Taxation & Representation, Oct. 25, 2023
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Taxation & Representation, Oct. 25, 2023

October 25, 2023

By Brownstein Tax Policy Team


Legislative Lowdown

House Speakership Update: Jordan’s Candidacy Dropped; Search for Next Speaker Continues. The week of Oct. 16 represented Rep. Jim Jordan’s (R-OH) rise and fall as the House Republican Conference’s nominee to be speaker: after a failed first vote on Oct. 17, Rep. Jordan failed to garner enough support during votes on Oct. 18 and 19, which resulted in the conference voting to withdraw his name as speaker-designate on Oct. 20. Nine representatives—House Majority Whip Tom Emmer (R-MN), as well as Reps. Austin Scott (R-GA), Byron Donalds (R-FL), Kevin Hern (R-OK), Gary Palmer (R-AL), Jack Bergman (R-MI), Mike Johnson (R-LA), Pete Sessions (R-TX) and Dan Meuser (R-PA)—announced that they would seek to replace Rep. Jordan as speaker-designate. The conference met in a closed-door meeting on the evening of Oct. 23 for the candidates to deliver their pitches to become the next nominee. The conference voted for their next nominee on Oct. 24. After several rounds of secret ballots, House Republicans narrowed their crowded field for the speakership nomination down to Reps. Emmer and Johnson, with Rep. Emmer ultimately prevailing as the nominee. After Rep. Emmer emerged as the winner, former President Donald Trump announced his opposition to Rep. Emmer’s nomination, he lost the support of several hardline conservatives. The conference subsequently reconvened, and Rep. Emmer dropped out as speaker-designee shortly thereafter. As of this writing, Rep. Johnson is once again the speaker designee. 
Senate Democrats Spar over Hydrogen Credit Guidance. On Oct. 16, eight Democratic senators, led by Sens. Sheldon Whitehouse (D-RI) and Jeff Merkley (D-OR), sent a letter to Treasury Secretary Janet Yellen and Climate Counselor Ethan Zindler, urging the agency to release guidance regarding the Clean Hydrogen Production Credit (§45V of the Inflation Reduction Act [IRA, Pub. L. 117-169]) that ensures the credit is strictly applied only to qualify for projects using new clean energy sources. The letter states that the credit “must not be applied to any projects that directly or indirectly increase power sector [greenhouse gas] emissions” as this would run the risk of a clean power market whose “gap in grid capacity is backfilled by fossil fuel generation,” potentially resulting in hydrogen production whose fossil fuel emissions are even higher than in conventional energy production.
A letter led by Sen. Maria Cantwell (D-WA) with nine other Senate Democrats is expected to urge a counter position, asking the Treasury Department not to apply additional restrictions—the so-called “three pillars”—to limit the flexibility of the hydrogen credit. Sen. Cantwell and other expected co-signers of the letter represent states that have been awarded billions in federal funding to build regional hydrogen hubs. Some of these hubs would create so-called “blue hydrogen” derived from natural gas, which some environmental groups—and the Senate Democrats joining the Whitehouse-Merkley letter—believe should not be incentivized.




