Taxation & Representation, Nov. 29, 2023
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Taxation & Representation, Nov. 29, 2023

November 29, 2023

By Brownstein Tax Policy Team


Legislative Lowdown

Biden Signs Two-Step Continuing Resolution into 2024. On Nov. 15, Congress staved off a government shutdown by passing a “laddered” continuing resolution (CR) with strong bipartisan support—the House passed the measure in a 336-95 vote and the Senate passed it in an 87-11 vote. Speaker Mike Johnson (R-LA) and GOP leadership’s “laddered” Continuing Resolution (CR) creates different funding deadlines for the 12 fiscal year (FY) 2024 bills. The measure provides a Jan. 19 deadline for four bills (Agriculture-FDA, Energy and Water, Military Construction-VA, and Transportation-HUD) and a Feb. 2 deadline for eight bills (Commerce-Justice-Science, Defense, Financial Services-General Government, Homeland Security, Interior-Environment, Labor-HHS-Education, Legislative Branch, and State and Foreign Operations). Speaker Johnson ruled out an additional clean stopgap funding bill for the next round of funding, setting up the possibility for a partial government shutdown in late January or a full shutdown in early February. Additionally, the Fiscal Responsibility Act (P.L. 118-5) provides that 1% budget cuts would be triggered in January if Congress does not pass all 12 full-year funding measures, but the across-the-board funding cuts would not impact agencies until April 30. Members of Congress are currently debating whether a year-long CR lasting until September 2024 would trigger the cuts, as the law states that cuts would take place if the government is operating under a short-term CR for “part of” the fiscal year. Democrats argue that a stopgap until September would count as a full year, allowing for no cuts to funding, while Republicans say that a CR until September would trigger the cuts.
Senate Majority Leader Chuck Schumer (D-NY) and appropriators are focusing on passing a “megabus” including the remaining nine spending bills in an attempt to start a conference negotiation with the House. This move is unlikely to occur before the new year, and the House and Senate remain far apart on topline numbers. Both Leader Schumer and Senate Appropriations Committee Chair Patty Murray (D-WA) say they will not agree to spending levels below those set by the debt limit deal that then-Speaker Kevin McCarthy (R-CA) and President Biden agreed to in May. Additionally, some Republicans are proposing a deficit reduction commission as part of a potential spending deal. Sens. Mitt Romney (R-UT) and Joe Machin (D-WV) recently introduced the Fiscal Stability Act (S. 3262) to establish a bicameral fiscal commission to find legislative solutions to decrease the debt. Both the House and Senate are scheduled to adjourn before the holidays at the end of the week of Dec. 11. Both chambers are scheduled to be back in session on Jan. 8, providing few legislative days before the first tranche of funding bills expires on Jan. 19.
Schumer Releases Dear Colleague Letter Outlining Priorities for Last 11 Days of Session. On Sunday, Nov. 26, Leader Chuck Schumer (D-NY) sent a Dear Colleague letter outlining his priorities for the last three weeks of the 2023 Senate session. He asserted that bipartisan cooperation will be needed to move key bills through the Senate and that senators should “expect long days and nights, and potentially weekends in December. He detailed that the House and Senate would need to work on the first tranche of appropriations bills: Agriculture, Energy and Water, MilCon-VA, and Transportation-HUD, before the Jan. 19 deadline. Leader Schumer also noted that he intends to bring President Biden’s national security supplemental package to the floor as soon as the week of Dec. 4. Leader Schumer said that Republican demands for border provisions as a condition for aid are currently unworkable. Another factor complicating negotiations is that some progressive Democrats are calling for conditioning aid to Israel on Israel’s compliance with international humanitarian law.
