Taxation & Representation, May 7, 2019

Taxation & Representation, May 7, 2019

May 07, 2019

Client Alert

Brownstein Client Alert, May 7, 2019

In This Issue

  • Tax Tidbit
  • Legislative Lowdown
  • RegWatch
  • 1111 Constitution Avenue
  • 2020 Vision
  • At a Glance
  • Brownstein Bookshelf


Tax Tidbit

This week’s tidbit is chock full of Game of Thrones references—for those of you who may not watch, eight seasons can be summed up in one sentence that tells you everything you need to know: the show’s protagonist, Jon Snow, unites warlords from seven kingdoms to fight an undead Night King.

What is Dead May Never Die. The real world is just like the seven kingdoms: partisan differences quickly fade when facing an existential threat from a common enemy. That sounds a lot like what happened on Monday when a group of organizations from across the political realm joined forces to try to prevent the resurrection of tax extenders, or as they call it: “zombie extenders.” In a timely reference to the Game of Thrones battle against the undead, the group pushed lawmakers to “let what is dead remain dead.”

The letter—which was sent to Speaker Nancy Pelosi (D-CA), House Minority Leader Kevin McCarthy (R-CA), Senate Majority Leader Mitch McConnell (R-KY) and Senate Minority Leader Chuck Schumer (D-NY)—urges Congress to not revive the tax extenders that have been expired for over 16 months. They argue that renewing the extenders retroactively after many taxpayers have already filed their taxes is bad policy which negates the intended benefit.

However, some in Congress say what is dead may never die. The energy-related tax breaks in particular have remained popular, with lawmakers recently introducing a number of bills to resurrect the provisions (e.g., the Biodiesel Tax Credit Extension Act and the Driving America Forward Act). However, lawmakers have quite a way to go before enacting any of the tax extenders provisions into law—on the House side, Ways and Means Democrats have made a commitment to paying for the legislation. It is unclear as to whether Democrats will choose a payfor that is acceptable to Republicans, or develop a consensus among the Democratic Caucus as to how to move forward. Additionally, some of the committee’s more progressive members are also wary of passing tax legislation that has tax breaks for corporations so soon after the passage of the Tax Cuts and Jobs Act (P.L.115-97).

In February, Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) introduced the Tax Extender and Disaster Relief Act (S.617), which would retroactively renew nearly 30 tax benefits that expired at the end of 2017 and 2018.


Legislative Lowdown

And I’m Freeeeeee… Free Filin’. The story of last week comes from ProPublica, which reported that companies participating in Free File—such as H&R Block and Intuit—have been attempting to hide their free federal software through search engine manipulations, diverting taxpayers to purchase software programs. Since the bombshell report, New York Governor Andrew Cuomo has directed the state’s Department of Financial Service and the Department of Taxation and Finance to investigation the allegations against the tax preparers.

On Thursday, a group of 12 Democratic lawmakers, including presidential hopefuls Sens. Elizabeth Warren (D-MA), Cory Booker (D-NJ) and Bernie Sanders (I-VT), urged Internal Revenue Service (IRS) Commissioner Charles Rettig and Federal Trade Commission (FTC) Chair Joseph Simons to take action against the companies involved. In the letter to Rettig, the bicameral group of lawmakers pushed the agency to remove the companies from the Free File program. In the letter to Simons, the group asked the FTC to launch an investigation into whether or not the companies are engaged in an illegal agreement.

Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) sent a letter of their own to the IRS yesterday, calling on Rettig to review participant compliance with the Free File Alliance, the memorandum of understanding between the participating companies and the IRS, and take disciplinary action where appropriate. The tax writers also suggested that the IRS to use this opportunity to revisit the agency’s approach to maximizing Free File use among taxpayers.

This is not the first time the Free File program has come under scrutiny since the House passed the Taxpayer First Act on April 9. Reps. Katie Hill (D-CA) and Katie Porter (D-CA) expressed opposition to the codification of the Free File program in the bill. Both members criticized the provision for preventing the IRS from creating a free filing system of its own to compete with those offered by private companies. The bill passed the House despite their concerns, but Congress agreed to create a working group to study the IRS’ deal with the tax software industry on Free File. No further details are available on the working group.

At the time, Senate Democrats did not seem inclined to reopen the bill to change the way the Free File provision was written. Wyden’s (D-OR) office noted that the IRS’s existing deal with the industry allows the agency to exit the contract and start its own program with 12 months’ notice.

However, the consequences of the recent development described above means that Finance Committee Democrats are no longer willing to fast-track the bill for approval through unanimous consent. A spokesperson for Wyden said the Free File program would need to be changed in order to accommodate Democratic senators’ concerns.

However, if Senate Democrats insist on removing the Free File provision or at least amending it, it is unclear how the bill will move through the Senate. Moreover, it is uncertain how the dynamics would play out during a second House vote. The lower chamber has essentially told the Senate that an amended bill may be difficult to approve in the House.

While the IRS reform bill is not dead, issues around Free File must be addressed.

With IRS reform legislation floundering and tax extenders legislation stalled, the odds that Congress will pass tax legislation before August recess are even more remote than originally thought.

Schumer & Pelosi Play Tax Hardball. In public comments and via a letter, Senate Minority Leader Chuck Schumer (D-NY) and House Speaker Nancy Pelosi (D-CA) made clear they are not willing to raise the regressive gas tax because of its disproportionate effect on lower income Americans, unless President Trump agrees to repeal parts of the 2017 tax reform law, raising the corporate rate from 21 to 25 percent. They want the president to consider reversing some of the tax cuts on businesses and individuals to pay for roads, bridges, “broadband, water, energy, schools, housing and other initiatives,” They went on to add that “we must also invest in resiliency and risk mitigation of our current infrastructure to deal with climate change.” While the president has not publicly signaled support for raising the gas tax, it has been reported that he has privately expressed a willingness to increase the tax up to 25 cents per gallon. The US Chamber of Commerce and the American Trucking Association, both supporters of raising the gas tax for infrastructure purposes, immediately pushed back against raising the tax rate to 25 percent saying that is a non-starter for a bipartisan deal.

