Taxation & Representation, April 9, 2019

Taxation & Representation, April 9, 2019

Apr 09, 2019

Client Alert

Brownstein Client Alert, April 9, 2019

IN THIS ISSUE



TAX TIDBIT

This week we are going to travel back in time and look at some of the most significant tax developments in U.S. history. Don’t worry—there won’t be a test on this later (although we know you’d ace it). Filled with rebellious whiskey producers and infamous Chicago gangsters, tax in the U.S. has a colorful past. So, without further ado, let’s jump back to 1794. 



The Whiskey Rebellion (1794). In western Pennsylvania, a group of farmers and distillers rose up to protest the imposition of a whiskey tax from the federal government. The tax, which President George Washington opposed, was advocated by Treasury Secretary Alexander Hamilton to pay for the debt incurred by the states during the American Revolution. Under the law, large producers paid an annual tax of six cents per gallon and small producers had to pay nine cents per gallon. After a number of demonstrations, the tax was repealed in 1802 under the leadership of President Thomas Jefferson. 
 
First Federal Income Tax (1913). Due to the expenses incurred during the Civil War, Congress needed a way to raise funds. As a result, the 16th Amendment—which provides Congress the authority to levy taxes on corporate and individual income—was ratified in February 1913.

Prohibition (1919). The 18th Amendment forbade the manufacturing, sale and use of liquid courage. The Internal Revenue Service (IRS) was initially responsible for enforcement before the Department of Justice took over. During that time, the price of bootlegged alcohol skyrocketed. In December 1933, the 21st Amendment was enacted, repealing Prohibition.

Al Capone (1931). The most notable example of underground activity during Prohibition was Chicago gangster Al Capone, who generated an annual $60 million from his speakeasies. In October 1931, Capone was sentenced to 11 years in prison for a number of tax evasion and prohibition charges. Tax Tip: If you’re going to engage in a life of crime—pay your taxes!

Payroll Withholding (1935). The Payroll Withholding Act was signed into law by President Franklin Roosevelt in August 1935. The law required a new system of tax withholding and developed unemployment compensation, forming the basis of today’s payroll withholding.

IRS Created (1953). Following a wide-ranging restructuring of the Bureau of Internal Revenue, the Internal Revenue Service was born in July 1953.

Tax Reform Act (1986). The Tax Reform Act of 1986, which was intended to simplify the income tax code, served as the impetus for electronic filing. Among other things, the law broadened the tax base and eliminated tax shelters.

Electronic Filing (1991). In order to lower operating costs at the IRS, the agency decreased its dependence on paper filing. During the current tax season, it is anticipated more than 90 percent of the 150 million taxpayers will be filed electronically. 

Taxpayer Bill of Rights (2014). National Taxpayer Advocate Nina Olson updated the Taxpayer Bill of Rights to clearly outline ten fundamental rights afforded to taxpayers, including the Right to Confidentiality—which may be of interest to President Trump.

Tax Cuts and Jobs Act (2017). In December 2017, President Trump signed the Tax Cuts and Jobs Act, which was the most substantial tax reform legislation since the 1986 law. As frequent readers of Taxation and Representation are well aware, the Treasury Department and IRS are currently rolling out regulations and providing guidance on the various provisions of the law.
 

LEGISLATIVE LOWDOWN

Congress’s Kumbaya Moment. Bipartisan cooperation on something tax related—who knew that was still possible? On Tuesday, April 2, the House Ways and Means Committee held a markup of retirement, tax administration and reemployment services legislation which continued extensive work that had been done in the last Congress. The three bills—the Building on Reemployment Improvements to Deliver Good Employment for Works (BRIDGE for Workers) Act (H.R.1759), the Setting Every Community Up for Retirement Enhancement (SECURE) Act (H.R.1994) and the Taxpayer First Act (H.R.1957)—have been placed on the House suspension calendar and will be voted on this week. The bills are expected to pass the House with overwhelming bipartisan support. The bills will then move to the Senate for consideration. 

