Washington Tax Insight October 2020
Politics and Congressional Activity
The House and Senate approved a temporary spending bill, which was signed by the President on October 1st, preventing a government shutdown by funding the government through December 11, 2020. The bill reflects an agreement reached by Congressional leaders and the Administration on issues including farming assistance and nutrition programs, and generally maintains funding at FY 2020 levels.
With approval of the short-term funding legislation, it appears unlikely that any additional legislation will be considered in Congress prior to the November elections, absent a breakthrough in the negotiations on additional COVID-19 relief legislation. House Speaker Pelosi (D-CA) and Treasury Secretary Mnuchin have continued their discussions with the White House sending mixed signals about the type of package the President would support, and the Senate remaining on the sidelines for now. Although the prospects for legislation pre-election seem unlikely, an agreement on a deal cannot be ruled out.
The Senate is planning to hold hearings on the nomination of Amy Coney Barrett to the Supreme Court and is planning to schedule a vote on her confirmation prior to Election Day. Several members of the Senate, however, have tested positive for COVID-19, so Senate Majority Leader McConnell cancelled floor action in the Senate until October 19th, and the Judiciary Committee hearing may be done virtually with Senators potentially returning for a Senate Floor vote.
President Trump tested positive for COVID-19 and after spending several days at Walter Reed Hospital, he returned to the White House. The Commission on Presidential Debates made a decision to change the format of the next debate between Trump and Biden on October 15th to a virtual town hall, but it is unclear whether that debate will take place with both candidates in that format.
Election Day is November 3rd, and there are a number of policy debates dominating this Presidential election cycle including the COVID-19 pandemic and the federal response to it, the Supreme Court and the current vacancy created by the death of Justice Ruth Bader Ginsburg, racial and ethnic equality, healthcare and the future of the Affordable Care Act (ACA), and climate change. Tax policy issues are also on the ballot for this election given the stark differences between the policy agendas of the two Presidential candidates – President Trump with the Tax Cuts and Jobs Act (TCJA) enacted in 2017 during his first term, and former Vice President Biden who has criticized the TCJA and offered a number of policy proposals that would reverse policies in the TCJA.
Our True Alert detailing the tax proposals of the two candidates will provide you with a summary of each candidate’s key proposals with consideration of the tax agenda for 2021 and the future of the TCJA. Neither candidate has released detailed legislative proposals for their ideas with their comments on tax policy intended to send messages to voters about their tax priorities. The “message proposals” that have been released by both candidates, however, make it clear that there are significant differences between the two with respect to their tax policy agendas on both business and individual taxes, with Biden making it clear that he would reverse much of the tax policy that was enacted by the Trump Administration through the TCJA.
House Ways & Means Committee
The House Ways & Means Committee held a hearing on “Consequences of Inaction on COVID Tax Legislation” during which members on both sides of the aisles and hearing witnesses agreed that additional legislation is needed on COVID relief, with no agreement, however, on the size or scope of such a package. There was agreement on some specific issues that should be included in the next relief bill, including: (1) expanded employee retention tax credit; and (2) business credit for COVID mitigation expenses.
Congressman Cedric Richmond (D-LA) was named to fill the seat on the W&M Committee held by the late Congressman John Lewis (D-GA). With the appointment of Richmond to the panel, there are now 25 Democratic members on the Committee and 17 Republicans.
House Ways & Means Committee Chair Neal (D-MA) has indicated that he thinks there may be an opportunity to consider the tax extenders in a lame-duck session after the elections. Senate Finance Committee Grassley (R-IA) has also indicated willingness to talk about these issues after the elections, because there is bipartisan agreement on some issues. The fate of these issues may depend in part on the outcome of the elections and whether a stimulus package moves this year. If Democrats pick up control of the Senate and/or the White House, they may decide to wait until 2021 to move a stimulus package which could incorporate extension of expiring tax provisions.
