Washington Tax Insight October 2021
Politics and Congressional Activity
Congress has been actively working in 2021 on legislation designed to enact the agenda laid out by President Biden in his State of the Union address and the budget for Fiscal Year 2022 that he forwarded to Congress in the spring. After enacting additional pandemic-relief legislation, Congress then moved on to infrastructure legislation, which was approved in the Senate and is awaiting final action in the House. The major legislation in 2021 with respect to tax issues, however, is the budget reconciliation bill, which has been drafted to include many of the key Biden agenda items.
In addition to these major fiscal-related issues, Democratic leaders in Congress continue to plan consideration of legislation dealing with voting rights, the National Defense Authorization Act, abortion rights, and a number of executive and judicial nominations that are awaiting action.
Funding for Fiscal Year 2022 and the Debt Limit
The current fiscal year ended at midnight on Thursday, September 30, 2021. Treasury Secretary Yellen told Congress that the federal government could default on its obligations without a statutory increase in the debt limit in by October 18th.
The House and Senate passed a continuing resolution that would extend funding for government operations from October 1 through December 3, 2021, and President Biden signed the bill on October 1st. On Thursday, October 7th, Senate Majority Leader Chuck Schumer announced that a deal was reached to extend the debt ceiling through December 3rd. The Senate has approved this legislation, and Speaker Pelosi is expected to call the House back into session so that the legislation can be approved and sent to the President for signature in the next week.
Bipartisan Infrastructure Package
The Senate-passed infrastructure bill is awaiting House Floor consideration. A planned vote in late September was postponed when it became clear to Speaker Pelosi that several House members who want to link approval of that legislation to the budget reconciliation bill would vote against the infrastructure bill. The new target date for completion of both bills is the end of October. The infrastructure legislation includes only a handful of tax provisions including the imposition of new information reporting mandates for cryptocurrencies and the early termination of the Employee Retention Credit program after 3Q of 2021.
The Budget Reconciliation Legislation
The major legislation in 2021 with tax provisions is the budget reconciliation bill, which has been drafted to include many of the key Biden agenda items, including provisions targeting large corporations and high-income individuals, middle-class tax relief, tax incentives and new spending on traditional infrastructure projects and “human” infrastructure initiatives, and proposals to address climate change. The budget reconciliation legislation is being considered pursuant to the Fiscal Year 2022 budget resolution that provides reconciliation instructions to the House committees for a package of $3.5 trillion in spending and tax relief provisions, which would be partially offset by corporate and individual tax increases.
The House budget reconciliation bill was sent to the House Rules Committee after the House Budget Committee consolidated legislative material from the Ways & Means Committee and several other House committees into one bill. The House Ways & Means Committee is responsible for spending proposals in key areas such as retirement and health care as well as all tax issues, including tax cuts, tax incentives, and tax increases. House Democratic leadership will modify the bill in the House Rules Committee in order to ensure approval in the House and Senate. The legislation must get 217 votes from Democrats out of a total of 220 in the House (with three current vacancies) in order to pass.
House and Senate Democratic leadership announced that they have agreed on a “framework” for the revenue raising proposals that will be included in the final bill, although no details on the specifics of that framework have been released.
The Senate Finance Committee has not held a committee markup of draft budget reconciliation legislation or announced that such a markup will occur. Instead, it appears that the SFC will negotiate the Senate tax title more informally to be inserted into the Senate version of the overall package that would go directly to the Senate Floor.
Under normal Congressional procedures, a House and Senate version of the bill would be approved in each chamber and then the House and Senate would “conference” the bill to reach a final agreement. There has been discussion, however, of negotiating the bill between the two bodies prior to bringing it to a vote in either the House or Senate, i.e., effectively “pre-conferencing” the bill in order to ensure passage in both chambers.
The Ways & Means Committee bill (“House bill”) includes the following key revenue raising proposals:
- Increase the top corporate tax rate to 26.5% (from 21%)
- Increase the top individual income tax rate to 39.6% and impose a new surtax on the highest-income taxpayers
- Increase the top capital gains rate to 25% and modify the carried interest rules to increase the holding period for assets to qualify for capital gains treatment generally to 5 years
- Limit the section 199A deduction for certain owners of certain pass-through entities
- Provide additional funding for the IRS in order to increase its compliance and enforcement activities
The House bill also includes changes to key international tax rules that were first enacted in the 2017 Tax Cuts and Jobs Act (TCJA). Key international proposals include limitations on interest expense of international financial reporting groups, modification to inbound and outbound international provisions, including global intangible low-taxed income (GILTI), foreign derived intangible income (FDII), foreign tax credit (FTC) rules, base erosion and anti-abuse tax (BEAT), and subpart F income.
