Tax Policy Update

NUMBER OF THE WEEK: 13

Photo credit: expatbostonians.com

The number of workdays left on the congressional calendar before the startof August recess, July 31. BUT…it looks like Senate Majority Leader MitchMcConnell (R-KY) is getting ready todelay the summer recess by two weeks. Delay or no delay, the to-do list goes something like this: healthcare,budget and appropriations, and debt ceiling. Those who have been followingtax reform developments already know not to expect anything major to dropbefore recess — according to comments made by the White House, tax reformdetails aren’t coming until September.

While there may be some reprieve on the tax front, it is touch and go forthe Senate GOP’s healthcare bill. McConnell’s failure to hold a vote beforethe Fourth of July recess has made things a little more difficult, asSenate Republicans got an earful during town hall gatherings back home (forthose brave enough to hold such meetings anyway). Senate Republicans aremeeting behind closed doors this week to assess whether there’s a realisticpath forward. Always one to brighten things up, Sen. John McCain (R-AZ)believes the bill is “probably…dead.”

Before the summer break, Republicans will also have to make some headway onthe FY2018 budget resolution. Although Congress’s past budget blueprintshave often been greeted with a sigh and a shrug, the FY2018 budgetresolution is crucial, as it will carry the reconciliation instructions forthe GOP’s tax reform plan. After two postponements due to GOP infightingover spending levels, the House Budget Committee may finally be ready tomark up the resolution this week. It remains to be seen whether lawmakerscan get this across the finish line before the start of the month-longrecess. Although the House Appropriations Committee has been busy churningout the annual spending bills, it is still unclear what the GOP’s plan isfor these funding measures. CR, anyone?

Then there’s also the matter of raising the debt ceiling. Although thegovernment can stretch the statutory limit to mid-October, TreasurySecretary Steven Mnuchin would much prefer Congress to raise it beforeleaving for recess. Sounds easy enough with a Republican Congress exceptGOP lawmakers are still bickering among themselves on whether to do a“clean” increase or attach some spending cuts to the legislation.

And with that…welcome back, Congress!

LEGISLATIVE LANDSCAPE

Follow the Yellow Brick Road. If only it were that easy. The Senate GOP is back from the July Fourthrecess this week and with only about 13 working days left until Augustrecess, they’re up against a tight deadline to pass their healthcarelegislation. Senate Majority Leader Mitch McConnell isn’t ready to give up— GOP leadership announced that it plans to unveil a revamped draft of itslegislation to repeal and replace Obamacare by the end of this week. Thenew bill text may be released as soon as July 13, with a CBO score tofollow early next week. Depending on feedback for the bill, a vote may bescheduled for the end of next week or the week before August recess.McConnell is expected to brief …

Medicaid, HSAs, and Freedom Plans, Oh My! Major holdups littering the path to victory for the GOP includedisagreements on how to handle scaling back Obamacare’s Medicaid expansionand a new initiative called “Freedom Plans” from Sens. Ted Cruz (R-TX) andMike Lee (R-UT).

Freedom Plans are a conservative initiative designed to lower premiums andcreate parity between individual market and employer plans. The Cruz-Leeplan would allow the following …

Red Brick Road. As Senate Republicans struggle to reconcile ideological differences withinthe party, leadership is considering various fallback options, in case theGOP is unable to pass healthcare legislation before August recess.

Conservatives in both chambers are already entertaining the idea ofrepealing Obamacare without a replacement on hand. Sens. Ted Cruz, MikeLee, Rand Paul (R-KY), and Ben Sasse (R-NE), as well as the TrumpAdministration have all expressed support for this strategy. However, thisplan is unlikely to gain any traction. Several senators have alreadystrongly opposed this idea, including McConnell who has clearly stated that“doing nothing” is not an option since the individual markets need to befixed.

To that end, McConnell and others in the GOP leadership have beenconsidering the possibility of bipartisan cooperation. The Senate GOP maywork with Democrats on a narrower bill to stabilize Obamacare’s individualmarkets and lower premiums.Sen. Lindsey Graham (R-SC) has expressed support for this approach,noting that “Obamacare is going to fail… My advice is, if it does fail, work together ina bipartisan fashion to replace it.”

Energy Tax Bills Want Some Attention.Not all tax provisions are waiting to hitch a ride on the GOP’scomprehensive tax reform legislation. After all, there’s a very realpossibility that tax reform isn’t happening in 2017. Some lawmakers arehoping that a series of energy tax items could get some love on the side.