In the letter, Leader Schumer also detailed that the Senate would pass the National Defense Authorization Act (NDAA) during the work period and work with House leadership to pass the NDAA before the end of the year. Both the House and Senate have passed their own versions of the NDAA but have not come to an agreement on controversial provisions related to abortion, diversity and other social policies for a final bill to reach President Biden. Additionally, Leader Schumer said that he would bring a Rules Committee resolution to the floor in the coming weeks that would allow the Senate to quickly confirm over 350 military nominations blocked by Sen. Tommy Tuberville (R-AL) over the Pentagon’s abortion policies. The letter also notes that the Senate will continue working to confirm President Biden’s nominees to the federal bench. Notably absent from the letter is an extension of the Federal Aviation Administration (FAA). Multiyear reauthorization bills have advanced in the House and Senate, with a one-year or shorter extension as the most likely path forward. Additionally, the Section 702 foreign surveillance authority is set to expire on Dec. 31 and has been a subject of debate over a provision that allows surveillance of U.S. citizens with connections to foreign persons. The most likely outcome for that is also a short-term extension, given the compressed timeline.
Treasury and IRS Issue Proposed Regulations on Section 48 ITC. On Nov. 17, the Treasury Department and the Internal Revenue Service (IRS) released a Notice of Proposed Rulemaking that includes proposed rules implementing the changes to the section 48 investment tax credit (ITC) enacted by the Inflation Reduction Act of 2022. The proposed regulations update the types of energy property eligible for the energy credit, including: energy storage technology, qualified biogas property, microgrid controllers, dynamic glass, interconnect property, and linear generator assembly property.
The proposed rules also provide additional requirements and rules generally applicable to energy property, including new rules for determining functionally interdependent components and property that is an integral part of an energy property. For retrofit projects, the proposed regulations apply an “80/20 Rule” under which a qualifying project must include at least 80% new energy property. Other provisions in the proposed regulations address dual-use property, separate ownership of components of an energy property, property that could be eligible for multiple federal income tax credits, and
elections to treat qualified facilities eligible for the renewable electricity production credit instead as property eligible for the energy credit. Additionally, the proposed regulations also clarify the interaction between the new credit transfer rules and the energy-credit recapture rules in the case of a failure to satisfy the prevailing-wage requirements.
The new ITC guidance applies to qualifying energy property the construction of which commences before Dec. 31, 2024. Thereafter, unless current law is extended, the ITC switches to the new technology-neutral approach under section 48E. Taxpayers may rely on the proposed regulations with respect to property that is placed in service after Dec. 31, 2022, and during a taxable year beginning on or before the date final regulations are published in the Federal Register, provided the rules are applied in their entirety and in a consistent manner.
Notably, the Notice of Proposed Rulemaking also withdraws and reproposes with clarifications the proposed regulations relating to the prevailing-wage and apprenticeship provisions required to qualify for the maximum value of many of the IRA energy tax credits.
The proposed regulations are open for public comment for 60 days (closing on Jan. 21, 2024).
Senate Democrats Introduce Carried Interest Bill. On Nov. 15, Senate Finance Committee Chair Ron Wyden (D-OR) and Sens. Sheldon Whitehouse (D-RI) and Angus King (I-ME) introduced the Ending the Carried Interest Loophole Act (S. 3317), which would end the tax break on carried interest that they said disproportionately benefits wealthy Americans. The bill would prevent the recharacterization of compensation earned by hedge fund managers and requires them to recognize their annual compensation, which would be taxed at ordinary income rates. Other Senate Democrats that co-sponsored the bill were Sens. Elizabeth Warren (D-MA), Bernie Sanders (I-VT), Brian Schatz (D-HI), Jack Reed (D-RI), John Fetterman (D-PA), Ed Markey (D-MA), and Mazie Hirono (D-HI). The bill text was released alongside a press release, along with a summary and one-pager of the bill.