Senate/Senate Finance Committee
SFC Chair Wyden (D-OR) has released discussion drafts and draft legislative language on a number of issues that could be considered as revenue raisers in the Senate version of the budget reconciliation legislation discussed above. Some of these proposals were discussed in the September issue of the Washington Tax Insight, and we have covered additional proposals in this issue of the WTS.
Draft legislation to modify the partnership tax rules: SFC Chair Wyden (D-OR) released a discussion draft and legislative language that would make significant changes to the partnership tax rules including addressing issues such as the allocation of income, gain, loss, and deduction; allocation of partnership liabilities; and the tax treatment of publicly traded partnerships (PTPs). The draft bill is intended to address perceived tax avoidance and abuses by partnerships.
Draft legislation on the tax treatment of mutual funds, exchange-traded funds (ETFs), and publicly-traded partnerships: SFC Chair Wyden released draft tax legislation that would directly affect the tax treatment of mutual funds, ETFs, and PTPs and their investors. The proposed legislation would require mutual funds and ETFs, which are taxed as regulated investment companies, to recognize gain when redeeming in-kind appreciated portfolio investments. The legislation would also eliminate the pass-through tax treatment applicable to certain PTPs including master limited partnerships (MLPs) and impose a corporate income tax at the entity level.
Draft legislation on stock buybacks: SFC Chair Wyden released a legislative proposal called the “Stock Buyback Accountability Act,” which would impose a 2% excise tax on the amount that a publicly-traded company spends to buy back its own stock. The excise tax would not apply to the extent the stock buyback is used to fund an employee pension plan, an ESOP, or similar vehicle, is used for employee stock plans, or is below a de minimis threshold. Special rules address the treatment of foreign corporations, while inverted corporations are fully subject to the excise tax.
Treasury and the IRS
Assistant Secretary for Tax Policy Confirmed: The Senate voted 64-34 to confirm Lily Batchelder to serve as Treasury Assistant Secretary for Tax Policy. Ms. Batchelder has been a tax law professor at New York University and her prior experience includes Democratic Chief Tax Counsel to the Senate Finance Committee and Deputy Director of the White House National Economic Council.
Treasury Inspector General for Tax Administration leadership changes: TIGTA has named three people to senior leadership roles including Trevor Nelson as Acting Deputy Inspector General for Investigations; Heather Hill as Deputy Inspector General for Inspections and Evaluations; and Mervin Hyndman as Deputy Inspector General for Mission Support.
COVID-19 Crisis Guidance & Related Issues
Reporting for Paid Family and Sick Leave: The IRS issued Notice 2021-53, which provides new guidance on reporting qualified sick and family leave wages paid for leave in 2021. Qualified leave wages are reported on a 2021 Form W-2, Box 14, or a separate statement. The IRS noted in the guidance that this reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits for the 2021 taxable year under the Families First Act of the American Rescue Plan Act.
Temporary and Proposed Regulations on Recapture of Pandemic-Related Credits: The IRS issued temporary and proposed regulations that allow the IRS to recapture qualified sick and family leave credits and employee retention credits that are erroneously allocated to employers by assessing and collecting them as underpayments of taxes, rather than having to pursue litigation to recapture these credits. The temporary regulations also serve as the proposal regulations. Comments are due by November 9, 2021.
Other Issues and Guidance
IRS Priority Guidance List for 2021-2022: The IRS issued its 2021-2022 Priority Guidance Plan, which lists 193 regulatory and sub-regulatory projects, including regulations, notices, rulings, and procedures, that the IRS plans to address in the current plan year, which is July 1, 2021, to June 30, 2022. If projects included on the prior year plan were not included in the current plan, it means they are no longer considered to be priorities for purposes of allocating resources, although they could be added in the future.
Treasury and IRS Comments on the Status of Certain Regulatory Projects: Representatives of the IRS and Treasury participated in the ABA Tax Section Fall meeting and commented on the status of a variety of regulatory projects including the following.
Guidance or action that could be forthcoming:
- Guidance related to deducting costs related to tax-free spinoffs. The IRS has an active and ongoing compliance campaign to address companies that are incorrectly taking immediate deductions in the years they complete their transactions.
- Guidance for companies that modify their accounting method to comply with final rules under Section 451, clarifying how they should record revenue for tax purposes. Guidance was issued in August of 2021 (Revenue Procedure 2021-34), but the IRS is reviewing the guidance in light of taxpayer comments.
- In October, the IRS will start its Large Partnership Compliance Program, which relies on data analytics to select returns for audit with an initial focus on 2019 returns. This program is similar to an existing program for large corporations.
