it’s only a draft opinion and the justices may change their votes before rendering a final decision, this leaked draft is likely to make abortion rights a priority issue in this election cycle.
Once Congress departs for the Memorial Day recess, it will become increasingly difficult to reach agreement on any type of legislation in light of the mid-term elections in the fall, even if there is bipartisan support.
The Administration’s Build Back Better Act (BBBA)
The Administration is still determined to pursue action on a smaller version of the BBBA with advancement stalled in the Senate. Senator Manchin (D-WV), who previously raised issues preventing approval of the bill, has indicated he is open to negotiating again, but there are no reports of serious negotiations taking place. Senator Manchin’s interests do not appear to align with the interests of his Democratic colleagues in the House. If they do not make progress on this issue in May before the next recess, then prospects for action this year will not be promising.
As a potential alternative to deal with climate and energy issues, Senator Manchin has been having discussions with some Senate Republicans on the possible outline of a bipartisan climate and energy security bill that 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 for a smaller version of the BBBA is difficult to predict. The Memorial Day recess marks the next possible deadline, but it is hard to envision the Senate drafting a new version of the bill and achieving approval in committee and on the Senate Floor with a conference on the bill with the House by that date. The July 4th recess is probably more feasible, but only if serious action in the Senate begins in May. The current reconciliation instructions expire on September 30th, which marks the last day to consider the BBBA under the budget reconciliation process, but in practical terms that may be too late as it is only a few weeks from the mid-term elections.
For information about the provisions affecting individual taxpayers that were included in the House-approved bill, 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 and Additional Funding for Ukraine
Prior to the recess, the Senate was unable to schedule a vote on the $10 billion plan to provide additional pandemic preparedness through vaccines, testing, and treatments due to disagreements about whether amendments would be allowed, including a pandemic-related immigration amendment. The House approved a $40 billion package of aid to Ukraine, which was an increase from the $33 billion request sent proposed by the Biden Administration. The Ukraine aid legislation is expected to be approved by the Senate in the next few days.
A Lame Duck Tax Package?
Although there are several months left until the fall mid-term elections, there is already consideration of what might be considered in a lame-duck package should Congress fail to complete action on some or all of the outstanding tax bills before November. The outcome of the mid-term elections always has some impact on whether legislation moves in a lame-duck session and how significant such legislation might be.
If Congress has not dealt with the package of tax extenders that covers provisions that expired in 2021 or are due to expire in 2022, then that legislation would be considered for a lame-duck package. The bipartisan retirement legislation discussed in the next section might also be included.
House & Ways & Means Committee
Bipartisan retirement legislation: On March 29th , the House approved bipartisan retirement security legislation (SECURE Act 2.0) aimed at making it easier for businesses to offer tax-qualified retirement savings plan to their employees and for individuals to participate in retirement plans and increase their tax-preferred savings. This legislation would reduce federal revenue by nearly $35.8 billion over 10 years, but that would be offset by the $35.9 billion in revenue offsets, including the expansion of “Roth” treatment of certain retirement accounts and certain retirement account contributions.
The legislation is now being considered in the Senate where it also has bipartisan support, but there are also additional proposals that Senators will want to incorporate into the 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 SFC and the Committee on Health, Education, Labor, and Pensions are planning committee markups of their own retirement package in the near future. It is uncertain at this point whether this legislation could move on its own or would be combined with other bipartisan tax issues, such as tax extenders.
Hearing on the impacts of tax policy on communities of color: The Ways & Means Committee held a hearing on “Overcoming Racism to Advance Economic Opportunity” on April 6, 2022. The hearing explored how the benefits of federal policies under the committee’s jurisdiction may be felt differently by various racial groups and considered a number of tax issues including the child tax credit, the earned income tax credit, and the child and dependent care tax credit.
Issues related to Russia and the War in Ukraine
SFC Chair Wyden (D-OR) and Ranking Member Portman (R-OH) released draft legislation that would deny foreign tax credits for taxes paid to the Russian government. The bill would also identify certain individuals including sanctioned Russian oligarchs and disqualify each from certain tax preferences. The draft bill is a warning to US companies still operating in Russia that they may face increased taxes. Comments on the draft legislation were due April 21, 2022.
The IRS has suspended the exchange of tax information with Russia, which is designed to ensure that the US is not providing any information that could contribute to the enrichment of the Russian government through increased tax collections, according to Treasury. A 1992 tax treaty between the US and Russia provides for the exchange of tax information between the two countries, but Senators Cardin and Portman urged the President to suspend the exchange of information in a recent letter.