Tax Worldview

UN Proceeds with New Global Tax Reform Plan; Treasury Pushes for Delay in Pillar One Deadline. With the support of 125 countries, the United Nations voted on Nov. 22 to establish a working group on international tax rules. The new working group will be a direct challenge to the yearslong effort by the Organisation for Economic Cooperation and Development (OECD) to implement a global tax regime. The UN effort met with opposition from 48 countries, including the United States and the EU countries that have championed the OECD effort. Developing countries have led the campaign for an alternative to the OECD’s two-pillar approach based on concerns that the framework would only benefit developed nations.
While a number of countries have started the process to implement the OECD’s Pillar Two 15% global minimum tax, the Pillar One profits-allocation regime continues to draw opposition from Congress, and the required multilateral agreement to implement Pillar One remains elusive. Canada’s decision to proceed with a digital sales tax (DST) in the absence of a Pillar One agreement, despite broad agreement to postpone such taxes until 2025, presents another threat, especially to U.S. businesses that will bear much of the burden if DSTs continue to spread.
Treasury Department officials are working with the OECD’s Inclusive Framework to establish a new timeline for signing the Pillar One agreement, with a new target of the first half of 2024. Deputy Assistant Secretary for International Tax Affairs Michael Plowgian also stressed the importance of extending the hiatus for implementation of digital sales taxes (DST). The delay would provide additional time to resolve objections, namely from India, Colombia and Brazil, to the draft Pillar One treaty released in October. The Treasury Department has requested public comments on the draft by Dec. 11, and Treasury Secretary Janet Yellen has stated that the United States would not be able to sign the agreement by the original year-end deadline given the outstanding issues.
U.S.-Chile Tax Treaty Advances. With the unanimous support of Chile’s Senate, the tax treaty between the United States and Chile advanced a step closer to taking effect on Nov. 22. Originally signed in 2010, the treaty was previously ratified by Chile in 2016. Due to changes in U.S. law in 2017, the treaty required a side agreement, known as reservation language, before it could be ratified by the U.S. Senate in July of this year. The additional provisions, however, required new approvals by the Chilean government. Having now cleared Chile’s legislature, the agreement must be signed by President Gabriel Boric, and once official notifications are exchanged between the two counties, the agreement will come into force.
India Considers Tax Cuts on EVs. On Nov. 13, Indian Minister of Commerce and Industry Piyush Goyal visited Tesla’s factory in Fremont, California, as part of an effort by the Indian government to increase the manufacturing of electric vehicles (EVs) and EV components in this country. Goyal noted that Tesla is planning to double its imports of EV components from India, and that the government is looking to potentially cut taxes on EV imports to further boost EV production. In addition, India is considering a policy that would allow international car manufacturers to import battery-powered vehicles at special rates, if the manufacturer makes a commitment to eventually build EVs in India. Previous Indian efforts to increase EV adoption in the country include the launch of a $3.1 billion incentive program in 2021.



1111 Constitution Avenue

IRS Announces Another Delay in Form 1099-K Reporting Threshold for 2023. On Nov. 21, the Internal Revenue Service (IRS) released Notice 2023-74 announcing a delay of the $600 Form 1099-K reporting threshold for third-party settlement organizations for calendar year 2023.
The American Rescue Plan Act (ARPA), passed in 2021, required third-party settlement organizations (TPSOs), such as online marketplaces and platform companies, to report payments of more than $600 for the sale of goods and services on a Form 1099-K starting in 2022. Prior to the passage of ARPA, the reporting requirement applied only to the sale of goods and services involving more than 200 transactions per year totaling over $20,000. The lower reporting threshold of $600 was never implemented in 2022; instead, the IRS temporarily delayed the requirement.
In a press release, the IRS noted that due to concerns from taxpayers, the agency will treat 2023 as an additional transition year. The IRS stated that this action “will reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn’t expect one and may not have a tax obligation.”
The IRS is also planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold. The reporting requirements do not apply to personal transactions (e.g., birthday gifts or sharing the cost of a meal). These payments are not taxable and should not be reported on Form 1099-K. However, the casual sale of goods and services, including selling used personal items such as clothing or furniture, or selling tickets could generate a Form 1099-K, even if the seller generates a loss. Further complicating matters for the IRS is that anyone who receives a Form 1099-K—an estimated 44 million taxpayers—cannot participate in the agency’s new Direct File ”pilot” in 2024.
The IRS commissioner noted that the agency “spent many months gathering feedback from third-party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements. Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion as we continue to look at changes to the Form 1040. It’s clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area.”
The IRS has requested feedback on the proposed 2024 threshold of $5,000 and how to focus reporting on the narrow universe of taxable transactions. The chair of the Ways and Means Committee, Rep. Jason Smith (R-MO), released a statement criticizing the $5,000 threshold noting that it would still result in the “IRS send[ing] at least 30 million new 1099-K tax forms” in January 2024.
The IRS’s decision to once again delay the implementation of the $600 Form 1099-K reporting threshold comes on the heels of Congress’s failure to pass a year-end tax bill. The IRS’s move buys Congress additional time to change the reporting deadline through legislation, though there is still no agreement on what a revised threshold should be. Republicans largely support legislation to revert the threshold back to pre-ARPA levels. There is only one bipartisan proposal—Sens. Sherrod Brown (D-OH) and Bill Cassidy (R-LA) introduced the Red Tape Reduction Act, which would increase the reporting threshold for third-party payment platforms to issue a Form 1099-K to $10,000 in annual aggregate transaction value or less than 50 total transactions.