New York State of Mind. Democratic members of the House Ways and Means Committee were in New York City over the weekend to discuss their policy agenda. Major issues included renewing dozens of expired tax extenders, eliminating the $10,000 cap on federal deductions for state and local taxes, and potential funding ideas for President Trump’s recently announced $2 trillion infrastructure plan.

No Surrender by Energy Extender Defenders. Federal spenders (i.e. appropriators) and legal amenders (i.e. lawmakers) on both sides of the aisle announced a new effort to renew expired tax credits for producers of alternative fuels. The group, speaking at a National Biodiesel Board event led by Senate Finance Chair Chuck Grassley (R-IA), declared it “unacceptable” that the biodiesel tax credit had not been renewed since it expired in December 2017. Previously, the tax credit offered a $1-per-gallon credit to specific fuel manufacturers that blend a mix of biodiesel and petroleum. Joining them at the event were Sens. Joni Ernst (R-IA) and Sheldon Whitehouse (D-RI) and Reps. Abby Finkenauer (D-IA), Dave Loebsack (D-IA), Cheri Bustos (D-IL), and Darin LaHood (R-IL). Sen. Grassley and Rep. Finkenauer have notably introduced legislation to retroactively extend the biodiesel tax credit through 2018 and 2019.

Go for Gold. Last week, a number of House Ways and Means Committee members introduced legislation to repeal a tax increase on survivor benefits for children whose parents gave the ultimate sacrifice while serving in uniform. The bill, the Gold Star Family Tax Relief Act, would shield survivor benefits from a potential 37% tax that unintentionally impacted these families under the Tax Cuts and Jobs Act (P.L. 115-97). Both House Ways and Means Committee Chair Richard Neal (D-MA) and Ranking Member Kevin Brady (R-TX) have supported the bill. Brady has said “military survivor benefits are clearly different than a gift of stocks and bonds to a child, and they never should have been caught up in this decades-old anti-abuse tax in the first place.” Neal has explicitly endorsed the bill in front of reporters. However, the timeline and vehicle on which the bill would advance remains uncertain.



Carbon Capture Catch Up. On May 2, the Internal Revenue Service (IRS) and Treasury Department released Notice 2019-32 requesting comments in anticipation of issuing regulations on the implementation of carbon tax credits. Early last year, Congress passed the Bipartisan Budget Act (P.L.115-123), which implemented section 45Q which increased the tax credit for carbon capture to $35 from $10 per ton. The technology has support on both sides of the aisle with Sens. Sheldon Whitehouse (D-RI), John Barrasso (R-WY) and Shelley Moore Capito (R-WV) all endorsing the credit. While development of the tax credit has lagged, advocates for the credit are optimistic about lowering carbon emissions for coal plants and manufacturers. Comments must be submitted within 45 days of publication in the Internal Revenue Bulletin.


2020 Vision

With the 2020 presidential election already in full swing, all major Democratic candidates—aside from Joe Biden—have released years of their tax returns. Below is a comparison of their 2018 income.

Democratic Presidential Contenders
2018 Income

At a Glance

  • Mind the Gap. The House Ways and Means Committee announced last week that it will hold a hearing on Thursday to explore the “tax gap,” or the billions of dollars left uncollected by the IRS each year. According to Commissioner Charles Rettig, the IRS expects an update of its tax gap estimate in June that covers the 2011 to 2013 timeframe.
  • House Sun Rays and Breeze Committee. The House Ways and Means Committee announced it will be holding a May 15 hearing on climate change, with committee Chair Richard Neal (D-MA) saying he is “committed to passing legislation out of my committee that will help bring down emissions” and support efficiency and clean energy.
  • Gonna Be a No for Me, Dawg. House Minority Leader Kevin McCarthy (R-CA) told the Washington Post last week that he would not support any adjustment to the tax code to help pay for an infrastructure package. The statement follows growing conjecture by appropriators as to how a $2 trillion infrastructure plan—as discussed by President Trump and Democratic leaders—would be paid for.
  • Tax Court Comrade. On Thursday, the Senate Finance Committee will hold a hearing to consider Emin Toro’s nomination to take a seat on the United States Tax Court. Like many others, Toro was nominated last April but failed to be confirmed before the end of the 115th Congress; President Trump re-nominated him in February.


Brownstein Bookshelf

  • IRS Self-Correction. Some of Brownstein’s West Coast colleagues put together an analysis on the IRS expansion of self-correction of retirement plan errors. Read it here.
  • Show Me the Money. In the wake of the Treasury Department denying House Democrats’ request for President Trump’s tax returns, Isaac Stanley-Becker of the Washington Post discusses the near century-old relationship between the Treasury Secretary, tax writing committees and releasing of tax returns.

    George Yin, a law professor and former chief of staff of the Joint Committee on Taxation, recommends in POLITICO that House Ways and Means Committee Chair Richard Neal (D-MA) focus on the 1924 law when attempting to obtain President Trump’s tax returns, rather than their subpoena approach.
  • The Capitol Loop. Colorado Governor and 2020 candidate John Hickenlooper discusses the taxation of capital gains and expanding the Earned-Income Tax Credit in his “I’m Running to Save Capitalism” op-ed in the Wall Street Journal.