In action early in April, Congress passed a pair of bipartisan bills that suspended normal trade relations with Russia and Belarus and suspended energy imports from Russia.
Senate & Senate Finance Committee
Cannabis legislation: Senate Majority Leader Schumer, SFC Chair Wyden, and Senate Democrat Cory Booker have announced that a bill establishing a federal standard for cannabis legalization and regulation is on track to be introduced before the August recess. The House has already approved a similar measure.
Hearing on Political Activities of Tax Exempt Groups: The SFC Subcommittee on Taxation and IRS Oversight held a hearing on May 4, 2022, on “Laws and Enforcement Governing the Political Activities of Tax Exempt Entities.” In conjunction with the hearing, the Joint Committee on Taxation has issued a report on the tax treatment of tax exempt organizations.
New Opportunity Zone legislation: A bipartisan group of House and Senate members have introduced new legislation on the opportunity zone program, which would establish reporting requirements for funds that raise capital for opportunity zone projects and their investors. The bill would also extend the program for two years, which would allow investors to defer paying taxes on capital gains invested until the end of 2028.
Treasury and the IRS
The IRS has announced that Lia Colbert is the new Commissioner of the IRS Small Business Self-Employed Division. After holding several different positions in the IRS, she takes over from Eric Hylton.
The IRS also announced that Maha Williams will act as the division’s Deputy Commissioner for Examination. Darren Guillot will continue to serve in his role as Deputy Commissioner for collection and operations support.
Issues and Guidance
Opposition 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 March issue of Washington Tax Insight, there has been significant opposition to the new guidance with requests that the regulations either be withdrawn or delayed. A group of nine lawmakers have now written to Treasury Secretary Yellen urging Treasury to be more open to business concerns about the final FTC regulations, although the letter did not ask for a delay of the rules. The letter did request more comprehensive IRS guidance for applying the FTC rules and for Treasury to consider offering companies safe harbors in certain situations.
Invalidation of the 2019 Section 245A Temporary Regulations: The US District Court for the District of Colorado on April 4, 2022, granted summary judgment to Liberty Global, Inc. in Liberty Global Inc. v. United States, ruling that the Section 245A dividends received deduction temporary regulations adopted by Treasury on June 18, 2019, are invalid because they were issued without following the Administrative Procedure Act’s notice and comment requirements. The temporary regulations were issued to address a gap in the effective dates for Section 245A, which provides a deduction for certain dividends received from controlled foreign corporations (CFCs), and Section 951A (the global intangible low-taxed income/GILTI regime), which imposes a minimum tax on certain income from CFCs.
Opportunity Zones: The IRS is sending letters to opportunity zone investors and funds who may need to file an amended return or administrative adjustment request (AAR) with additional information. The IRS news release (IR-2022-79, April 12, 2022) stated that taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may received Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard, which tells them that information needed to support the annual certification of investment standard is missing, invalid, or the calculation is not supported by the amounts reported. If taxpayers intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement. In addition, taxpayers may receive Letter 6502, Reporting Qualified Opportunity Fund (QOF) Investments, or Letter 6503, Annual Reporting of Qualified Opportunity Fund (QOF) Investments, which notify them that they may not have properly followed the instructions for Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments. If taxpayers intend to maintain a qualifying investment in a QOF, they can file an amended return or an AAR with a properly completed Form 8997. Failure to act will mean those who received the letter may not have a qualifying investment in a QOF, and the IRS may refer their tax accounts for examination.
Proposed Regulations on Exclusion for Estate and Gift Tax: The IRS issued proposed regulations on the basic exclusion amount (BEA) under the estate and gift tax. The rules would apply to donors of gifts made after 2017 and to the estates of donors dying after a reduction in the BEA and would implement a change in the amount that is excluded from estate tax.
Public input on IRS Priority Guidance Plan for 2022-2023: In Notice 2022-21, the IRS is soliciting input as it prepares to issue its next Priority Guidance Plan (PGP), which will list the regulations, rules, and other guidance the IRS intends to issue in the 2022-2023 plan year. Public comments are due by June 3, 2022. Among the considerations given to taxpayer suggestions are (1) whether it resolves significant issues relevant to a broad class of taxpayers; (2) reduces controversy; (3) lessens the burden on taxpayers or the IRS; and (4) promotes sound tax administration.
Instructions for Foreign Reporting Requirements for Partnerships: On April 12, 2022, the IRS updated its instructions for foreign reporting requirements for partnerships through new FAQs on Schedules K-2 and K-3. The FAQs deal with when an S corporation is required to complete the relevant part of the forms, passive foreign investment companies, and which parts of the forms are required to be completed for “dormant foreign corporations.” The IRS has also delayed its timetable to July 24th for when electronic filing will be available for S corporations on these schedules.