At a Glance

PTEP Regulations Delayed to First Half of 2024. At a conference on Nov. 14, the special counsel in the IRS Office of Associate Chief Counsel, Paul McLaughlin, stated that proposed regulations on previously taxed earnings and profits are to be expected in “the first half of 2024.” This is a further delay in the IRS’s timeline, as IRS officials indicated in October that guidance was expected in “early 2024.” McLaughlin noted that the regs will address shareholder-level and foreign corporation-level accounting rules, currency gain and loss, and scenarios in which controlled foreign corporations are owned by partnership or by split-ownership structures.
Werfel Promotes Direct File Program as ‘Competitive” With Paid Options. At a conference on Nov. 14, IRS Commissioner Daniel Werfel promoted the agency-run Direct File program, which is slated to pilot during the next tax-filing season, as necessary because it would give competition to the paid tax-preparation industry. Though Republicans and the tax-prep industry have stated that the program is unnecessary, Commissioner Werfel said that the Direct File program would motivate paid tax-prep companies to “keep their product as good as possible so that there isn’t a demand that’s created."




Brownstein Bookshelf

  • Repatriation Tax on the Docket. Ann Marimow and Julie Zauzmer Weil explain in the Washington Post how a case coming before the Supreme Court might strike a provision of the 2017 tax law and could preemptively block efforts to establish a wealth tax. In Moore v. United States, the justices will decide whether the so-called “repatriation” tax, created as part of the Tax Cuts and Jobs Act, is an unconstitutional tax on unrealized gains. The court is scheduled to hear oral arguments on Dec. 5.
  • UN Challenges OECD. Reuters reporter Leigh Thomas writes the UN established an intergovernmental group on international tax rules last week. The move was opposed by the United States and other developed countries but supported by developing countries. It could complicate the OECD’s efforts to implement an international tax framework that has been the subject of negotiations for several years.
  • Wrong Track. In his latest article, Heritage Foundation Senior Policy Analyst David Ditch argues taxpayer subsidies for Amtrak should be eliminated. He suggests that since Amtrak’s ridership numbers only account for a fraction of a percentage of all travel modes, its share of transportation funding is disproportionate to its actual needs.
  • State Safety Nets Examined. Tara Watson, director of the Center for Economic Security and Opportunity at Brookings, and Gabriela Goodman, research assistant at Brookings, recently published their research on the generosity of each state’s safety net programs. They found safety net programs have become more generous since 2001, with a significant increase driven by temporary pandemic-era expansions to SNAP and the CTC.



Hearings and Events


House Ways and Means Committee

Today, the Work and Welfare, and Oversight Subcommittees will hold a hearing titled "Strengthening the Child Support Enforcement Program for States and Tribes."
Tomorrow, full committee will hold a markup of the following three tax bills: 
H.R. 5988 – “The US-Taiwan Expedited Double Taxation Relief Act.”   
H.R. 1432 - “VSO Equal Tax Treatment Act,” or “VETT Act.”  
H.R. 6408 - A Bill to Terminate the Tax-Exempt Status of Terrorist Supporting Organizations

Senate Finance Committee
The Senate Finance Committee has no hearings scheduled for this week.