Government Response to the Coronavirus Pandemic
In response to the COVID-19 pandemic, government officials in Washington DC have taken a number of actions related to the economic effects of the crisis including legislation, regulatory action, and government agency action. As summarized in past True Alerts (Tax Issues Addressed by COVID-19 Emergency Legislation; Congressional Action on the COVID-19 Pandemic: The CARES Act), Congress has passed several major pieces of legislation to provide economic relief to the US economy and US taxpayers.
Although both House Democrats and Senate Republicans have put forth new legislation for COVID-19 relief, the negotiations remain stalled, and it appears unlikely that a deal can be reached prior to the November elections. House Speaker Pelosi (D-CA) has resumed contact with Treasury Secretary Mnuchin in an effort to get the negotiations restarted. Some of the key issues in conflict relate to state and local government funding and funding for schools.
In May, the Democratic-controlled House approved the Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act”), which was intended to lay down markers on the issues the House Democrats believe should be addressed in the 4th Phase Bill. On October 1st, House Democrats passed an updated version of the HEROES Act, which was introduced by Rep. Nita Lowey, D-N.Y., and approved by a vote of 214-207. The projected cost of the bill is $2.2 trillion, and it includes state and local government funding, protections for health care workers serving during the novel coronavirus pandemic, and the following tax issues: (1) multiemployer pension reforms; (2) expansions of the child, dependent care and earned income tax credits; (3) extended credits for paid sick and family leave; (4) deduction of expenses paid for by PPP loans; (5) NOL limitation rules; and (6) loan forgiveness rules related to income inclusion.
The Senate has put forward two bills that are considerably smaller including the $1 trillion HEALS Act, which was released in July but never considered by the Senate, and the $500 billion Delivering Immediate Relief to America’s Families, Schools, and Small Businesses Act, which was considered on the Senate Floor on September 10th, but blocked by Senate Democrats on a procedural vote.
The latest Republican bill included: (1) an additional $300 in unemployment benefits per week through the end of the year; (2) a second round of forgivable Payroll Protection Program (PPP) loans to eligible businesses; (3) loan forgiveness for the US Postal Service if its cash balance falls below a certain threshold; and (4) liability protection for schools, businesses, and other entities against COVID-related claims. It included only two tax provisions from several that were included in the HEALS Act – specifically included is an increased above-the-line deduction for charitable giving in 2020 and two years of tax credits for contributions to scholarship-granting organizations that fund private schooling.
Treasury and the IRS
COVID-19 Crisis Guidance & Related Issues
Guidance on Deferring Payroll Taxes: The IRS issued Notice 2020-65, which provides guidance on the President’s August 8th Memorandum to defer withholding of certain payroll taxes on wages paid from September 1, 2020 through December 31, 2020 below a specified amount. The House Ways & Means Subcommittee debated this issue in a Committee hearing and considered two bills that would reverse the White House action on this issue, but took no action on them. Key Senate leaders indicated that they may invoke the Congressional Review Act to nullify the Treasury guidance implementing the President’s directive.
Paycheck Protection Program: The IRS released Announcement 2020-12 stating that lenders should not file information returns or furnish payee statements under §6050P to report the amount of qualifying forgiveness with respect to covered loans made under the Paycheck Protection Program.
Tax Cuts & Jobs Act (TCJA) Guidance
Downward Attribution/§958: The IRS released final and proposed regulations relating to the repeal of §958(b)(4) by the TCJA, which affect US persons that have ownership interest in, or that make or receive payments to or from, certain foreign corporations. As a result of the repeal, stock in a foreign corporation owned by a foreign person can be attributed “downward” to a US person under §318(a)(3) for various purposes, including the determination of whether the US person is a US shareholder and the foreign corporation is a controlled foreign corporation (CFC).
