United States: Tax Policy Update - April 14, 2015

NUMBER OF THE WEEK: $1.4 Trillion.  The estimated total of individual income taxes the Internal Revenue Service is expecting to collect on April 15. The U.S. House of Representatives has returned from recess and is planning to vote this week on a package of tax bills aimed toward reforming the Internal Revenue Service – a timely effort to mark tax week! The package includes the "Taxpayer Bill of Rights Act" (H.R. 1058), as well as legislation that would modify the 501(c)(4) application process and allow organizations to appeal decisions on their nonprofit status. Copies of the IRS reform bills can be found here.

LEGISLATIVE LANDSCAPE

Estate Tax Repeal, Permanent Sales Tax Deduction Up for Debate. In addition to the six IRS reform bills up for floor consideration this week, House members will also begin debate on two controversial measures to repeal the estate tax (H.R. 1105) and to make permanent the deduction for state and local sales tax (H.R.622). Under the "Death Tax Repeal Act of 2015," the estate tax along with the generation-skipping transfer (GST) tax would be repealed. The act would also reduce the top marginal gift tax rate from 40 percent to 35 percent. The repeal would cost the federal government $269 billion in revenue over 10 years, according to the latest estimate from the Joint Committee on Taxation. House Democrats largely oppose the repeal as they view the estate tax as a way to promote fairness. In his dissent in the committee report (H.Rept. 114-52), Ways and Means Ranking Member Sandy Levin (D-MI) noted that only about 0.6 percent of all farm operator estates owed any estate tax – countering Republican arguments that the tax unjustly hurts family farms, ranchers, and other small businesses.

A bill to make permanent the deduction of state and local sales tax is also on the docket this week. The measure was approved by the House Ways and Means Committee on February 11. Democrats on the panel had opposed the measure as they would prefer to deal with permanent extensions as part of comprehensive tax reform. They are also opposed in principle given the lack of offsets for the bill, which would cost approximately $42 billion over 10 years.

White House Makes Case for Middle-Class Tax Proposals. The Obama Administration is also taking advantage of tax week to push for its middle-class tax plan outlined in the president's 2016 budget proposal. The White House released a report on Monday, touting the benefits of the president's tax plan for working Americans. The report provides an overview and analysis of the administration's plan to expand the Child Care Tax Credit and the Earned Income Tax Credit, along with other provisions, to help working families get ahead. "The President's proposed tax cuts would provide over 44 million working families with an average tax cut of nearly $600," the report said. Read the full report here.

The More You Know – JCT Explains Corporation Taxation. The Joint Committee on Taxation has published a primer on the federal tax treatment of C corporations, partnerships (including LLCs), and S corporations. The report provides a brief backgrounder on passthrough entities and includes a quick reference chart summarizing the major differences among these business entities in terms of how they are treated for tax purposes. The latter half of the report includes data showing the distribution of business entities by number, size, industry, and net income. The full report entitled, "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations," can be read here.

Wyden Frowns at Medical Device Tax Hearing. The Senate Finance Subcommittee on Health Care has announced an April 23 hearing on the impact of the medical device tax on jobs, innovation, and patients. Senate Finance Ranking Member Ron Wyden (D-OR) was quick to express his disapproval of holding the hearing at the subcommittee level. "It is unfortunate that a hearing on the operation of the medical device tax is being held by the Health Care Subcommittee rather than by the full Finance Committee," Wyden said. "A full committee hearing is necessary to focus on the broad range of issues, including, in this case, not only health policy but also tax policy that must be considered if changes are to be made [...] moving in this manner politicizes the issue." In response, a spokesperson for Chairman Orrin Hatch said a full committee hearing might come "in the near future."

Do You Want $3 of Your Federal Tax to Go to the Presidential Election Campaign Fund?

