United States: Tax Policy Update - January 27, 2015

Last Updated: February 4 2015
Article by Russell W. Sullivan and Danielle R. Dellerson

NUMBER OF THE WEEK: $110 Billion

The amount expected to be raised over the next 10 years from the Obama Administration's plan to impose a 7 basis point fee on the liabilities of banks with more than $50 billion in assets. The proposed tax has already received criticism from the financial services industry. Additional details are expected to come with the release of the president's FY 2016 budget proposal on Feb. 2.


Hatch Plans to Reintroduce SAFE Retirement Act. Senate Finance Chairman Orrin Hatch is looking to reintroduce the 2013 legislation (S. 1270), which would overhaul the country's pension system with reforms to both private and public sector plans. In addition to the various provisions aiming to modify and simplify existing plans, the SAFE Act would also require the Treasury Department to consult with the Securities and Exchange Commission when working to formulate rules regarding fiduciary duty, giving the Treasury "sole jurisdiction for IRA prohibited transaction rules." Hatch said it makes sense to give Treasury the lead because the fiduciary rule for IRAs originates in the tax code.

Game On! Call of [Fiduciary] Duty: The White House Edition. While Hatch would like Treasury to lead on fiduciary duty rulemaking, the White House is ready to lend its support to the Department of Labor's ongoing efforts to re-propose a fiduciary rule that would impose stricter requirements on brokers and financial advisors that handle retirement accounts. In a working memo titled "Draft Conflict of Interest Rule for Retirement Savings," the White House outlines the administration's arguments for tougher oversight of certain broker practices that have been deemed as harmful and costly to investors. A copy of the memo can be read here.

Highway Trust Fund Bill & the Re-Patriots. With increases to the gas tax out of the question, Senator Rand Paul is working to introduce legislation that would use revenue from the repatriation of foreign corporate earnings to fund the HTF. The senator from Kentucky has been working with Senator Barbara Boxer on a proposal that would set a five-year window for corporations to bring their profits back to the United States. Paul introduced a similar measure back in 2013 (S. 911), which failed to attract co-sponsors. He believes he could get at least a dozen Democrats to co-sponsor the new measure this time around. According to Paul's projections, a 5 percent repatriation rate could generate $30 to $60 billion the first year.

Legislation to Strengthen 529 Plans Introduced. In response to President Obama's plans to get rid of the tax-free benefits under 529 college savings plans, Reps. Lynn Jenkins (R-KS) and Ron Kind (D-WI) introduced a bill strengthening 529 college savings plans (H.R. 529). The bill clarifies that computers are qualified expenses, removes the distribution aggregation rules, and permits refunds from colleges without taxes or penalties. The bill does not tackle Obama's tax plan head on; but it shows there is bipartisan support of tax-free 529 college-savings plans.

Try, Try Again: Democrats Introduce Anti-Inversion Bill. Senators Dick Durbin (D-IL) and Jack Reed (D-RI) along with Congressmen Sander Levin (D-MI) and Lloyd Doggett (D-TX) unveiled the Stop Corporate Inversions Act of 2015 to deter corporate inversions. Under the proposal – which would apply to inversions completed after May 8, 2014 – a combined foreign corporation would be treated as a domestic corporation for tax purposes if its shareholders own more than 50 percent of the combined foreign corporation, or if the affiliated group that includes the combined foreign corporation is managed and controlled in the U.S. and engages in significant business activities in the U.S. A short summary of the proposal can be read here.


Anti-Inversion Regulations or Legislation? The Treasury and IRS are working hard to turn Notice 2014-52, which curbs inversion-related transactions, into Treasury regulations. As a follow-up to the notice, they are also considering earnings-stripping provisions. Chairman Hatch recently stated that tax reform would be the only appropriate measure to prohibit corporate inversions. Hatch noted that the wave of corporate inversions have ebbed and flowed depending on the government's reaction to them, but that ultimately tax reform would be the solution. It is likely that Treasury regulations will be released prior to any legislative changes concerning corporate inversions.

OECD Principal Purpose Test Portends Uncertainty. Given the subjective nature of the OECD's principal purpose test (PPT) regarding treaty benefits, practitioners asked for either a pre-clearance procedure or exemption from the PPT at a public consultation this past week. Many believed that such modifications to the PPT would permit funds to identify that their transactions are entitled to treaty benefits. Representatives of OECD feared that modifications may "use [it] as a safe harbor for aggressive tax planning." Marlies de Ruiter, head of the OECD's tax treaty division, stated that a revised discussion draft on preventing treaty abuse would be issued in June.


Don't Count Your Eggs Before They've Been Taxed. Last week, the Tax Court ruled that a taxpayer's receipt of $20,000 for her egg donation was taxable income. The issue came down to whether the amount was received for compensation of services or on account of pain and suffering, i.e., "damages." The court shot down the "damages argument", reasoning that the compensation was similar to that received by professional boxers and hockey players in the sense that they are well aware of and accept the attending risks.


Tuesday, 1/27

House Budget Committee

The committee holds a hearing on the Congressional Budget Office's 2015 Budget and Economic Outlook. CBO Director Douglas Elmendorf is set to testify in 210 Cannon.

Joint Committee on Taxation

The JCT holds an open organization meeting where members will name a chairman and vice chairman.

Wednesday, 1/28

Senate Budget Committee

The Senate Budget Committee holds a full committee hearing on the budget and economic outlook.

Thursday, 1/29

House Democratic Legislative Retreat

House Democrats will meet in Philadelphia for their two-day legislative retreat.

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