The repeal had the result of expanding the number of foreign corporations that would be treated as CFCs. In October 2019, the IRS published proposed regulations and Revenue Procedure 2019-40, which included (1) certain safe harbor rules, (2) penalty relief under §6038 and 6662, and (3) certain reporting requirements on Form 5471. The final regulations also address other collateral effects of the rule change, including the timing of deductions for interest and other amounts paid to CFCs that are subject to the matching rule in §267(a)(3).
The proposed regulations under §958(b) modify the ownership attribution rules applicable to outbound transfers of stock or securities of a domestic corporation under §367(a) and also narrow the scope of foreign corporations treated as CFCs for purposes of the look-through rule under §954(c)(6).
Depreciation/§168(k): The IRS issued final regulations that provide guidance regarding the additional first year depreciation deduction under §168(k), including the correction to qualified improvement property (QIP) depreciation made by the CARES Act. The guidance covers rules relevant to: (i) the definition of qualified property; (ii) consolidated groups; (iii) the mid-quarter convention; and (iv) components acquired or self-constructed after September 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before September 28, 2017.
In the final regulations, the IRS stated that it was revoking the so-called partnership look-through rule for determining whether a partner had a previous interest in property, which would make it ineligible for the 100% first-year depreciation deduction. Under that rule, a partner would have been treated as having a previous interest in property if the partner belonged to a partnership at any time the partnership owned the property.
Foreign Partnership Sales of Domestic Partnership Interests: The IRS issued final regulations on the gain or loss of foreign persons from the sale or exchange of certain partnership interests, implementing a provision from the TCJA. The TCJA created §864(c)(8), which reversed the precedent set by the US Tax Court in the 2017 case of Grecian Magnesite v. Commissioner of Internal Revenue, and the IRS issued proposed regulations in December of 2018 establishing how to compute the income earned from a sale of an interest in a US partnership by a foreign entity. The final regulations maintain the basic approach and structure of the proposed regulations but add some flexibility for cases in which determining the gain from the sale is difficult, and also includes new sourcing rules for inventory, depreciable personal property and intangible assets. The final regulations also clarify how the rules will interact with the permanent establishment provisions of US tax treaties.
Foreign Tax Credits: The IRS released a new set of final and proposed regulations related to foreign tax credits. The final regulations address the allocation and apportionment of deductions and foreign taxes, foreign tax redeterminations, foreign tax credit disallowance under §965(g), consolidated groups, hybrid arrangements, and certain payments under §951A. The proposed regulations address the foreign tax credit, including guidance with respect to expense allocation, sourcing of inclusions, legal liability for foreign tax, and when foreign taxes accrue and may be claimed as credit.
Rules on Eligible Terminated S Corporations: The IRS issued final regulations on the definition of an eligible terminated S corporation to implement changes enacted by TCJA under §1371. The rules include guidance on cash distributions by such a corporation after the post-termination transition period.
Foreign Income Rules for S Corporations: The IRS issued Notice 2020-69, which announces forthcoming regulations on the application of §951 and the global intangible low-taxed income (GILTI) regime under §951A to certain S corporations with accumulated earnings and profits. For those S corporations electing this treatment, GILTI inclusions would create an accumulated adjustments account.
Guidance Regarding the Treatment of Qualified Improvement Property under the Alternative Depreciation System for Purposes of the QBAI Rules for FDII and GILTI: IRS Notice 2020-69 also states that the IRS is developing rules that address “the treatment of qualified improvement property (QIP) under the alternative depreciation system (ADS) of section 168(g) for purposes of calculating qualified business asset investment (QBAI) for purposes of the foreign-derived intangible income (FDII) and GILTI provisions.” The CARES Act included a change to the TCJA that reclassified certain improvements to the interior of nonresidential real property as 15-year property for depreciation purposes.
Rehabilitation Tax Credit: The IRS issued final regulations on the rehabilitation tax credit under §47 including rules to coordinate the new 5-year period over which the credit may be claimed with other special rules for investment credit property. Under the TCJA, the credit can be claimed over a 5-year period or all in one year under prior law under certain circumstances. A transition rule permits taxpayers to use the prior law if the project meets certain conditions. This final guidance will require taxpayers to determine the credit amount in the year they place the building into service and allocate that amount ratably over the 5-year period.