Employee Retention Credit Penalty Relief: The IRS issued a news release setting forth certain penalty relief options that may be available to taxpayers who are unable to pay increased tax liabilities resulting from retroactive claims for Employee Retention Credits.
2022 IRS Nationwide Tax Forum: The IRS issued a news release announcing that the 2022 IRS Nationwide Tax Forum, which is an annual series of continuing education seminars for tax professionals will be held virtually from July 19, 2022, through August 18, 2022.
FAQs on the 2020 Recovery Rebate Credit: The IRS issued a news release that provides an updated Fact Sheet containing answers to FAQs regarding the 2020 Recovery Rebate Credit, which was enacted as part of the CARES Act.
Superfund Penalty Relief: The IRS issued Notice 2022-15, providing relief (for Q1 2022 through Q1 2023) with respect to penalties under Section 6656 for failure to make deposits of Superfund chemical taxes under Sections 4661 and 4671 of the Code, which was reinstated as part of the Infrastructure and Investment Jobs Act. The IRS will also maintain the right of companies due to pay the tax to use deposit safe harbor rules for the first 3 quarters of 2023 if certain requirements are met.
IRS Practice Unit on transfer pricing risk in country-by-country reporting: The IRS issued an outline on April 25, 2022, of a practice unit on Country-by-Country (CbC) reporting in the transfer pricing risk analysis process. The guidance includes a description of the background that led to the required filing of Form 8975 and accompanying Form 8975, Schedules A by certain US multinationals and guidance on the appropriate use of these forms in the IRS high-level transfer pricing risk assessment process.
PTEP regulations: IRS rules on previously taxed income will address the issue of whether US partnership will see basis adjustments in foreign corporations they own, according to Andrew Gordon, an official in the IRS Office of Associate Chief Counsel (International). The issue applies when a US partnership, owned by US shareholders, also owns a foreign corporation, resulting in GILTI for the shareholders. Current regulations do not address whether that then leads to the US partnership recording an increase in basis in its ownership of the foreign corporation. He also said that this guidance is a high priority for Treasury and the IRS.
Partnerships – Section 752 and the “Fractions Rule”: A senior IRS official said that the IRS is nearing completion of two sets of final regulations affecting partnerships. A final version of the “fractions rule” is expected, which will provide guidance on the application of Section 514(c)(9)(E) to partnerships. The IRS is also working to complete final rules under Section 752 including guidance on related party debt.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
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 also launched a public consultation on the GloBE Implementation Framework on March 14, 2022. A public consultation meeting was held virtually on April 25th. We will provide a discussion of the public consultation in a future True Insight.
On February 4, 2022, the OECD released its initial “Draft Rules for Nexus and Revenue Sourcing under Pillar One Amount A,” and comments were due February 18th. 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. We will provide a detailed summary of this OECD guidance in a future True Insight.
European Union: European finance ministers have continued to fail to reach a unanimous agreement on a minimum tax in the EU. The Economic and Financial Affairs Council of the EU (ECOFIN) met on April 5th to reach an accord on the implementation of the Pillar Two framework, but failed once again due to objections from Poland. Poland was not willing to agree without a defined legal link between Pillar One and Pillar Two based on the position that the two pillars were approved as a package by the OECD and should be introduced as a package at the EU level. The agreement was tabled again and will be reconsidered again on May 24, 2022.
United States: SFC Republicans have written to Treasury Secretary Yellen several times over the last few months raising several concerns about the commitments the US has made with respect to negotiations on the OECD project and their position that Treasury has failed to engage meaningfully with SFC Republicans. In an April 5th statement from senior Republicans on the SFC and the House Ways & Means Committee, Senator Crapo (R-ID) and Congressman Brady (R-TX) respectively, cited the failure of the EU to agree on the Pillar Two proposals as a reason for the US to be cautious with their support.
The following comments were included:
“EU finance ministers have again failed to agree on the global minimum tax, further evidence that the Biden Administration was premature in taking a victory lap on the OECD Agreement. If the EU is already hitting roadblocks, no one should expect countries like China to implement this deal anytime soon. The Biden Administration has neglected to consult with Congress in this process, and the result is a bad deal for American businesses and workers. The Administration should abandon its failed go-it-alone approach and work with Congress to negotiate a deal that protects US economic strength.”
In letters sent in the past, SFC Republicans have repeatedly asked for Treasury to engage with Congress in a meaningful way regarding the negotiations and to provide the requested data and analysis necessary for Congress to properly evaluate the effect of its agreement on the US business community and US revenue.