- Guidance for repatriated intellectual property under Section 367(d)
- Finalizing guidance under Section 482 dealing with an “aggregate” approach to valuation, such as considering the combined value of items and services
- Finalizing foreign tax credit regulations that were proposed in 2020
- Guidance on previously taxed earnings and profits, which will likely be issued in separate packages with the first package related to the timing of adjustments
- Guidance on elections under the passive foreign investment company rules
- Guidance on foreign pension funds under Section 897(l)
- Treasury is still working on guidance on Section 987 gains or losses from foreign currencies and considering ways to simplify the rules.
- The IRS will likely release form and instruction updates this year concerning tax and compliance issues related to the PPP.
- The IRS is considering regulations addressing whether contractors conducting research and development on behalf of another entity can claim a write-off for their R&D expenses.
- The IRS plans to update guidance (Rev. Proc. 2000-50) on software development costs after the TCJA made changes requiring that R&D expenses be capitalized and amortized over 5 years (15 years for research performed outside the US), which are scheduled to take effect in 2022. A proposal approved as part of the Ways & Means budget reconciliation legislation would delay the effective date of the TCJA change until 2026, so the IRS has stated they are monitoring the legislation and considering its impact on the updates they are making to the decades-old guidance.
- The IRS is working on guidance under Section 45Q concerning carbon capture credits.
Guidance that has been paused or is not expected to be issued:
- Regulations under Section 385–designed to prevent US companies from moving profits offshore to avoid taxes and rules that would limit a corporation’s ability to use the losses gained through a merger or acquisition to offset future taxes–have been paused.
- The IRS does not expect to issue any additional guidance on the Employee Retention Credit unless there are changes to the law.
Final Rules on Qualified Improvement Property under Sections 250(b) and 951A(d): The IRS issued final regulations under Sections 250 and 951A addressing the calculation of qualified business asset investment for qualified improvement property under the alternative depreciation system. The regulations also deal with the transition rules relating to the impact on loss accounts of net operating loss carrybacks allowed by the CARES Act. The final regulations affect US shareholders of controlled foreign corporations, domestic corporations eligible for the Section 250 deduction, and taxpayers that claim credits or deductions for foreign income taxes.
Final Rules on Property Distributions from Corporations: The IRS issued final regulations on the treatment of distributions of property from a corporation to a shareholder under Section 301. The guidance was first proposed in 2019 and has been finalized without substantive change. These regulations reflect changes made by the Technical and Miscellaneous Revenue act of 1988, which provide that the amount of a distribution of property made by a corporation to its shareholder is the fair market value of the distributed property. The effective date of the guidance is September 22, 2021.
IRS Rules Related to IRS Administrative Proceedings: The IRS issued final regulations that reflect changes enacted by the Taxpayer First Act that relate to IRS administrative proceedings. The regulations implement new rules regarding the persons who may be provided books, papers, records or other data obtained pursuant to Section 7602 for the sole purpose of providing expert evaluation and assistance to the IRS. The guidance also adopts further limitations on the type of non-governmental attorneys to whom any books, papers, records or other data may be provided. The rules prevent IRS contractors from directly questioning a witness under oath and prevent them from asking the taxpayer’s representative to clarify an objection or assertion of privilege. The rules will be effective as of September 7, 2021.
Instructions for Form 1065, US Return of Partnership Income: The IRS released instructions for Form 1065, US Return of Partnership Income, to reflect the addition of Schedules K-2 and K-3 that are used to report information to their partners about certain international tax provisions. The IRS also released similar instructions for Form 1120-S, US Income Tax Return for an S Corporation which also require the new Schedules K-2 and K-3.
IRS Ends Compliance Campaign for Foreign-Related Issues: The IRS Large Business and International Division has ended the offshore voluntary disclosure program for returns deemed noncompliant due to past unreported foreign financial assets or a failure to file foreign-information returns. The IRS said it would address continued noncompliance through other means including letters and examinations.
Opinion letters for nonprofit organizations retirement plans: The IRS issued Revenue Procedure 2021-37, which sets forth new procedures for issuing opinion letters for nonprofit organizations’ pre-approved retirement plans to closer align them with the rules for for-profit company plans. They also issued Revenue Procedure 2021-38, which extends the deadline for adopting interim amendments to 401(a) plans to match the deadline for 403(b) plans.
Private Foundations – No Rulings Area: The IRS issued Revenue Procedure 2021-40, which states that the IRS will not issue letter rulings on whether certain transactions are self-dealing under Section 4941(d). A complete list of areas on which the IRS will not issue letter rulings or determination letters is found in Revenue Procedure 2021-03.