Excise Tax on Investment Income of Colleges and Universities: The IRS issued final regulations on the 1.4% excise tax on net investment income of certain private colleges and universities under the TCJA and §4968. The rules cover educational institutions with non-exempt assets of at least $500,000 per student and with 500 or more tuition-paying students (for a minimum investment asset value of $250,000). The guidance defines several of the terms necessary for education institutions to determine whether the §4968 excise tax applies to them and clarifies how to determine net investment income.
Other Issues and Guidance
IRS Chief of Staff: The IRS will have a new chief of staff starting October 1st, Kevin McIver. He is replacing Lia Colbert, who will take over as the Deputy Chief of Appeals.
Delay in Applicability Dates for Foreign Currency Guidance: The IRS issued Notice 2020-73, announcing a one-year delay in the applicability date of the final regulations under §987 and certain related final regulations. They now apply to taxable years beginning after December 7, 2021.
IRS Priority Guidance Plan/4th quarter update: The IRS released the 4th quarter update to the 2019-2020 Priority Guidance Plan, which reflects 53 additional projects that have been published or released during the period from April 1, 2020, through June 30, 2020.
IRS Approves Six Forms for Digital Signatures: The IRS expanded the number of forms that it will accept as digitally signed including Forms 706, 706-NA, 709, 1120-ND, 3520 and 3520-A.
Special Travel Per Diem Rates: The IRS issued Notice 2020-71, which sets the special per diem rates for substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home as of October 1, 2020.
Revenue Procedure 94-69/Disclosure of Potential Tax Adjustments: The IRS’s Large Business and International Division (LB&I) has requested comments from large corporate taxpayers that rely on Revenue Procedure 94-69 to disclose potential tax adjustments at the start of an IRS examination. LB&I is considering revoking Rev. Proc. 94-69 and comments are due by October 19th. Proper disclosure provides penalty protection and is common practice for taxpayers that have historically been subject to continuous audit.
LB&I Compliance Campaigns: The LB&I Division also added new compliance campaigns in four issue areas including: (1) Allocation of Success-Based Fees without Rev. Proc. 2011-29; (2) §807(d) – Computation of Life Insurance Reserves; (3) §807(d) – Re-Computation of Life Insurance Reserves; and (4) FIRPTA Reporting Compliance for Non-Resident Aliens.
Interest Rates: The IRS released Revenue Ruling 2020-20 that provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.
Request for Designation for Litigation: The IRS published a memorandum concerning guidance to the field on the criteria that should be applied in considering if a request for designation for litigation should be made to the Office of Chief Counsel. The internal memorandum reflects changes made by the Taxpayer First Act, which will become part of the Internal Revenue Manual and the Chief Counsel Directive Manual.
IRS Practice Units: The IRS published new practice units covering: (1) the definition of foreign earned income for purposes of §911; (2) the taxability of distributions from an S corporation that either does not have accumulated earnings and profits (AE&P) or makes distributions from sources other than AE&P; (3) the last-in first-out (LIFO) pooling method and taxpayers who may elect to compute opening and closing inventories for goods using LIFO; (4) an overview of the Overall Foreign Loss (OFL), Separate Limitation Loss (SLL), and Overall Domestic Loss (ODL) rules; and (5) audit techniques for examiners assigned foreign earned income exclusion cases.
Treasury Decision 8702/transfers of domestic stock or securities by US person to foreign corporations: The IRS published a notice and request for comments on Treasury Decision 8702 relating to certain transfers of domestic stock or securities by US persons to foreign corporations. The regulation relates to certain transfers of stock or securities of domestic corporations under the corporate organization, reorganization, or liquidation provisions of the Code. Transfers of stock or securities by US persons in tax-free transactions are treated as taxable transactions when the acquirer is a foreign corporation, unless an exception applies under §367(a). The regulation provides that no US person will qualify for an exception unless the US target company complies with certain reporting requirements. Comments are due by October 26th.
