United States: Tax Policy Update

Last Updated: January 20 2014
Article by Russell W. Sullivan and Danielle R. Dellerson

Number of the Week: $53 Billion. The amount the Internal Revenue Service recovered through enforcement actions in the last fiscal year - a 6-percent increase over last year's recovery despite the low number of audits the agency carried out relative to the number of returns filed. The new omnibus spending package cuts the IRS budget to $11.2 billion, despite the agency's pleas for increased funding for enforcement and handling of new requirements under the healthcare law.


The House: All Quiet on the Tax Reform Front. But other fronts are buzzing with more oversight hearings on Obamacare, energy legislation markups and votes on a Healthcare.gov information security bill and a bill to ease EPA actions on states.

The House appears poised to pass a 12-part omnibus spending bill that will allocate all government spending through Sept. 30. House and Senate budget buffs completed their negotiations late on Jan. 13, divvying up the $1.1 trillion spending level agreed upon in last year's bipartisan budget agreement.

With the current funding bill set to expire Jan. 15, the House passed a three-day continuing resolution, as the Senate is expected to do as well, to fund the government at current levels while the bill moves through both houses. The spending package is expected to receive bipartisan support and arrive on the President's desk by the end of the week, as Republicans seek to avoid blame for another government shutdown.

The Senate: Beijing-Bound Baucus Not Done With Tax Reform Drafts. The full Senate remains locked in a battle over the extension of emergency unemploymentbenefits, but Sen. Max Baucus (D-Mont.), chair of the tax-writing Senate Finance Committee, is continuing his quest to overhaul the federal tax code.

This is likely Baucus's last gasp on the issue, as he is expected to be confirmed to become the new U.S. ambassador to China by mid-February. Following a series of tax reform discussion drafts released late last year, Baucus is expected to release another draft this week, likely focusing on infrastructure.


ACA Employer Reporting Requirements Ramp Up. The Internal Revenue Service issued proposed regulations for employer reporting requirements under the healthcare law included in Sections 6056 and 6055 of the Internal Revenue Code. The Obama administration delayed enforcement of the employer mandate until 2015. As a result, the reporting requirements are optional for 2014 and mandatory beginning in 2015. The McGuireWoods employee benefits team has an in-depth look at the proposed regulations here.

Treatment of Sales-Based Royalties and Vendor Allowances. The IRS finalized regulations on the capitalization and allocation of sales-based royalties under tax code Section 263A, and regulations relating to the determination of cost of merchandise in inventory under Section 471 when a taxpayer earns a type of sales-based vendor allowance.

Under the new rules, taxpayers can choose whether sales-based royalties - royalties incurred on the sale of property produced or acquired for sale - are entirely allocated to property sold with those costs included in the cost of goods sold, or they can allocate sales-based royalties between the cost of all goods sold and their ending inventory by using a facts-and-circumstances cost-allocation method. View the final regulations here.


High Court Will Review IRS Summons Case. The U.S. Supreme Court granted the government's petition for certiorari to review an 11th Circuit decision holding that a taxpayer challenging an IRS summons alleged to be executed for an "improper purpose" is entitled to a hearing in order to substantiate the bad faith allegation.

The 11th Circuit's ruling in United States v. Clarke split from the view adopted by 11 other circuits, which have held that a taxpayer's "improper purpose" allegation absent factual support does not entitle him to an evidentiary hearing on the issue.

Can I Get a Double-Double With a Side of Tax Reform? Super Sized? House Ways & Means Committee Chairman Dave Camp (R-Ohio) joined International Franchise Association President Steve Caldeira in calling for comprehensive tax reform during a joint press conference Jan. 13.

The IFA, which represents a wide range of franchises, including those in the food, business and personal services, lodging and automotive sectors, emphasized that it opposes corporate-only tax reform, as many if its members are pass-through entities that pay individual tax rates on their business income. Although momentum for tax reform appears to have stalled on Capitol Hill, Camp signaled that an overhaul of the tax code is merely re-energizing rather than dying.


Alternative Fuel, Pension Plan Tax Breaks Expiring This Year. In addition to the already-expired "extenders," more provisions are approaching expiration later this year, the Joint Committee on Taxation reminded us in a report released Jan. 10. Several provisions related to alternative fuels and some related to defined benefit pension plans will sunset beginning Sept. 30, absent congressional action. The report also lists a number of transportation-related provisions set to expire in 2015 and beyond. Read the full JCT report here.

Omnibus, Then Recess. After Congress passes the spending package - as it is expected they will before the end of the week - House and Senate members will return home for a state work period and the observance of Martin Luther King, Jr. Day. Both houses will return the week of Jan. 27.

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