United States: Tax Policy Update - April 28, 2014

Last Updated: April 30 2014
Article by Russell W. Sullivan and Danielle R. Dellerson

NUMBER OF THE WEEK: 6

The number of tax bills the House Ways & Means Committee will markup tomorrow, April 29. Each would permanently extend a currently expired business tax provision. The bills collectively address the following: the research and development (R&D) tax credit, the Subpart F exemption for active financing income, the look-thru rule for payments between related controlled foreign corporations, the treatment of built-in gains for S-corps, basis adjustments to stock of S Corps making charitable contributions of property, and expansion of the Sec. 179 deduction for small businesses.

LEGISLATIVE LANDSCAPE

Back With a Vengeance. The House and Senate return this week after two weeks of recess with a packed schedule of hearings, markups and some floor votes expected on significant tax legislation between now and Memorial Day.

House: On Your Markup...Get Set...Go! First up is the House Ways & Means markup set for tomorrow, April 29, at 10:15 a.m. Six pieces of tax legislation will be considered, all of which were the focus of a business tax extenders hearing the committee held on April 8, 2014. In addition to the tax bills, the committee will also mark up a bill related to preventing sex-trafficking of youth in foster care. The tax-related bills include:

  • H.R. 4438: to simplify and make permanent the R&D tax credit (Sec. 41 of the Code);
  • H.R. 4429: to make permanent the Subpart F exemption for active financing income (Sec. 953);
  • H.R. 4464: to make permanent the look-thru rule for payments between related controlled foreign corporations (Sec. 954(c));
  • H.R. 4453: to make permanent the reduced recognition period for built-in gains of S Corporations (Sec. 1374(d));
  • H.R. 4454: relating to basis adjustments to stock of S Corporations making charitable contributions of property (Sec. 1367(a)); and,
  • H.R. 4457: to permanently extend the increased limits for Sec. 179 expensing.

House Releases Spring Agenda. The markup comes just days after House Majority Leader Eric Cantor (R-VA) released the GOP's spring legislative agenda, which confirmed that a tax extenders package with a permanent extension of the R&D credit will come to floor in May. Also on the agenda are a slew of 2015 spending bills that will be considered under an open amendment process, including military construction-Veterans Affairs, legislative branch, and Commerce-Justice-Science appropriations bills.

Cantor said the full House will also take up a contempt resolution against former IRS official Lois Lerner who has refused to testify before the House Oversight Committee regarding her alleged role in targeting conservative groups applying for tax-exempt status.

Senate: Vote on Extenders Package Coming Soon. Senate Majority Leader Harry Reid (D-NV) has said he will bring the tax extender package, reported out by the Senate Finance Committee in March (insert link), to the floor for a vote during the May work period. Reid said he has not yet decided whether to allow amendments on the floor, and while Senate Finance staffers are hoping for an "old-style" floor debate, no one's predicting that will be successful. More likely than not, we will see a "fill-the-tree" process, with senators jockeying in behind-the-scenes negotiations to hang their branches.

CAMP COUNSELOR

In this week's Camp Counselor, McGuireWoods attorney Dan Chung takes a look at LIFO.

Despite a successful run of nearly eighty years, the Last-In, First-Out inventory accounting method ("LIFO") may be on its final lap if Camp's plan gains traction in Congress. The Tax Reform Act of 2014 proposes to repeal LIFO for tax years beginning in 2015. Instead, taxpayers would use LIFO's less-heralded sibling, the FIFO (First-In, First-Out) inventory accounting method, or any other accounting method that clearly reflects income in a particular trade or business.

Throw Me a LIFO preserver! The repeal of LIFO could be the death-knell for many companies across a broad spectrum, especially because of the recapture tax on LIFO reserves. Energy companies, auto dealers, manufacturers, wholesalers and distributors would take a hit. For many taxpayers in these and other industries, the recognition of deferred tax liability on LIFO reserves all in one year could result in a tax bill that could sink the business. Camp's plan provides some respite. LIFO reserves would be slowly reintroduced in the first tax year beginning in 2019. In the first year, 10 percent would be included in the taxpayer's income; 15 percent in the second year; 25 percent in the third year; and 50 percent in the fourth year. Further relief is provided to closely held entities, defined as those with 100 owners or less, that are subject to a reduced 7 percent tax rate. For those taxpayers ready to get their feet wet, they can elect to begin the four-year inclusion period in an earlier tax year.

Point. In justifying the repeal of LIFO and the recapture of LIFO reserves, Camp's tax reform discussion draft states that because LIFO taxpayers, in choosing LIFO, accepted that the tax benefits they received from LIFO would have to be returned to the government at some point, there is no retroactivity associated with triggering the recapture that the taxpayers have known all along was inevitable. The point here is that LIFO taxpayers understood that the tax deferral was only temporary.