2021 Compliance Assurance Process Program: The IRS announced the opening of the application period for the 2021 Compliance Assurance Process program, which will run from September 1st to November 13th. The IRS will notify applicants if they are accepted into the program in February of 2021.
IRS Notices: The IRS announced it has temporarily stopped mailing notices to taxpayers with balances due including CP501, the CP 503, and the CP 504. It also said that any payments by mail will be posted and credited on the delivery date and not when opened and processed by the agency.
Bipartisan Budget Act Centralized Partnership Audit Regime: The IRS announced the launch of the webpage for the Bipartisan Budget Act (BBA) Centralized Partnership Audit Regime, which replaces the Tax Equity and Fiscal Responsibility Act (TEFRA) and the electing large partnership rules. Under the BBA, the IRS generally assesses and collects any understatement of tax at the partnership level.
Revenue Procedure 2015-40/Tax Treaties: The IRS requested comments on Revenue Procedure 2015-40, which provides guidance for taxpayers who believe that the actions of the US, a treaty country or both result (or will result) in taxation that is contrary to the provisions of an applicable tax treaty. Comments are due by November 2nd.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
Multilateral tax negotiations, which have been ongoing at the Organization for Economic Cooperation and Development (OECD) with the goal of producing a global agreement on the taxation of multinational corporations, including those that provide digital services, have been impacted by the COVID-19 pandemic. The 2020 timeline has been modified, but the deadline for producing an agreement continues to be the end of 2020.
The US has taken the position that the Pillar One approach should be optional, which is in conflict with several EU countries. The two Pillars operate independently, however, so agreement could be reached on Pillar Two, since there appears to be more consensus on that issue. The head of the OECD Center for Tax Policy and Administration has said that he expects the US to continue to participate in the OECD project, regardless of who wins the November election, and indicated that the US is a critical participant in the process.
Recently, copies of the latest versions of the Pillar One and Pillar Two digital tax blueprints dated September 16th were leaked and have now been widely distributed. The Inclusive Framework is scheduled to meet October 8-9 and the G20 finance ministers are scheduled to meet October 15-16th followed by a G20 meeting on November 21st-22nd.
The European Union has said that it will put forward a digital tax proposal in early 2021 if no global agreement is reached. France has accused the US of obstructing the ongoing process at the OECD and will push for an EU tax in 2021 (absent a global agreement). The UK has stated that it has no plans to drop its planned tax on digital companies in order to secure a trade deal with the US, despite reports to that effect. The tax took effect on April 1st and is considered a temporary measure until there is a global agreement. The two parties began trade negotiations in May, necessitated by Brexit which requires the UK to negotiate separate deals with its trading partners.
The European Union
- The European Commission will appeal a court ruling striking down its landmark decision ordering Ireland to recover billions in illegal subsidies granted to Apple through a series of tax rulings. The EC will take the case to the European Union’s highest court after the General Court nullified the 2016 order that Ireland claw back the taxes from Apple.
- European Commission Executive Vice President Valdis Dombrovskis, who is also financial services chief, will take over as the European Union’s new trade commissioner.
- The EU plans to examine the difference between how debt and equity are treated for tax purposes and whether withholding tax relief should continue to be applied at the source – information that was disclosed as part of a draft of the European capital markets union action plan.
The Netherlands: The Dutch Minister of Finance presented the Dutch Tax Plan 2021 with tax legislative proposals for 2021. The measures include a conditional withholding tax on interest and royalty payments to low tax jurisdictions, a tightening of the liquidation loss regime, an increase of the effective tax rate for the innovation box (7% to 9%), amendments of the corporate income tax rate, and a carbon tax on companies that don’t sufficiently reduce their carbon emissions.