Special Per Diem Rates for 2021-2022: The IRS issued Notice 2021-51, which sets new special per diem rates to substantiate expenses for lodging, meals, and incidental expenses when traveling away from home. The guidance provides the special transportation industry rate, the rate for the incidental-expenses-only deduction, and the rates and list of high-cost localities for purposes of the high-law substantiation method. The rules will take effect on October 1, 2021.
Foreign Insurers – Computing Net Investment Income: The IRS issued Revenue Procedure 2021-41, which provides the domestic asset/liability percentages and domestic investment yields for foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under Section 842(b) for taxable years beginning in 2020. The guidance also provides instructions for computing foreign insurance companies’ liabilities for the estimated tax and installment payments of estimated tax for taxable years beginning after December 31, 2019.
Request for Comments on several forms related to FATCA: Treasury and the IRS published a notice and request for comments on forms related to foreign account tax compliance act registration (FATCA), including Forms 8966, 8957, 8966-C, 8809-I, and 8508-I.
IRS Seeks comments on Energy Efficient Home Guidance: The IRS requested public comments on guidance it published on methods for calculating energy consumption for a tax credit, specifically Notice 2008-35 and Notice 2008-36, which established additional procedures for calculating a manufactured home’s energy use for the New Energy Efficient Home Credit.
Audit Technique Guide: The IRS released an audit technique guide related to activities not engaged in for profit (hobby losses) under Section 183.
IRS Practice Units: The IRS published a practice unit related to the limitation of exchange gain or loss on payment or disposition of debt instrument. They also issued a practice unit on general principles for foreign tax credits as changed by the TCJA.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
Plans are in place for a final OECD global agreement to be reached on several fundamental changes to international tax rules by October 2021, which coincides with work in the US Congress on major changes to US international tax laws as part of the $3.5 trillion budget reconciliation bill. The G-20 Finance Ministers met in July and endorsed “the key components of the two pillars on the reallocation of profits of multinational enterprises and an effective global minimum tax.” They called on the Inclusive Framework members to finalize the design elements within the agreed framework together with a detailed plan for the implementation of the two pillars by the next G-20 meeting on October 15-16, 2021.
Countries are working on resolving the final details of the proposal approved by 134 jurisdictions, which includes both a 15% global minimum tax and a reallocation of taxing rights to countries that have customers but where companies lack a taxable physical presence. It will continue to be a challenge to reach agreement by the fall of 2021 within the Inclusive Framework on Pillar One and Pillar Two of the OECD project.
Treasury Secretary Yellen and French Finance Minister Le Maire, however, recently spoke by phone and agreed on the need to conclude a global tax deal by the end of October, both announcing that they believe the deadline can be met. The President of the European Union stated in her annual state of the union address that the European Commission would do everything in its power to help secure the global tax deal. Three EU countries have not signed onto the deal at this time – Ireland, Hungary, and Estonia in addition to 3 other holdouts – Kenya, Nigeria, and Sri Lanka.
At the same time, the EU budget commissioner announced at a budget committee meeting that a digital levy will form part of the EU’s long-term budget that is intended to contribute to covering the cost of pandemic-related borrowing. The details of the levy will be announced after the announcement of the global tax deal at the OECD. OECD representatives have stated that not all forms of digital taxation would conflict with the global tax deal, and that a country would have the right to introduce a value-added tax on digital services noting that it should have broad coverage and a low rate.
OECD – Miscellaneous
The OECD has released an updated version of the Model Manual on Exchange of Information for Tax Purposes, which is jointly published by the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, the World Bank Group, and the African Development Bank. The new version expands the coverage of the original manual released in 2013 by now covering a broader scope of information exchange topics including group and bulk requests, simultaneous tax examinations by two or more jurisdictions, and tax examinations abroad to collect information in a foreign jurisdiction.
The OECD also released an update on work of the Forum on Tax Administration including work on the “Tax Administration 3.0” discussion paper released in December or 2020 and the voluntary International Compliance Assurance Program.
The European Commission issued a report on the rewrite of the EU VAT rules, which they said was progressing well. They announced that the work is currently focused on a positive list of supplies to which the reduced rates may apply rather than on a negative list of items ineligible for the tax break. The EU tax commission said that the negotiations “are still driven by the idea that the application of reduced or zero VAT rates should, alongside other criteria, take into account social policy aspects.”
The UK has announced that they will delay the next phases of its Making Tax Digital (MTD) initiative by one year. The project is a plan for digitalizing how the country collects tax with the process for value-added tax having been established in 2019 and a planned expansion to cover personal income tax self-assessment in 2023. MTD for Income Tax will now be mandated for businesses and landlords with a business income over 10,000 pounds a year starting in April 2024. MTD for most partnerships will be delayed from April 2024 to April 2025.