Tax Worldview

Finance, Ways and Means Committees Release Taiwan Tax Bill Draft Text. On Oct. 19, the leadership of the Senate Finance Committee and the House Ways and Means Committee released the text for bipartisan legislation seeking to strengthen economic relations between Taiwan and the United States through more generous tax treatment for Taiwanese individuals and corporations subject to U.S. taxation with reciprocal benefits for U.S. taxpayers doing business in Taiwan. The release of the bill text follows the Finance Committee’s conceptual markup of the legislation on Sept. 14.
The bill would provide benefits to U.S. and Taiwanese resident individuals and businesses similar to those included in the 2016 United States Model Income Tax Convention (“U.S. Model Tax Treaty”), including: withholding taxes on U.S. source income, dividends, interest and royalties paid on cross-border investments reduced to a 10% rate; increasing the threshold for income subject to taxation under the permanent establishment standard; allowing Taiwanese workers to perform services in the United States for up to six months before being subject to U.S. income tax, with exceptions for certain types of wages that are considered taxable under the U.S. Model Tax Treaty; and modifying qualifications to determine whether certain dual-resident individuals of Taiwan and the United States would be treated as “qualified residents of Taiwan” based on country of domicile, the closer-connection exception, and other factors, among other measures. If enacted in the United States, the quasi-treaty benefits would become effective when reciprocal benefits for U.S. taxpayers are signed into law in Taiwan.
House Ways and Means Committee Chair Jason Smith (R-MO) and Ranking Member Richard Neal (D-MA), along with Senate Finance Committee Chair Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID) concurrently issued a joint statement advocating for the bill’s passage. Chair Smith cited the bill’s provisions that resolve current double-taxation burdens faced by companies operating in both jurisdictions as a key step in “encourag[ing] greater investment in our communities and creat[ing] jobs.” Chair Wyden noted that the bill would “supercharg[e] chip manufacturing in America.” One of the bill’s main intents is to incentivize Taiwanese companies to bring semiconductor chip manufacturing to the United States, enabling the alliance to counter China’s increasing dominance in the industry.
Vietnam Likely to Delay Implementation of OECD Global Minimum Tax. The National Assembly of Vietnam held its last legislative session of the year on Oct. 17. The noticeable absence of any discussion of the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two global tax regime that requires countries to impose a 15% global minimum tax signals that the country is unlikely to comply with Pillar Two rules beginning in 2024. As a result, multinational companies operating in Vietnam may face a higher tax burden unless and until Vietnam signs onto the Pillar Two agreement.