Specifically, on the Taxpayer First Act of 2019, the Senate Finance Committee is not expected to markup the legislation. Though the bill has bipartisan and bicameral support, several provisions in IRS reform legislation introduced by Sens. Rob Portman (R-OH) and Ben Cardin (D-MD) last year have been excluded. However, Portman and Cardin may get a second bite at the apple sooner than expected. At the markup last Tuesday, House Ways and Means Committee Chair Richard Neal (D-MA) announced he and Ranking Member Kevin Brady (R-TX) are working on additional retirement legislation that he hopes to finalize for full House consideration by the August recess. The legislation, according to Neal, will close the coverage gap, simplify the retirement system and help Americans preserve their assets during retirement. It may also serve as a vehicle for further IRS reform provisions not included in the Taxpayer First Act of 2019.

Much more happened during the markup, but in order to get the intel, you’ll have to read the full Brownstein Tax Policy Team breakdown

Biodiesel Tax Credit. On April 4, Rep. Abby Finkenauer (D-IA) and 13 other House members introduced the Biodiesel Tax Credit Extension Act. The bill would extend the biodiesel tax credit for two years. Congress had previously extended the tax credit retroactively for 2017 as part of tax extenders legislation, but not for 2018 and beyond. Several House Ways and Means Committee members have cosponsored the legislation, including Reps. Ron Kind (D-WI), Mike Kelly (R-PA), Adrian Smith (R-NE), Jackie Walorski (R-IN), Darin LaHood (R-IL), Danny Davis (D-IL), Bill Pascrell (D-NJ) and John Larson (D-CT).

Reps. Rosa DeLauro (D-CT), Cheri Bustos (D-IL), and Dave Loebsack (D-IA), off-committee sponsors of the bill, are trying to build support for the lapsed tax benefit by circulating a “dear colleague” letter they plan to send to House leadership and the top members on the Ways and Means Committee. The letter says “failure to extend incentives for biodiesel and renewable diesel jeopardizes environmental and public health benefits, as well as the future of the industry.” While the proposal has the support of Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR), it is unclear whether House Democrats will be able to agree on the extension.

The biodiesel credit extension previously hitched a ride on tax extenders legislation, which has become a point of contention within the Democratic party. Tax extenders legislation was originally scheduled to be marked up by the House Ways and Means Committee on April 2, along with IRS reform, retirement savings, and reemployment legislation. However, extenders were left off the markup, due to a lack of consensus on how to replace the revenue that would be lost as a result of renewing the tax extenders. Additionally, some Democrats are seeking to include extensions of the Earned Income Tax Credit on the extenders legislation so that the sole focus of the legislation is not corporate. House Democrats remain divided on how to address these provisions and a vote is not expected before the House adjourns for a two-week spring recess beginning on April 10.

In the meantime, Democrats continue to push leadership to take piecemeal action on energy credits and incentives beyond the biodiesel provision. On Thursday, April 4, over 100 Democrats signed a letter calling on House Ways and Means Committee Chair Richard Neal (D-MA) to incentivize renewable energy, energy efficiency and cleaner cars in upcoming tax legislation. Specifically, those members supported extending the Investment Tax Credit and Production Tax Credit.

On the Senate side, Sen. Tom Udall (D-NM) announced he is working to update his Renewable Electricity Standard Act (S.1264 (114)) to increase power producer commitments to renewable sources.

Moore Trouble for Fed Pick. President Trump is considering conservative economist Stephen Moore to fill one of two vacant seats on the Federal Reserve Board of Governors. Moore’s nomination has drawn criticism from experts on both sides of the aisle. Moore came under fire for co-authoring a Wall Street Journal article which slammed the Fed’s decision to hike interest rates at the end of 2018, which he said is preventing the economy from achieving its full growth potential. Those who oppose his nomination have said Moore’s outward complaint against the Fed, coupled with his past policy initiatives, raise legitimate concerns that his nomination would threaten the independence of the Fed.

Most recently, Moore has faced scrutiny regarding a tax dispute and child-support issues from a previous marriage. Reports have shown that Moore was held in contempt of court for failing to pay over $330,000 of spousal and child support to his ex-wife in 2013 and currently owes $75,000 in federal taxes to the Internal Revenue Service (IRS). Neither President Trump nor his nominee seem concerned with the allegations, though, with the president predicting Moore will “do fine” during the confirmation process. 