Of note is the extension of the Nuclear Production Tax Credit. In June, abill (H.R. 1551) to extend the availability of the nuclear PTC beyond the 2020 deadlinefor nuclear power plants easily cleared the House by voice vote.Additionally, there’s a push to fix the Investment Tax Credit — itsextension back in 2015 left off a number of qualifying sources (e.g. fuelcells, small wind projects, combined heat and power, etc.). It’s hard tosee Congress …

Hatch’s Helpers. Following up on his request for public input on tax reform, Senate FinanceChairman Orrin Hatch (R-UT) has asked certain members of the tax-writingcommittee to take lead on developing specific policy ideas for tax reform:

• International tax – Sens. Rob Portman (R-OH) and Mike Enzi (R-WY)
• Individual tax – Sen. Chuck Grassley (R-IA)
• Business tax & estate tax – Sen. John Thune (R-SD)
• Energy tax – Sens. Bill Cassidy (R-LA) and Dean Heller (R-NV)
• Agriculture tax – Sen. Pat Roberts (R-KS)

Hatch’s decision is a repeat of the committee’s tax reform efforts from twoyears ago, when he convened five working groups to examine key aspects of atax overhaul. Although Hatch said that the process should not be limited to“just Republican input” and that he would like to see Democrats come to thetable, no Democratic member has been invited to participate in theseworking groups.

REGULATORY WORLD

Here’s Another Treasury Report. In response to the April 21 executive order on “Identifying and ReducingTax Regulatory Burden,” the Treasury Department issued Notice 2017-38,an interim report identifying eight regulations that are burdensome andoverly complex. The list includes debt-equity and estate tax issues.

As a refresher, the executive order directed the Treasury to review allsignificant tax regulations issued in 2016 that may:

• impose an undue financial burden on U.S. taxpayers;
• add undue complexity to the federal tax laws; or
• exceed the statutory authority of the Internal Revenue Service.

From that initial review, Treasury flagged the following eight regulations,noting that they meet at least “one of the first two criteria” specified inthe executive order:

1. Proposed regulations under Section 103 on Definition of Political Subdivision
2. Temporary regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs)
3. Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview
4. Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes
5. Temporary Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities
6. Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness
7. Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit
8. Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations

It is interesting to note that the interim report does not …

INTERN-VENTION

Special thanks to McGuireWoods’ summer interns Colin Russell and BayzaAnteneh for contributing to this week’s Tax Policy Update. Check outtheir blurbs below.

Don’t Fall for It.The IRS is issuing warnings to tax professionals that they are beingtargeted by hackers out to steal taxpayer information.

The IRS is getting three to five data theft reports a week from taxpractitioners. Most of these scams involve “spear phishing,” wherefraudsters use legitimate-looking emails to install malware on taxpreparers’ computers or try to trick them into divulging usernames andpasswords.

But in an effort to raise awareness, there is a 10-week campaign called”Don’t Take the Bait” that the IRS, state tax agencies, and the taxindustry kicked off on July 11. The campaign includes advisories on spearphishing, business identity theft, account takeovers, ransomware, businessemail breaches and theft of Electronic Filing Identification Numbers(EFINs). In addition, security tips from the IRS, FBI and the NationalInstitute of Standards and Technology are provided.

I Know What You Did Last Summer: IRS Budget Slashed Again. Under theFY2018 Financial Services appropriations billapproved by a House subcommittee last week, the Internal Revenue Servicewould receive $11.1 billion in the new fiscal year — about $149 millionless than current funding levels. The House bill is a little more generouscompared to President Trump’s request, which proposed to cut the agency’sfunding by $250 million.

Despite the overall reduction, the House bill intends to provide additionalfunding to help the tax-collecting agency bolster its cybersecurity andinformation technology. The bill also includes provisions that addressunderperformance and poor management at the IRS:

• A prohibition on a proposed regulation related to political activities and the tax-exempt status of 501(c)(4) organizations;
• A prohibition on funds for bonuses or to rehire former employees unless employee conduct and tax compliance is given consideration;
• A prohibition on funds for the IRS to target groups for regulatory scrutiny based on their ideological beliefs;
• A prohibition on funds for the IRS to target individuals for exercising their First Amendment rights;
• A new prohibition on funds to determine church exemptions unless the IRS Commissioner has consented and Congress has been notified; and
• A requirement for extensive reporting on IRS spending and information technology.

Ways & Means Talks Payroll Tax Compliance. On June 29, the Social Security and Oversight Subcommittees of the HouseWays & Means Committee held a joint hearing on the challenges andcomplexity of Section 218 agreements and payroll tax compliance. Theyexamined the roles of the Social Security Administration (SSA), theInternal Revenue Service (IRS), and state social security administratorsplay in overseeing social security coverage for state and localgovernments.

What’s the problem?When social security was created, state and local government employees wereinitially excluded from receiving benefits. Overtime, laws were changed toallow state and local governments to extend the coverage to theiremployees. Now, the definition of “covered employee” varies drastically bystate.

But not so fast.SSA and IRS officials who testified at the hearing stated that this is notreally an issue. Only on rare occasions are public employers found to beout of compliance after being audited by the IRS. If a public employer isfound to be noncompliant, it is usually due to the lack of legal knowledge,not fraud or purposeful wrongdoing.