1111 Constitution Avenue

IRS Unveils Additional Details on Direct E-File Pilot. On Oct. 17, the IRS announced additional key details about its planned Direct E-File Pilot program for the 2024 tax-filing season. The program would allow select taxpayers the option to file federal tax returns for free through government-run and operated tax preparation software. The IRS confirmed in its release that only taxpayers with “relatively simple returns,” determined by the taxpayer’s income types and the tax and deductions for which they are eligible, would be able to participate in the pilot program.
Eligibility is also limited by the state the taxpayer resides in, as the pilot will only be rolled out in 13 states. Four states—Arizona, California, Massachusetts and New York—have agreed to participate in the IRS’s pilot program and work to integrate their state tax-filing systems into the Direct File pilot. The other nine states—Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming—do not levy state income taxes. Washington state officials have stated that they will work to ensure that the state’s Working Families Tax Credit will also be integrated and redeemable for taxpayers using the Direct E-file pilot. The release notes that the program will not concurrently prepare and file state tax returns, but will instead “guide taxpayers who want to file a state return to a state-supported tool that taxpayers can use to prepare and file a stand-alone tax return.”
In the release, IRS Commissioner Daniel Werfel called the IRS’s decision to continue with plans to build the Direct File pilot “a critical step forward” in testing the feasibility of a government-run tax filing program. Lawmakers and officials’ comments have been mixed, with Democratic lawmakers praising the IRS’s continued rollout and Republicans criticizing it. Following the release, Sens. Elizabeth Warren (D-MA) and Patty Murray (D-WA), as well as Reps. Katie Porter (D-CA), Brad Sherman (D-CA) and Don Beyer (D-VA) released a statement praising the IRS for pushing forward with the pilot program and criticizing private tax preparation companies for “making tax filing more complicated and expensive than it should be.” Senate Finance Committee Chair Ron Wyden (D-OR) echoed the comments of his Democratic colleagues, also stating that he is “glad” that the pilot is slated to launch in time for the 2024 tax filing season.
House Ways and Means Committee Chair Jason Smith (R-MO) released a statement criticizing the IRS’s continued efforts to pilot the Direct File program in light of what he believes to be a lack of taxpayer interest in the program. He also states that the IRS’s controversies should further disqualify the agency from hosting a tax-filing platform, writing: “Working Americans are rightly skeptical of an agency that consistently abuses its power, violates trust, and is currently implementing a plan to target more middle-class taxpayers with an audit. They certainly don’t want the same agency to tell them how much they owe the federal government.” The IRS’s announcement also fielded criticism from Tony Scott, a former chief information officer for the Obama-Biden administration, who wrote in an op-ed that that the project is “virtually guaranteed to fail” because he believes the software will not fulfill taxpayers’ basic necessities, such as the ability to concurrently file a state return and to provide technical and knowledgeable support during critical tax-filing periods. He stated that funds granted to the IRS would be better used to combat the agency’s “other high-priority technology issues … [including] upgrading its core infrastructure.”
IRS Announces Program for ERTC Withdrawal Requests. On Oct. 19, the Internal Revenue Service (IRS) issued IR-2023-19, stating that the agency will open a withdrawal process to help businesses who inadvertently filed fraudulent Employee Retention Tax Credit (ERTC) claims. Fraudulent ERTC claims spiked as so-called “ERTC mills” nefariously advised companies to amend their corporate tax return to claim the ERTC, in exchange for consultancy or preparation fees. The process will be open to employers that filed an adjusted employment return solely to claim the ERTC and wish to withdraw the entire amount of their claim. The notice nevertheless says that “[t]hose who willfully filed a fraudulent claim, or those who assisted or conspired in such conduct, should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.” This announcement comes in the midst of a nationwide moratorium on ERTC claims processing that the IRS implemented in September as part of a broad effort to combat ERTC fraud.
IRS Quarterly Report on IRA Funding Initiatives Highlights Corporate Compliance Efforts. On Oct. 20, the Internal Revenue Service (IRS) published IR-2023-194, summarizing the initiatives the agency has begun in the last quarter as part of its ongoing implementation of Inflation Reduction Act (IRA) funding. Among the projects discussed were ongoing and new initiatives to “ensure large corporations pay taxes owed,” with the release noting that IRA funding has allowed the agency to begin taking action to increase compliance among high-earning individuals, partnerships and corporations and that prior budget cuts had prevented the agency from previously doing so. Specific initiatives that the IRS highlighted in the release include increasing compliance with regard to transfer pricing practices, expanding the Large Business and International Division’s Large Corporate Compliance program, and combatting abuse of the now-repealed corporate tax break. The IRS also noted that the prioritization of high-income taxpayers with either unfiled tax returns or unpaid tax liabilities has already yielded $122 million in collected debts. Senate Finance Committee Chair Ron Wyden (D-OR) expressed approval for the IRS’s use of IRA funds, stating that investments in “crack[ing] down on … wealthy and corporate tax cheats” is “already paying off.”
The IRS also stated that IRA funding has enabled them to improve taxpayer service through opening, reopening and expanding the service of Taxpayer Assistance Centers (TACs). The agency noted that there was an 18% increase in the number of taxpayers TACs have served between fiscal years 2022 and 2023. The agency also discussed its technology modernization initiatives, including the launch of a business tax account program that aims to make business taxpayers’ interactions with the IRS more seamless, and its ongoing digitalization initiatives to scan and e-file paper returns.