Moore is a well-known conservative economist who founded the Club for Growth and the Free Enterprise Fund and currently serves as a visiting fellow for the Project for Economic Growth at The Heritage Foundation. He has also been an unofficial advisor to Trump on economic policy and recently authored a book entitled, “Trumponomics: Inside the America First Plan to Revive Our Economy,” which details his support for the president’s economic agenda.

Once formally nominated, the Senate Banking Committee will be responsible for reviewing Moore’s nomination. Committee Chair Mike Crapo (R-ID) has said that filling all vacant seats on the board is a priority and added that nomination hearings will “receive prompt attention.”

And the Results Are In. For the third year in a row, the Internal Revenue Service (IRS) saw a decrease in identity theft reports from individual taxpayers, in part due to the IRS Security Summit partnerships. This collaboration between state revenue bureaus and private-sector tax entities began in 2015, and the number of confirmed identity theft incidents among individual returns has dropped by 54 percent since then. While confirmed cases of identity theft did increase again by 9 percent in 2018 to a total of 649,000 incidents, the total value of the fraudulent refund scams was only $3.1 billion—significantly lower than the $6 billion in 2017. The IRS and its Security Summit partners pointed out that business tax returns and tax professional data are likely the next target of identity thieves. Business identity theft related to taxes rose by 10 percent over last year. Electronic Filing Identification and Preparer Tax Identification numbers are the most susceptible targets, and the agency is warning companies to take extra security precautions going forward. 


1111 CONSTITUTION AVENUE

Chuck Charging the Hill. Internal Revenue Service (IRS) Commissioner Chuck Rettig is set to testify before the Senate Finance Committee on April 10. The hearing will focus on the current tax-filing season and a “21st Century IRS,” according to committee Chair Chuck Grassley (R-IA). The hearing will be Commissioner Rettig’s first appearance before a congressional tax committee since the start of this year’s tax filing season, and only his second appearance before the Finance Committee since his nomination hearing last summer.

New Meaning in Remove Your Cap. House Democrats have proposed an increase in funding to the Internal Revenue Service (IRS) for tax enforcement and compliance purposes through the Investing for the People Act of 2019 (H.R. 2021), proposed by House Budget Committee Chair John Yarmuth (D-KY). The bill would allow for discretionary spending cap adjustments of up to $400 million for 2020 and $750 million for 2021. Democrats said the increased funding would help the IRS reverse the trend of its declining staff numbers—which has been an issue since 2010—and allow the agency to run more efficiently in the wake of the 2017 Tax Cuts and Jobs Act (PL 115-97). A summary of the bill also references the President’s 2020 budget proposal, which included an increase for IRS enforcement, to emphasize the issue’s bipartisan interest.

Opening Pandora’s Box. House Ways and Means Committee Chair Richard Neal (D-MA) officially requested President Trump’s tax returns from Internal Revenue Service (IRS) Commissioner Chuck Retting. Chair Neal asked for six years of personal income tax returns, information regarding any audits that have been performed in relation to them as well as the returns for some of his businesses. The decision has been long awaited by many Democrats. It coincided with two other investigative announcements from House leaders, who also moved to acquire a decade’s worth of President Trump’s financial records and prepared to issue a subpoena for the full Mueller report from the Department of Justice. Neal is prepared to issue a subpoena for the tax returns if they are not given to him by April 10 and is ready to take the issue to court if the administration refuses to comply.

Treasury Secretary Steven Mnuchin said that the Democrats’ request for the tax returns is being reviewed by the legal departments that that they look forward to responding to the request.  Mnuchin also told lawmakers on April 9 that the department’s lawyers had discussed Democrats’ efforts to access the president’s tax returns with the White House, but he has not personally had a conversation on the subject with Trump.

The Democrats’ official request for the president’s tax returns could result in upending any chances of bipartisan cooperation on larger legislative priorities, such as infrastructure reform. 
 