Go ahead and consider checking the box on your tax return forms folks! Presidential announcements are rolling in. On the GOP side, Senators Ted Cruz (R-TX), Rand Paul (R-KY), and Marco Rubio (R-FL) have officially declared their candidacies. Former Secretary of State Hillary Rodham Clinton also made her long-awaited announcement last Sunday.

Look for our presidential hopefuls to stake out policy positions as we move further along in the election season. On the tax policy front, Rubio is the first to present a framework for reform. Scarce on details, Rubio's plan focuses on lowering the corporate rate and shifting the U.S. to a territorial system of taxation for corporate earnings. Both Cruz and Paul have fixated on the concept of a flat tax – though Cruz takes his plan a few steps further, calling for the abolishment of the IRS. All three of the GOP candidates would also eliminate the estate tax. Although the Clinton campaign has yet to unveil a tax policy agenda, Democratic observers are expecting her to support tax cuts for the middle class and the elimination of corporate loopholes.

During this election season, be sure to check out the McGuireWoods Tax Policy Update each week as our team will be working hard to bring you the latest tax updates from our 2016 presidential candidates.

REGULATORY WORLD

OECD Expanding the Definition of CFCs . Last week, the Organization for Economic Cooperation and Development (OECD) released two discussion drafts in connection with its Base Erosion and Profit Shifting (BEPS) project – one on mandatory disclosure rules (Action 12), and another on controlled foreign corporation rules (Action 3). The Action 12 discussion draft discussed the design of a mandatory disclosure regime to combat aggressive or abusive transactions, with a focus on international tax schemes. The Action 3 discussion draft makes significant recommendations in overhauling controlled foreign corporation (CFC) rules. The draft recommends redefining CFCs to include partnerships, trusts and permanent establishments when owned by parent CFCs, for example. The computation of CFC income is also more expansive and would do away with much of the CFC planning in the U.S. today. The OECD has invited comments on the Action 12 and Action 3 discussion drafts to be submitted by April 31 and May 1, respectively.

Hatch Warns IRS on Exempt Organizations . Senate Finance Committee Chairman Hatch recently urged in a letter that the IRS should not move forward with its proposed rules limiting political activity by exempt organizations. The proposed rules released in November of 2013 would turn standard activities of 501(c)(4) organizations into prohibited political activities. In the letter, Hatched warned that if the IRS chooses to "regulate political activity", the actions will be viewed "with the presumption of political bias and bad faith" and Congress will investigate the reasons behind the "power grab." The proposed regulations have angered people on both sides of the aisle, and if issued before the 2016 presidential election, could hinder some groups. The IRS has stated however that even if the rules are issued before 2016, it would likely not take effect until after the elections.

COURTS & LEISURE

Section 1603 Grants Decided on the Merits . Last week, the U.S. Court of Federal Claims determined that Treasury may have incorrectly reduced the Section 1603 grants awarded to a RP1 Fuel Cell LLC, a fuel cell company, by disallowing $1.5 million. The Treasury omitted the cost basis of "gas-conditioning equipment" as part of a "fuel cell power plant" under Section 48(c)(1)(C). This was the first Section 1603 grant case to be settled on the merits, but the court did not have sufficient facts to determine the grant entitlement amount. While this case is not binding in Tax Court, this decision certainly bodes well for taxpayers seeking to challenge the grants awarded by Treasury under the Section 1603 program.

LOOKING AHEAD

Today

Bloomberg BNA Webinar on FATCA
Bloomberg holds a webinar to review the Foreign Account Tax Compliance Act and explore potential non-tax implications of FATCA. Read more here.

Wednesday, 4/15

POLITICO: America's Fiscal Future
POLITICO holds a discussion of the policy, politics, and trends that are influencing the current national fiscal landscape and the future of the economy. The inaugural event will feature former Treasury Secretary Hank Paulson. For more information, click here.

Heritage Foundation
The Heritage Foundation holds a discussion on "The Case for the Lee-Rubio Tax Reform Plan." Speakers include Senators Mike Lee and Marco Rubio.

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