At a Glance

New York Republicans Rub SALT in Jordan’s Wounds. Five Republicans from the state of New York were among the Republicans who voted against Rep. Jordan’s speakership on the House floor and then on the secret ballot that removed him as speaker-designate altogether. These Republicans—Reps. Andrew Garbarino (R-NY), Nick LaLota (R-NY), Mike Lawler (R-NY), Anthony D’Esposito (R-NY) and Marc Molinaro (R-NY)—all represent parts of Long Island or the exurban areas of New York City, and have cited dissatisfaction with Rep. Jordan’s stance on the state and local tax (SALT) deduction cap as a partial reason to oppose his candidacy. These members believed that Rep. Jordan would not be able to deliver for them on the issue of the SALT relief. A statement released by Rep. D’Esposito after the first floor vote read that he “want[s] a speaker who understands Long Island’s unique needs,” including SALT relief.
Biden Administration Submits Brief in Repatriation Tax Supreme Court Case. On Oct. 17, the Biden administration submitted the government’s respondents brief to the Supreme Court as part of Moore v. United States, which challenges the constitutionality of the so-called “repatriation” tax. The plaintiffs, Charles and Kathleen Moore, have challenged the tax, created as part of the Tax Cuts and Jobs Act, as an unconstitutional tax on unrealized gains. The solicitor general’s brief notes that the tax is similar to those Congress has imposed as part of the so-called “Subpart F” international tax regime, and that striking down the repatriation tax would threaten the constitutionality of other substantial parts of the tax code.
Treasury Planning to Propose CAMT Rules by Year-End. Treasury Department officials stated on Oct. 17 that the Treasury Department and the Internal Revenue Service (IRS) are planning to propose rules regarding the corporate alternative minimum tax (CAMT) by the end of the year. Jo Lynn Ricks, an attorney-advisor in the IRS Office of Chief Counsel, stated that additional notices on the CAMT are not anticipated, but the Treasury Department and the IRS will instead publish proposed regulations by the end of the year, including guidance addressing double counting of overseas income. The CAMT, which was enacted pursuant to the Inflation Reduction Act, requires companies reporting more than $1 billion in global adjusted financial statement income (AFSI) to pay a minimum tax equal to 15% of the company’s financial statement net income. If the total regular tax liability for such a company in a given year is less than 15%, then a “top-up tax” will be applied under the CAMT. If you have questions about the CAMT, please reach out to a member of the Tax Policy team.
IRS to Issue Secure 2.0 “Grab-Bag” Retirement Guidance. Treasury Department attorney-advisor William Evans announced on Oct. 19 that the Internal Revenue Service (IRS) will issue “imminent grab-bag” guidance on private-sector pension plans as they implement SECURE 2.0 Act (Pub. L. 117-328) provisions. The guidance will only cover a few select provisions that are either in effect or will take effect shortly, and will not touch on high-profile provisions, like 401(k) contributions tied to student loan repayments.
IRS Planning to Release R&D Accounting Guidance Before Year-End. Treasury Department tax policy adviser Tim Powell stated on Oct. 18 that the Treasury Department and Internal Revenue Service (IRS) plan to release procedural guidance allowing taxpayers to make accounting method changes due to the research and development amortization deduction in the Tax Cuts and Jobs Act of 2017. Powell indicated that the agencies would try to release guidance before the end of the year.



Brownstein Bookshelf

CBO Finds that IRA-IRS Fund Rescission Would Drastically Increase Deficit. In response to an inquiry from Senate Budget Committee Chair Sheldon Whitehouse (D-RI), the Congressional Budget Office (CBO) provided additional information on the estimated budget effects of rescinding $25.035 billion (pursuant to §4003 of Senate Amendment 1226) in tax enforcement funding for the Internal Revenue Service (IRS) provided by the Inflation Reduction Act (IRA). The CBO estimate showed that, although outlays (spending) would decrease by $25.035 billion over 10 years, revenues would also decrease by $48.797 billion. This would result in increased deficits over the 2024–2033 period by $23.762 billion.
IRS Releases Rules for Mortality Tables in Pension Plans. On Oct. 19, the Internal Revenue Service (IRS) issued proposed and final regulations concerning the use of mortality tables in pension plans. The proposed regulations would update the requirements that a plan sponsor of a single-employer defined benefit plan must meet to obtain IRS approval to use mortality tables specific to the plan in calculating present value for minimum funding purposes. The final regulations would “prescribe[e] mortality tables to be used for most defined benefit pension plans … specify[ing] the probability of survival year-by-year for an individual based on age, gender, and other factors."



Hearings and Events

House Ways and Means Committee
On Wednesday, the House Ways and Means Committee will hold a hearing titled “Educational Freedom and Opportunity for American Families, Students and Workers.” The hearing will focus on educational tax benefits, including section 529 qualified tuition programs for primary and secondary education as well as other tax benefits for educational organizations.
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.