REGWATCH

NaCl, Sodium Chloride. Thankfully for taxpayers, knowledge of the periodic table will not be necessary as House Democrats are looking for ways to ease the burden of the $10,000 cap on state and local tax (SALT) deductions, created by the 2017 Tax Cuts and Jobs Act (PL 115-97). The cap most directly affects individuals in high-tax states, such as California, New York and New Jersey. Members of the House Ways and Means Committee have formed a working group to discuss ways to curb the cap’s effects, including increasing the cap or repealing it in its entirety. Some representatives have proposed an increase in the top individual tax rate to make up for the funds that would be lost by increasing or eliminating the cap. While Democrats are generally supportive of the initiative, it seems unlikely many Republicans would be willing to make modifications to the key legislative success of the Trump presidency. The enactment of the SALT cap was a major revenue raiser for the TCJA and underscored Republican opposition to federal taxpayers underwriting state and local budgets that they view as having little to no fiscal discipline in many states.
 

AT A GLANCE 

  • Peace Out. Treasury Secretary Stephen Mnuchin will soon be down a couple of key aides. Eli Miller, his chief of staff, and Tony Sayegh, the assistant secretary for public affairs, will soon be leaving the department. Monic Crowley, a Fox News commentator was seen in the Treasury Department headquarters last week and is thought to be among the prospective replacements for Sayegh. 
  • BPC to IRS: Step Up Your Game. The Bipartisan Policy Center released a report yesterday suggesting the Internal Revenue Service improve its administrative abilities, including simplifying the tax code and finding a way to make things easier for taxpayers and the tax collection process.
  • EV Phone Home. Last week, Sen. Debbie Stabenow (D-MI) announced she and Sen. Lamar Alexander (R-TN) are working on legislation intended to increase the deployment of electric cars in the United States. The bill, which will be released shortly, would raise the tax credit cap for electric vehicles.
  • Taxing Code. The Austrian Government on Wednesday formally introduced a five percent digital revenue tax on large tech firms operating in the country. Following the failure of an EU-wide measure last fall, Austria joins France as the only other European country levying the taxes against companies, including Google and Facebook. 
  • From Pies to Policy. President Trump plans to nominate former Godfather’s Pizza CEO and Kansas City Federal Reserve Bank chairman, Herman Cain, to the Federal Reserve Board. Cain would join Heritage Foundation fellow Stephen Moore as the second prospective nominee for the Board of Governors in the past few weeks. 


BROWNSTEIN BOOKSHELF

  • Tax Season. In congressional testimony this morning, Treasury Secretary Steven Mnuchin said he has not discussed the tax return request with President Trump. The New York Times has more.
  • More Tax Returns. Sen. Bernie Sanders (I-VT), another White House contender, will not reveal when he will release his tax returns. CNN has the full story.
  • Harris Housing Bill. Democratic presidential candidate Sen. Kamala Harris (D-CA) has released a proposal to address the affordable housing crisis. On Tuesday, she introduced a new version of the bill. Find out more here.


REGULATION STATION

INTERNATIONAL
 

Regulation

Latest Action

Regulation Link

Comment Countdown

Brownstein Commentary

Sec. 965

Transition Tax

Correction

April 10, 2019

2019-07012

2019-07018

N/A

 

FDII and GILTI

March 6, 2019

REG-104464-18

27 Days

 

Sec. 965

Transition Tax

Feb. 5, 2019

Final Regulations

84 FR 1838

Deadline Passed

Oct. 9, 2018

 

Certain Hybrid Arrangements

Dec. 28, 2018

REG-104352-18

Deadline Passed Feb. 26, 2019

 

BEAT (Sec. 59A)

Dec. 21, 2018

REG-104259-18

Deadline Passed Feb. 19, 2019

 

Foreign Tax Credit

Dec. 7, 2018

REG-105600-18

Deadline Passed

Feb. 5, 2019

 

Sec. 956

Nov. 5, 2018

REG-114540-18

Deadline Passed Dec. 5, 2019

 

GILTI

Oct. 10, 2018

REG-104390-18

Deadline Passed

Nov. 26, 2018

 