Senate Bill Gives Workers a Piece of the (Stock) Pie. A group of bipartisan lawmakers reintroduced a bill to make it easier forbusinesses and startups to offer their workers stock options. The taximplications often make this impractical for many rank and file employees.

To address this issue, the Empowering Employees through Stock Ownership Act would lengthen thetime period for employees to pay income taxes on their stock options to upto seven years. The bill would also require companies to offer stockoptions to at least 80 percent of their workers to qualify for the taxbenefit. In an effort to further promote these benefits to everydayemployees, certain categories of employees would not be eligible, includingmajority owners, corporate officers and executives.

The bill has garnered support from more than 60 companies, includingGitHub, Medium, and Foursquare and has bipartisan support in Congress.

Thebill(S. 1444) was introduced by Sens. Mark Warner (D-VA) and Dean Heller(R-NV). Reps. Erik Paulsen (R-MN) and Joe Crowley (D-NY) introduced acompanion bill(H.R. 3084) in the House.

COMMANDER-IN-TWEET

LINE ITEMS

1. In a July 5 letter, House Financial Services Chairman Jeb Hensarling (R-TX) threatened Consumer Financial Protection Bureau Director Richard Cordray with contempt, accusing him of failing to respond fully to a subpoena request. Specifically, Hensarling claimed that the CFPB missed a May 2 deadline for sending information related to a proposed rule on arbitration agreements.
2. The Internal Revenue Service launched a new website to help companies make sense of the OECD’s country-by-country reporting requirements.
3. The Joint Committee on Taxation issued its estimates for the revenue provisions included in the president’s FY2018 budget request. According to the one-page score report, requiring a valid social security number to claim the Child Tax Credit and Earned Income Tax Credit would help raise about $30 billion. Increasing the oversight of paid tax return preparers would generate $149 million, and providing the IRS with more flexibility to fix correctable errors would raise $283 million.
4. A House appropriations subcommittee approved the FY 2018 Financial Services spending bill, which includes provisions to bring the FDIC, FHFA, OCC, NCUA, and CFPB under the regular congressional appropriations process. The bill would also repeal the Volcker Rule’s ban on proprietary trading. The FY 2018 Financial Services measure is not expected to pass as a standalone bill due to these problematic provisions.
5. Chris Campbell, the Republican staff director for the Senate Finance Committee, has been tapped to serve as assistant secretary for financial institutions at the Treasury Department.
6. The Department of Labor has issued a request for information in connection to the Fiduciary Rule. The request for information specifically seeks public input regarding potential new exemptions or revisions to the rule as well as the advisability of extending the Jan. 1, 2018 applicability date of certain provisions in the BIC exemption. Comments regarding the extension of the applicability date are due July 21, 2017. Comments in response to all other questions in the request are due Aug. 7, 2017.

IN THE QUEUE

Congressional Activity

Wednesday, 7/12

House Financial Services Committee
Subcommittee hearing to examine legislative proposal to provide targetedregulatory relief for community financial institutions.

House Financial Services Committee
Hearing on the Federal Reserve’s semi-annual monetary policy report and thestate of the economy. Fed Chair Janet Yellen is set to testify.

Thursday, 7/13

Senate Banking Committee
Hearing on the Federal Reserve’s semi-annual monetary policy report toCongress. Fed Chair Janet Yellen is set to testify.

House Financial Services Committee
Subcommittee hearing on the impact of the Fiduciary Rule on capitalmarkets.

House Ways and Means Committee
Tax Policy Subcommittee hearing on the benefits of tax reform for smallbusinesses and job creation.

Agency Activity

Tuesday, 7/11

FDIC
Meeting of the FDIC Advisory Committee on Community Banking to provideadvice and recommendations on a broad range of policy issues that haveparticular impact on small community banks throughout the United States andthe local communities they serve, with a focus on rural areas.

Internal Revenue Service
An open meeting of the Taxpayer Advocacy Panel Tax Forms and PublicationsProject Committee – the Taxpayer Advocacy Panel is soliciting publiccomments, ideas and suggestions on improving customer service at theInternal Revenue Service.

Thursday, 7/13

Internal Revenue Service
The Taxpayer Advocacy Panel is soliciting public comments, ideas, andsuggestions on improving customer service at the Internal Revenue Service.The agenda will include a discussion on various letters, and other issuesrelated to written communications from the IRS.

Other Activity

Tuesday, 7/11

Bipartisan Policy Center
A discussion panel on “Solutions to Long-Term Care Financing in PoliticallyChallenging Times” with special guests Tom Daschle and Bill Frist.

Wednesday, 7/12

National Economic Club of New York
SEC Chairman Jay Clayton to deliver his first major public speech – he isexpected to discuss the commission’s plans and agenda.

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