Counterpoint. There are many who stand in opposition to the LIFO provision. Just this past March, the LIFO Coalition, made up of more than 125 members including trade associations like the National Association of Manufacturers and the National Association of Wholesaler-Distributors, shared some comments on Camp's tax reform discussion draft. Specifically, their comments cite a Senate Committee Report on the 1942 tax act: "[S]o long as conditions remained normal and the taxpayer continued in the same business, these low cost figures would never enter, for tax purposes, into the computation of the cost of goods sold."

The After-LIFO. LIFO has been a mainstay of many industry sectors in the U.S. and its prospective repeal is understandably jarring to a wide swath of businesses. The Joint Committee on Taxation has projected the repeal of the accounting method would generate $79.1 billion in new revenue over the next ten years. Industry groups reliant on the LIFO method say the provision would do far more economic harm than good by levying a retroactive recapture tax on businesses and preventing them from utilizing a more realistic picture of income by matching current costs against current revenues.

REGULATORY WORLD

IRS to Shine Spotlight on Retirement Issues. The Internal Revenue Service released a third-quarter update for its 2013-2014 Priority Guidance Plan on April 21 reflecting a renewed focus on retirement benefits, including the one-per-year limit on individual retirement account rollovers and the procedures for issuing opinions and advisory letters for Section 403(b) pre-approved plans. An announcement accompanying the update said the agency will also focus on issues of "international taxation, health care and implementation of legislative changes."

IRS Issues New FATCA FAQs. On April 24, 2014, the IRS revised its frequently asked questions (FAQs) on the Foreign Account Tax Compliance Act (FATCA) to add a new section dealing with general compliance. The FAQs also clarify certain issues concerning qualified intermediaries, withholding foreign partnerships, withholding foreign trusts, and intergovernmental agreements.

COURTS & LEISURE

Reliance on IRS Guidance Perilous? The Tax Court denied a taxpayer's motion for reconsideration of its decision, despite the fact that the taxpayer's position was supported by IRS guidance contained in Publication 590. The court previously ruled in Bobrow v. Commissioner that Code Sec. 408(d)(3)(A)'s limitation on IRA rollovers applies on an aggregate basis, rather than to each individual IRA, and imposed an accuracy-related penalty against the taxpayers. In ruling that the taxpayer's reliance on contrary IRS guidance did not warrant reconsideration of the case, the court said such guidance is "not binding precedent" and the taxpayer's reliance on it is "at their own peril."

LOOKING AHEAD

Relevant Congressional Activity

House Ways & Means Committee Markup (As Outlined Above)

House Appropriations Committee

  • On Tuesday, April 29, 2014, the House Financial Services and General Government Subcommittee will hold a hearing on "FY2015 Budget Hearing – Department of Treasury." Witness testimony will be given by:

    • The Honorable Jacob Lew, Secretary
      Department of the Treasury

House Judiciary Hearing

  • On Tuesday, April 29, 2014, the Subcommittee on Regulatory Reform, Commercial and Antitrust Law will hold a hearing on H.R. 1129, the "Mobile Workforce State Income Tax Simplification Act of 2013," to limit the authority of states to tax certain income of employees for employment duties performed in other states.

Senate Appropriations Committee

  • On Wednesday, April 30, 2014, the Senate Financial Services and General Government Subcommittee will hold a hearing on the "President's FY2015 Funding Request and Budget Justification of the Department of the Treasury and the Internal Revenue Service." Witness testimony will be given by:

    • The Honorable Jacob Lew, Secretary
      Department of the Treasury
    • The Honorable John Koskinen, Commissioner
      Internal Revenue Service

Senate Banking, Housing, and Urban Affairs Committee

  • On Tuesday, April 29, 2014, the Senate Banking, Housing, and Urban Affairs Committee will conduct a markup of S. 1217, the "Housing Finance Reform and Taxpayer Protection Act of 2013."

Relevant Agency Activity

Department of the Treasury

  • On Tuesday, April 29, 2014, the Department of the Treasury will hold a closed meeting of the Treasury Borrowing Advisory Committee of The Securities Industry and Financial Markets Association, on major financing operations.
  • On Wednesday, April 30, 2014, the Internal Revenue Service will hold a meeting on the regulations that provide guidance on certain provisions of the American Jobs Creation Act of 2004 and conform the regulations to statutory changes in the Taxpayer Relief Act of 1997, specifically as regards basis allocation rules and guidance on allocations resulting from revaluations of partnership property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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