GILTI

Sept. 13, 2018

Rev. Proc. 2018-48

N/A

 

 

 199A

Regulation

Latest Action

Regulation Link

Comment Countdown

Brownstein Commentary

Qualified Business Income Deduction (Sec. 199A)

Feb. 8, 2018

REG-134652-18

Deadline Passed

April 9, 2019

 

Qualified Business Income Deduction

 (Sec. 199A)

Feb. 8, 2019

Final Regulations

84 FR 2952

Deadline Passed

Oct. 1, 2018

 

W-2 Wages for Qualified Business Income Deduction

 (Sec. 199A)

Jan. 18, 2019

Rev. Proc. 2019-11

N/A

 

Trade or Business Safe Harbor: Rental Real Estate

 (Sec. 199A)

Jan. 18, 2019

Notice 2019-07

N/A

Washington Update

 

 DOMESTIC BUSINESS

Regulation

Latest Action

Regulation Link

Comment Countdown

Brownstein Commentary

Interest Expense Deduction

Dec. 28, 2018

REG-106089-18

Deadline Passed Feb. 26, 2019

 

Opportunity Zones

Oct. 29, 2018

REG-115420-18

Deadline Passed
Dec. 28, 2018

 

Debt-Equity Documentation

(Sec. 385)

Sept. 24, 2018

REG-130244-17

Deadline Passed

Dec. 24, 2018

 

Sec. 162(m)

Aug. 21, 2018

Notice 2018-68

N/A

Washington Update

Full Expensing

Aug. 3, 2018

REG-104397-18

Deadline Passed

Oct. 9, 2018

 

Carried Interest

March 1, 2018

Notice 2018-18

N/A

 

 

 EXEMPT ORGANIZATIONS

Regulation

Latest Action

Regulation Link

Comment Countdown

Brownstein Commentary

Excise Tax on Executive Compensation

Dec. 31, 2018

Notice 2019-09

N/A

 

UBIT (Sec. 512(a)(7))

Dec. 10, 2018

Notice 2018-99

N/A

 

Time and manner for filing and paying excise taxes

Nov. 7, 2018

REG-107163-18

Deadline Passed

Dec. 7, 2018

 

UBIT (Sec. 512(a)(6))

Aug. 21, 2018

Notice 2018-67

N/A

Washington Update

Higher Education Excise Tax

June 8, 2018

Notice 2018-55

Deadline Passed

Sept. 6, 2018

 

 

 OTHER

Regulation

Latest Action

Regulation Link

Comment Countdown

Brownstein Commentary

Estate and Gift Taxes

Nov. 23, 2018

REG-106706-18

Deadline Passed Feb. 21, 2019

 

Sec. 451(b) Market Discount Guidance

Sept. 27, 2018

Notice 2018-80

N/A

Washington Update

Safe Harbor of Eligible Rollover Distributions

Sept. 20, 2018

Notice 2018-74

N/A

Washington Update

SALT

Aug. 27, 2018

REG-112176-18

Deadline Passed

Oct. 11, 2019

Washington Update

 

Education Savings

July 30, 2018

Notice 2018-58

N/A

Washington Update

Health Savings Accounts

March 5, 2018

Rev. Proc. 2018-18

Rev. Proc. 2018-27

N/A

 

 

Meet The Team

Rosemary Becchi Strategic Advisor and Counsel T 202.383.4421 rbecchi@bhfs.com
Harold Hancock Shareholder T 202.383.4422 hhancock@bhfs.com
Lori Harju Policy Director T 202.747.0519 lharju@bhfs.com
Charlie A. Iovino Senior Policy Advisor T 202.383.4424 ciovino@bhfs.com
Josh A. Kowalczyk Policy Assistant T 202.383.4715 jkowalczyk@bhfs.com
Michael P. Marn Policy Assistant T 202.652.2355 mmarn@bhfs.com
Russell W. Sullivan Shareholder T 202.383.4423 rsullivan@bhfs.com
Anne C. Starke Policy Advisor T 202.872.5297 astarke@bhfs.com
Radha Mohan Policy Advisor and Associate T 202.383.4425 rmohan@bhfs.com